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Why prices of consumer goods will rise

Workers pack wheat flour ready for market
Workers pack wheat flour ready for market. FILE PHOTO | NMG 

It should not surprise if we start seeing the prevailing sluggish economic conditions in the country start driving upward consumer prices in key segments of the manufacturing sector.

For instance, I see the cement manufacturers soon resorting to adjusting their consumer prices upwards even as they continue to grapple with the effects of over investment and falling profitability in that sector.

Indeed, cement manufacturers are at a point where cash-flow generated by activity does not cover the capital invested.

It is paradoxical because in theory, per capita cement consumption is considered to be a proxy measure for GDP growth.

The fact that cement production and consumption numbers are moving in opposite directions and are not in tandem with the rosy growth trends we are seeing from official statistics is an enigmatic economic happening.

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Methinks that one of the key factors in the declining fortunes for cement manufacturers and that is hardly articulated in public discussion is gradual slowdown in infrastructure spending at both the county and national level over the last five years.

Accumulated arrears and the large pending bills owed to government contractors, the low pace in execution of development budgets, and the lack of capacity to deliver projects within stipulated time at both national and county levels, have also been major factors contributing to the declining fortunes of cement manufacturers.

Still, if you want a better explanation for the declining fortunes of this key segment, you look for it in the broader business environment.

Official statisticians will not accept that this economy has been suffering anaemic growth conditions in the last five years. Just count the number of profit warnings, redundancies and the dip in electricity consumption by large industries, the slow take up of credit by the manufacturing sector – and of course — declining trends in the growth of the cement sector.

Manufacturing has been shrinking even as the government was busy spewing out rosy statistics with little relevance to the conditions of the real economy. We all know that the performance of the construction sector in an economy and the trends in cement consumption are some of the sectors where the rubber meets the road- where real growth can actually be seen, touched or smelt.

Consider the following numbers. First, over the past five years, installed capacity in cement production has increased by 50 percent rising to 12.5 metric tonnes. Yet consumption has been either declining or flat-lining since 2016 when the sector registered a growth rate of six percent.

The following year, 2017, the sector registered the worst growth rate in decades — a drastic fall of negative four percent growth. Last year, it registered a growth rate of two percent.

How has the phenomenal growth in installed capacity in such a short time played out? First, excess capacity utilisation rates in an industry facing declining demand.

Secondly, the crowded field has spawned an attrition game between firm that play by the rules on the one hand, and on the other, companies owned by a nouve riche and late entrants in the sector who are keen on chasing market share at all costs and in putting up new plants at a pace not supported by the fundamentals in the industry.

Worse for the sector, energy costs have soared by 32 percent, mainly driven by rising prices of electricity and fuel.

The projections right now are that clinker, the main raw material in cement production will go up by four percent. And, with the new rule on sulphur fuels by International Maritime Authority low sulphur fuels expected to kick in effective January 2019, the cost of freight on all imported materials is projected to go up by at least four percent.

Clearly, cement companies- and the manufacturing sector as a whole are in the middle of bleak times. When — as a manufacturer — you find yourself facing short-term demand uncertainty, decline in volumes, low capacity utilisation rates and in environment characterised by falling profitability, a price correction will be inevitable.

Call me a pessimist if you like. I see prices of manufactured consumer goods starting to trend upwards.

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