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FBN Capital reports growth in Nigeria’s PMI readings

By BusinessNews Staff on November 9, 2013

FBN Capital Limited, on Friday, released a report of the results of the seventh monthly reading of the manufacturing Purchasing Manager’s Interest (PMI) for Nigeria, which it gathered in collaboration with NOIPolls Limited.

A PMI is an exercise carried out to determine the “temperature of the manufacturing sector”. According to the method adopted to determine certain factors, 50 is a neutral reading and anything above it suggests expansion in the manufacturing economy.

The variables used to determine PMI are output, employment, new orders, delivery times from suppliers and stocks of purchases.

Results from the seventh headline reading was 52.8, which showed a slight increase from the 52.4 reached in September. Normally, such a slight change is linked to an advanced economy rather than a frontier market where business is run in a “challenging operating and macroeconomic environment”.

The July readings were discouraging and believed to have been as a result of the deterioration of power supply.

Normally, the readings are expected to be above 50 for a frontier market that caused the manufacturing sector to expand by almost seven percent year-on-year in the second quarter of 2013; the growth rate was 8.4 percent year-on-year in the first quarter and was made possible by positive base effects. The manufacturing sector has been developing by over six percent every year, since 2003.

Output sub-index

According to the report, the 51 reading in October compares with the 52 in September and the differences in the readings for output, such as the movement from 45 in July to 56 in August, were hardly surprising.

The report goes on to list some of the many challenges faced by businesses in Nigeria including factors such as poor transport infrastructure, irregular supply of petroleum products, power shortages and limited access to credit. Large firms, with at least 200 employees (for purposes of the survey), were the only ones that could afford to operate their own power systems, independent of the national grid, and were confident that banks could meet their financing requirements.

Following the poor power supply in the middle of 2013, the generation of power has experienced some improvement in the last quarter of the year. According to the report, “Off-grid, an estimated 1,500 megawatts (mw) is generated by captive plants for the country’s leading industrial and manufacturing companies. The readings for output for all companies in the survey should become more consistent as the turnaround of the power sector gathers momentum under the FGN’s roadmap.“

In late August, the 75% balance due to the state was paid by 14 of the preferred bidders for the generation and distribution companies created out of the old Power Holding Company of Nigeria (PHCN).”

38 percent of the participants in the October survey reported an increase in output compared with 34 percent in September. Anecdotal evidence along with results of some listed companies in the sector for the second quarter for 2013, showed an impressive rate of demand for consumer goods and cement, which are both an important segment of the sector. The companies have quickened their investment programmes following their private analysis of household demand.

Employment sub-index
The employment reading was the most stable of all the five sub-indices. A mere 16 percent of the participants in the survey showed increase in their workforce; 70 percent of the participants reported zero change.

The report stated that the small companies in the survey were reluctant to make any changes to their workforce.

A recent survey carried out by the National Bureau of statistics (NBS) showed that 810,000 jobs were created in the fourth quarter of 2012 and the first quarter of 2013 combined. “This figure is gross not net, and we have no update on the size of the labour force. We cannot therefore offer a current unemployment rate although, given Nigeria’s young population, we suspect that it remains close to the 23.9% reported by the NBS for 2011,” the report read.

New orders sub-index
The survey method used by the organisation did not require the participants to distinguish between domestic and export orders. Only three percent of Nigeria’s exports are non-oil products. The Central Bank of Nigeria (CBN) survey for the second quarter of 2013 showed that manufacturers and industrial products were responsible for 75 percent of Nigeria’s total non-oil exports (only $760million).

The report further stated that, “The sub-region does not offer attractive export markets and, even if it did, non-tariff barriers and the modest level of integration within the Economic Community of West African States (ECOWAS) are not encouraging pointers. The reading slipped from 52 to 49 in October, and the largest segment of respondents (38%) reported no change.”

Suppliers’ delivery times sub-index
This question was reversed for the participants, i.e. a reduction in delivery time was a positive indicator. Over half of the participants reported zero change in October; 34 percent reported shorter delivery times.

The suppliers’ delivery times reading is the most unstable among the five sub-indexes; it went from 46 to 60.

Stocks of purchase sub-index
Results for this reading were 53, less in comparison to the previous month, which was 60. Most of the participants (42%) reported an increase in stocks of purchases. The experiences of the different companies were, however, varied and 36 percent reported a reduction in their stocks of purchase.

The report explains that: “Ideally, companies like to maintain rigorous control of stocks for reasons of cost but have to allow some flexibility if they have concerns about the delivery of their orders for logistical or other reasons. The cost of halting production (in the extreme case) due to a shortage of raw materials will be higher than the cost of allowing a cushion in the accumulation of stocks.”

The report stated that because this was only the seventh reading, long-term trends could not yet be identified. The report further explained that “

Any broad conclusions need to be tentative because we are operating in a near void: there are very few credible data sources on sectoral trends. We should add that the flaws in the official statistics complicate the task of commenting on the overall economy on the basis of the PMI readings.”

[Nigerian Telegraph]

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