Production Level Rise ahead of Festive Period Despite Slowing Demand Triggered by Inflation…

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Recently released Purchasing Managers’ Index (PMI) survey report by Central Bank of Nigeria (CBN) showed that manufacturing sector hit 50.2 index points while the non-manufacturing sector witnessed further recovery from contraction, nearing 50 index points (which indicates neutrality), as production level and business activities picked.

In line with our expectations, the manufacturing composite PMI rose from contraction to 50.2 index points in November (from 49.4 in October), following sixth consecutive months of contraction since May 2020.

The faster expansion in manufacturing composite PMI was chiefly driven by an increase in production index, to 51.7 in November 2020 (from 50.0 in October 2020), albeit demand dragged a little as new orders index slowed to 50.5 (from 51.2).

Producers’ costs of production increased (input prices index rose to 71.7 from 70.9), however selling prices were generally sticky (output prices index increased to 60.1 from 60.0).

Supplies of raw materials to manufacturers improved despite increasing demand from producers – supplier delivery time index rose to 52.2 in November (from 51.8 in October).

Despite the swiftness on the part of suppliers, manufacturers still stocked up raw materials as festivities beckon – raw materials/work-in-progress index moved up, to 48.5 from 46.2 – reflected by the quantity of purchases index which rose to 51.7 from 47.8.

We saw stock of finished goods rise – its index increased to 46.6 points in November 2020 from 44.9 points in October 2020 – as sales slowed despite rising production level.

Similarly, contraction in staffing levels in the manufacturing space further slowed given the increase in production volume – employment index rose further to 47.3 points in November (compared to 46.0 points in October).

Of the fourteen manufacturing sub-sectors, Transportation equipment and Cement sub-sector indices expanded to 64.2 points and 52.6 points in November 2020 from 59.6 points and 50.5 points in October 2020 while the Nonmetallic mineral products, Furniture & related products and Food, beverage & tobacco products sub-sectors recovered from contrations to 59.4 points (from 47.5 points), 55.8 points (46.6 points) and 50.1 points (49.3 points) respectively.

Meanwhile, the non- manufacturing sector recorded slower contraction as its composite PMI increased to 47.6 index points in November 2020 (from 46.8 index points in October 2020).

This was chiefly driven by improved business activity to 50.5 (from 48.7) despite the incoming business index slowing to 47.8 from 46.9.

Also, employment index further increased, to 46.7 (from 44.2).

Business activity still picked in spite of the rise in average price of inputs, to 54.5 index points in November (from 52.9 index points in October).

Elsewhere, the rising prices of different benchmarks of crude oil were sustained in the just concluded week.

Notably, the West Texas Intermediate (WTI) crude price rose w-o-w by 1.89% to USD41.90 a barrel while Brent price rose by 1.54% to USD44.20 a barrel as at Thursday, November 19, 2020. Bonny Light increased by 0.87% to USD43.85 a barrel.

Also, we saw a 2.93% w-o-w jump in US crude oil input to refineries to 13.84 mb/d as at November 13, 2020 (albeit, It declined y-o-y by 15.82% from 16.44 mb/d as at November 15, 2019).

However, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 0.16% w-o-w to 489.48 million barrels as at November 13, 2020 (inventories have risen by 8.68% y-o-y from 450.38 million barrels as at November 15, 2019).

We feel that manufacturers tried to get ahead of the aniticipated rise in input prices during festive period in December.

Hence, they opted to produce more now despite the slowing demand which appears to be triggered by rising inflation rate.

Meanwhile, we expect GDP in Q3 2020 to be reflective of the positive PMIs figures in Q3

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