Higher freight, input costs dampen recovery of jobs in manufacturing sector

High cost of production and inputs remains a thorn in the side of Kenyan manufacturing firms, forcing them to lay off more people this year than they did last year even as other business conditions continue to improve.

Firms polled by advisory firm KPMG and the Kenya Association of Manufacturers (KAM) primarily point to higher freight charges, cost of raw materials and the weaker shilling as the reasons for the higher costs.

More of them (23 percent) have, therefore, laid off staff this year compared to last year (18 percent), highlighting the difficulties that remain in Kenya’s ongoing efforts to climb out of the Covid-19 economic hole.

The joint survey is a follow-up on another one done last year when the pandemic first hit Kenya, which sought to find out the impact the pandemic had on business operations in the manufacturing sector.

The steeper cut on the employee numbers has also been attributed to the uncertainty that is still clouding the business environment, largely due to fears of the possibility of a fourth wave of Covid-19 that would bring on a new round of restrictions.

This also comes at a time when firms are having to deal with subdued demand and lower cash flows.

The economy has continued to face shocks over the past year with repeated cycles of the government easing restrictions and reimposing tough measures in line with the periodic waves of infections.

“The adverse effects of the pandemic coupled with investor uncertainty continue to drive down employment levels with some facing difficulties in paying salaries and wages. 23 percent have laid off a part of their workforce compared to 18 percent who did so in 2020,” said the survey report.

“Fewer firms (15 percent) have adjusted salaries of their employees compared to 27 percent of firms in 2020…other measures include a freeze on salary increments and organisational restructure to adjust the responsibilities for staff.”

shortage of containers

The manufacturing sector has seen an increase in sea freight costs due to a shortage of containers in the global market, due to increased imports by US shippers from East Asia since the second half of 2020.

KAM says this saw the cost of shipping a 20-foot container from China’s main ports to Mombasa rise to $2,500-$3000 (Sh274,322-Sh329,187) in March 2021 from $800-$900 (Sh82,992-Sh93,366) in March 2020.

The cost of imported raw materials from international markets has also increased including crude palm oil, which increased to $1,300 in June 2021 (Sh140,151) compared to $700 (Sh70,700) before the onset of the pandemic.

The high demand for shipping in the US is expected to last until the end of 2021, indicating that the raised rates and container shortage will persist for the rest of the year.

The World Bank also estimates that steel prices will be 30 percent higher in 2021 compared to 2020, adding to the cost headache for manufacturers.

The depreciation of the shilling has also been making imports of raw materials and intermediate products more expensive, with local producers unable to absorb this cost of depreciation from profits of exports, which are mostly inclined towards the agricultural products.

The shilling depreciated by 5.8 percent against the US dollar to trade at an average of 109.73 in March 2021 from 103.74 on average in March 2020.

It has, however, strengthened to an average of 107.81 in June, backed by dollar inflows from external loans and remittances.

“Due to supply chain disruptions, most of the surveyed firms (51 percent) have resorted to expanding their supply network to replenish their stock while 40 percent have increased stock levels of their raw and intermediate materials.”

“The need to source for alternative suppliers and hold more inventories further increases logistics costs and causes liquidity constraints.”

Some of the restrictions put in place when the pandemic hit Kenya are still in force, such as the nighttime curfew which led to businesses scaling down operating hours, exacerbating a drop in sales that were flagging even before Covid-19 struck.

This depressed demand, revenues and cash flow, which led to pay cuts, redundancies and employees being forced to take unpaid leave.

Data from the Kenya National Bureau of Statistics showed that within three months of the pandemic reaching Kenya’s shores in March 2020, 1.72 million workers had lost jobs.

The Federation of Kenya Employers (FKE) also disclosed that more than 600 companies had shed jobs since the onset of the Covid-19 crisis by August due to strain on corporate earnings.

FKE executive director Jacqueline Mugo said employers resorted to looking for employees who were agile and could perform more than one job function.

A year later, most small-sized businesses are still struggling to pay salaries, mirroring the situation in the manufacturing sector.

GRADUAL RECOVERY

It is not all doom and gloom, however, with the survey finding that some of the challenges experienced last year including falling sales, liquidity challenges and operating below capacity are easing this year.

The survey noted that compared to last year, fewer firms (18 percent) experienced a decrease in their sales turnover of more than 30 percent, compared to 74 percent of respondents in 2020.

“While 66 percent of surveyed firms negotiated payment plans with their suppliers in 2020, only 27 percent of the surveyed firms have done so in 2021…similarly, the number of firms that reached out to commercial banks to restructure their loans more than halved in 2021,” said KPMG and KAM.

They added that only 27 percent of the surveyed firms operated below half of the production capacity in comparison to 55 percent of the surveyed firms in 2020.

Two-thirds are also operating above half capacity, up from just 45 percent last year.

Most companies have been drawing optimism from the easing of measures in key production hubs such as Nairobi, Nakuru, Machakos and Kiambu, and the anticipated acceleration of the vaccination programme.

The government plans to fully vaccinate the adult population by the end of next year through the Sh14 billion World Bank loan and Sh7.3 billion own-budget financing.

More than 930,000 people had received the first dose of the vaccine as of mid-May 2021, representing about 1.8 percent of the population.

Concern remains, however, due to the higher infection rates in counties in western Kenya, where the government was forced to tighten movement and curfew measures until the end of this month to tame the virus.