High costs cut firms’ earnings – Business Daily
A technician work on the cylinders at the BOC gases plant along Kitui road in Industrial area. FILE PHOTO | NMG
Manufacturing firms are paying the price for the inability to fully pass on the higher cost of imported inputs to the final customer, reporting lower profits despite a jump in sales turnover this year.
Bamburi Cement, Flame Tree Group, and Crown Paints all recorded lower profits in the six months ended June compared to the corresponding period last year, despite their sales going up as economic activity picks up post-Covid-19.
Medical and industrial gases manufacturer BOC Kenya also reported that the higher cost of imported inputs and a weaker shilling against the dollar ate into its earnings, even though it was able to raise its profits marginally.
Several manufacturers had told Business Daily in earlier interviews that they are only able to pass on between 30 and 60 percent of additional costs to end users, citing price competition in the sector.
Cement maker Bamburi recorded a three percent or Sh505 million increase in top-line revenue to Sh20.13 billion, which it said was driven by growth in volumes of cement sold in the period coupled with a higher average selling price of the commodity compared to the prior year.
The company however saw a drop of 88 percent in net earnings to Sh95 million from Sh776 million a year earlier.
“Significant inflation of fuel prices, logistics costs, and imported clinker prices in both Kenya and Uganda adversely impacted the operating profit. This was also adversely impacted by forex losses of the Kenya shilling and Uganda shilling against other major currencies,” said Bamburi.
Crown Paints also attributed its inability to turn higher revenue into increased profits to input price inflation, as well as exchange rate volatility that makes it harder to recoup imported input costs through local sales.
The firm’s net profit for the half-year period fell by 15 percent to Sh288 million, despite sales going up by 22 percent to Sh6 billion.
“The decrease in profitability is largely attributed to the increased cost of raw materials, volatility in foreign exchange rates, and a general increase in operating costs due to price inflation,” the paint maker said in its financial statement.
For fast-moving consumer goods and water tank maker Flame Tree Group, the biggest cost factor was the jump in the price of plastics, which are the main raw material in its inventory.
The firm raised its revenue by 11 percent to Sh1.8 billion in the six months to June but fell into a net loss of Sh44.7 million from a net profit of Sh67 million in the corresponding period last year.
Like the other manufacturing firms, the weaker shilling compounded the effect of higher input costs for Flame Tree, which said it was forced to pump more funds into the business to cater to the higher import costs, thus increasing its debt levels.
“This drop of margin…is directly linked to the very tough international context of extreme increase of oil prices and shipping costs (tripled over the past 12 months), driving the costs of our main raw materials (plastics) to levels not seen before,” said Flame Tree.