Manufacturing PMI Falls Further in June as New Orders Remained Weak on Partial Lockdown

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Recently released Purchasing Managers’ Index (PMI) survey report by Central Bank of Nigeria (CBN) showed that the manufacturing sector contracted in June 2020 as new orders declined faster amid partial lockdown of the economy.

The non-manufacturing businesses reflected a gradual recovery as business activities picked amid improved incoming business.

Specifically, the manufacturing composite PMI contracted further to 41.1 index points in June (from 42.4 in May), the second consecutive contraction. The contraction in manufacturing composite PMI was due to decline in new orders index to 36.4 in June 2020 (from 42.8 in May 2020), which resulted in lower production – the production index decreased further to 36.6 (from 44.5).

Producers were hit with higher costs of production (input price index rose to 67.2 from 61.4), but were unable to pass on costs to customers (output price index remained flat at 53.2) due to the drop in new orders.

Supplies of raw materials to manufacturers slowed partly due to interstate lockdown – supplier delivery time index fell to 60.9 in June (from 65.2 in May).

Given the delay from supplier’s end manufacturers stocked up raw materials – raw materials/work-in-progress index moved up, to 41.0 from 37.4 – even as the quantity of purchases index inched up to 35.8 from 26.3.

We saw the stock of finished goods rise – its index rose to 43.3 in June 2020 from 39.6 in May 2020 – due to slow sales. Surprisingly, contraction in staffing levels at manufacturers slowed despite the lower production volume – employment index rose to 38.8 points in June 2020 (compared to 24.5 points in May 2020).

Cement sub-sector index (of the fourteen manufacturing sub-sectors) rose sharply to 56.9 points in June 2020 from 29.0 points in May 2020. Meanwhile, the non-manufacturing sector recorded slower contraction as its composite PMI rose to 35.7 index points in May 2020 (from 25.3 index points in May).

This was driven by improved business activity to 34.3 (from 19.5). Incoming business slowed due to a rise in the average price of inputs, to 46.7 index points in June 2020 (from 42.6 index points in May 2020). Despite the slower business activity, the employment index point increased, to 37.4 (from 32.0).

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In a related development, macroeconomic updates from the fiscal and monetary authorities showed that a total of N107.3 billion has been disbursed to support local manufacturing and production across critical sectors.

A new fiscal gap of USD13.8 billion (N4.97 trillion at N360/USD) was also anticipated for 2020 and will be funded by USD5.5 billion foreign and USD6.1 billion domestic borrowings. While the fiscal authority revised the budget exchange rate higher to USD360/USD from N305/USD, CBN promised to pursue the unification of currency rates around the NAFEX window.

On the foreign scene, US crude oil input to refineries rose week-on-week by 1.76% to 13.84 mb/d as at June 19, 2020 (but 25.29% lower than 17.34 mb/d printed on June 21, 2019); hence, refinery capacity utilization jumped to 74.6% from 73.8% in the preceding week (but far from 94.2% as at June 21, 2019).

However, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose w-o-w by 0.27% to 540.72 million barrels (and rose by 15.15% from 469.58 million barrels as at June 21, 2019).

n a weekly basis, WTI crude fell by 2.57% to USD38.72 a barrel; also, Brent crude moderated by 2.67% to USD41.12 a barrel while Bonny Light crude rose further by 2.34% to USD40.70 a barrel as at Thursday, June 25, 2020.

The contraction of the manufacturing PMI was in line with our earlier forecast that the country’s economy would slide into recession this year. Nevertheless, with the early churn out of expansionary policies by the fiscal and monetary authorities, we expect Nigeria to recover quickly from the IMF’s revised negative growth rate of 5.4%.

Cowry Asset Research