Rising Production Costs Bite Into Profits

Manufacturing and operating costs of industries -- be it steel, cement, ceramics or pharmaceuticals -- have increased significantly this year, eating into businesses' profit margin.

If the trend continues, it will hamper investment and much-needed job creation in the country, industrialists and an analyst said.

The Daily Star analysed the first quarter data of 10 companies listed on the Dhaka Stock Exchange and found that eight saw a significant increase in their manufacturing and operating expenses from a year earlier.

Only two companies were able to keep their manufacturing costs in check.

Non-listed companies also witnessed the same situation, businesses said.

The prices of raw materials, oil and energy have shot up significantly, all of which have push up manufacturing and operating costs in recent months, said Masud Khan, an adviser of LafargeHolcim Cement, whose operating expenses jumped 11.1 percent in the first quarter of 2017.

For instance, clinker, a raw material for cement, which sold at $36 a tonne a year ago, is now selling at $42, he said.

The prices of other raw materials used for producing cement, such as calcium carbonate, silica, alumina and iron ore, are also increasing.

The government raised gas price in September 2015, and twice this year -- by about 23 percent on both the occasions.

In September 2015, the power tariff was raised 26.29 percent on average at the consumer level, according to the Bangladesh Energy Regulatory Commission.

“The short-term impact would be the shrinking of profit margin. But the long-term impact will be much more serious.”

New investments and job creation will be affected for the spiral in production cost, said Khan, who earlier worked with Lafarge as its chief financial officer.

“Our production cost has increased exactly to the tune of the energy price hike,” said Luthful Bari, executive director of Meghna Group that manufactures bicycle, tyre and parts, all of which are energy intensive.

Nearly 20 percent sales growth in January-March period could not boost RAK Ceramics' earnings due to a substantial rise in operating and financial expenses of the tiles and sanitary ware manufacturer.

Linde Bangladesh, which is the country's leading manufacturer and supplier of industrial and medical gases, is also facing the same situation.

Its manufacturing and operating costs soared more than 15 percent and 33 percent respectively in the first quarter. The cost escalation has shrunk the company's earnings by 3.4 percent.

A surge in operating expenses, of about 22 percent, and a decline in revenue of about 13 percent have brought down Heidelberg Cement Bangladesh's net profit by nearly 39 percent. BSRM Steels experienced a 16 jump in manufacturing costs during the July-March period.

Mir Nasir Hossain, chairman of Mir Group that has exposure in cement, ceramics and construction, said the hike in energy price and a strong dollar are putting pressure on the manufacturing costs.

“We have to import many raw materials and the dollar rate that went up to Tk 84 recently is increasing our import costs,” said Hossain, also a former president of the Federation of Bangladesh Chambers of Commerce and Industry. It was the same narrative for drug makers.

GlaxoSmithKline Bangladesh's manufacturing costs and operational costs increased about 12 percent in the first quarter.Mostofa Kamal, chairman of Meghna Group of Industries, pointed out corruption to be another reason behind the escalation of operating costs.

Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue, said rising production cost is making entrepreneurs lose the competitive advantage. “Though there is hardly any scope for reduction of gas price, government can bring down the oil prices in line with the international market,” said Moazzem, referring to the case of India.

This cost escalation will reduce entrepreneurs' investible funds, he added.