Rising freight and input costs are slowing the recovery of manufacturing jobs
- Companies polled by the consultancy firm KPMG and the Kenya Association of Manufacturers (KAM) mainly indicate that the freight charges, the cost of raw materials and the lower shilling are the reasons for the rising costs.
- More of them (23%) have therefore laid off staff this year compared to last year (18%), highlighting the difficulties that remain in Kenya’s continued efforts to emerge from the Covid-19 economic hole.
- The joint investigation follows one carried out last year when the pandemic first hit Kenya, which was seeking to know the impact of the pandemic on business operations in the manufacturing sector.
The high cost of production and inputs remains a thorn in the side of Kenyan manufacturing companies, forcing them to lay off more people this year than last year, even as other business conditions continue to improve.
Companies polled by the consultancy firm KPMG and the Kenya Association of Manufacturers (KAM) mainly indicate that the freight charges, the cost of raw materials and the lower shilling are the reasons for the rising costs.
More of them (23%) have therefore laid off staff this year compared to last year (18%), highlighting the difficulties that remain in Kenya’s continued efforts to emerge from the Covid-19 economic hole.
The joint investigation follows one carried out last year when the pandemic first hit Kenya, which was seeking to know the impact of the pandemic on business operations in the manufacturing sector.
The larger reduction in the number of employees has also been attributed to the uncertainty that still plagues the business environment, in large part due to fears that a fourth wave of Covid-19 could lead to a new round. restrictions.
It also comes at a time when businesses face moderate demand and lower cash flow.
The economy has continued to face shocks over the past year with repeated government cycles easing restrictions and reimposing tough measures in line with periodic waves of infections.
“The adverse effects of the pandemic coupled with investor uncertainty continue to depress employment levels, with some having difficulty paying wages and salaries. 23% laid off part of their workforce against 18% who did so in 2020 ”, indicates the survey report.
“Fewer companies (15%) have adjusted their employee salaries compared to 27% of companies in 2020… other measures include a freeze on salary increases and organizational restructuring to adjust staff responsibilities. “
The manufacturing sector has seen an increase in ocean freight costs due to a shortage of containers in the global market, due to the increase in imports by US shippers from East Asia since the second half of the year 2020.
KAM says this saw the cost of shipping a 20ft container from major Chinese ports to Mombasa drop from $ 2,500 to $ 3,000 (Sh274 322-Sh329 187) in March 2021 from $ 800 to $ 900. (Sh82 992-Sh93 366) in March 2020.
The cost of raw materials imported from international markets has also increased, including crude palm oil, which rose to $ 1,300 in June 2021 (Sh 140,151) from $ 700 (Sh 70,700) before the start of the pandemic.
Strong demand for shipping to the United States is expected to last through the end of 2021, indicating that rising tariffs and container shortages will persist for the remainder of the year.
The World Bank also estimates that steel prices will be 30% higher in 2021 compared to 2020, which will compound the cost puzzle for manufacturers.
The depreciation of the shilling has also made imports of raw materials and intermediate products more expensive, as local producers are not able to absorb this cost of depreciation through the profits of exports, which are mainly turned towards agricultural products.
The shilling depreciated 5.8% against the US dollar, trading on average at 109.73 in March 2021 against 103.74 on average in March 2020.
However, it strengthened to an average of 107.81 in June, supported by inflows of dollars from external loans and remittances.
“Due to supply chain disruptions, most of the companies surveyed (51%) have resorted to extending their supply network to replenish their stock while 40% have increased their stock levels. raw materials and intermediates.
“The need to seek alternative suppliers and to hold more inventory further increases logistics costs and leads to liquidity constraints. “
Some of the restrictions put in place when the pandemic hit Kenya are still in effect, such as the nighttime curfew that has led companies to cut hours of operation, exacerbating a drop in sales that was sagging even before Covid-19 don’t knock.
This depressed demand, income and cash flow, resulting in pay cuts, layoffs, and employees forced to take unpaid time off.
Data from Kenya’s National Bureau of Statistics showed that within three months of the pandemic’s arrival on Kenya’s shores in March 2020, 1.72 million workers had lost their jobs.
The Kenya Employers’ Federation (FKE) also revealed that more than 600 companies have cut jobs since the start of the Covid-19 crisis in August due to pressure on corporate profits.
FKE Executive Director Jacqueline Mugo said employers resort to finding employees who are agile and able to perform more than one function.
A year later, most small businesses are still struggling to pay wages, as is the situation in manufacturing.
However, all is not pessimistic, with the survey revealing that some of the challenges faced last year, including declining sales, liquidity issues and under-capacity operations, are easing this year.
The survey noted that compared to last year, fewer companies (18%) experienced a drop in turnover of more than 30%, compared to 74% of respondents in 2020.
“While 66% of companies surveyed have negotiated payment plans with their suppliers in 2020, only 27% of companies surveyed have done so in 2021… likewise, the number of companies that have contacted commercial banks to restructure their loans fell by more than half in 2021. ”said KPMG and KAM.
They added that only 27% of companies surveyed were operating below half of production capacity, compared to 55% of companies surveyed in 2020.
Two-thirds are also operating above half of their capacity, up from just 45% last year.
Most companies are optimistic about the easing of measures in major production centers such as Nairobi, Nakuru, Machakos and Kiambu, and the expected acceleration of the vaccination program.
The government plans to fully immunize the adult population by the end of next year with a loan of 14 billion shillings from the World Bank and 7.3 billion shillings from its own budget.
More than 930,000 people had received the first dose of the vaccine by mid-May 2021, representing about 1.8% of the population.
Concern remains, however, due to higher infection rates in counties in western Kenya, where the government has been forced to tighten displacement and curfew measures until this end of this season. months to tame the virus.