Beverage companies likely to experience rising costs as sugar price rises

Spike in global sugar price is likely to be felt by brewers and soft drinks producers in the country in the form of increased costs and lower profit margins.

The surge in sugar prices was as a result of heavy rains disrupting harvest in world’s biggest producer countries such as Thailand, India and Brazil.

Raw sugar has risen 24% this year on U.S. ICE Futures in New York. Prices on Monday reached 19.42 cents per pound, the highest for a most-active futures contract since October 2013.

Because Nigeria also depends on imports to meet its sugar needs, importers and refiners of the commodity may have to pay more.

The ripple effect is that consumer goods companies will buy sugar, which is a raw material component in production, at a high cost from refiners.

As a result, beverage companies are likely to experience a rise in input costs which would decrease margins.

“Spike in the global price of sugar will feed directly into input cost of local sugar refiners, forcing margins to compress if it cannot be passed-through to final consumers,” said Abiodun Karipe, analyst at Elixir Investment Partners Ltd.

“Consumers will probably have to consume less of the products or rotate into cheaper substitutes where possible,” said Karipe.

Recent financial release of some of these firms show input costs rising.

In the first three months through March 2016, Dangote Sugar Refinery (DSR), a major producer of the sweetener by market value, saw cost of sales climb 52% to N25.84bn, from N17bn in the same period last year.

Similarly, Nigerian Breweries, the country’s largest brewer has also seen its cost of sales rise 12% to N40.27bn, from N36bn in the same period in 2015.

Soft drinks manufacturers haven’t been spared from the spiraling cost as seen in Seven-Up Bottling Company’s latest financial from December 2015, which showed a 10% rise in cost of sales to N14bn, from N13bn in 2014.

The cumulative cost of sales ratio of the three firms rose 61.6%, in the current period, from 58% in the previous year.

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