Local manufacturers in catch 22 situation

Roberta Katunga, Senior Business Reporter
LOCAL manufacturers are caught between a rock and hard surface as they have been forced to maintain prices despite the increase in operational costs that have been triggered mainly by power shortages.

Captains of industry said in spite of the increase in operational costs, they cannot increase their prices fearing that they will lose an already delicate market to cheap imports.

A number of Zimbabweans had over the years started embracing local products such as cooking oil, mealie-meal, flour, beverages, among others, a move which was hailed as promoting local production.

However, since the country started experiencing power cuts, most manufacturers have either lost production time resulting in reduced volumes or have incurred extra costs in finding alternative power.

Bakeries noted that operating costs have gone up by 30 percent as they are now mostly using generators while other companies are losing about 20 hours of production time per week. In the past industry would respond to such scenarios by increasing the prices of their commodities.

However, Confederation of Zimbabwe Industries president Mr Busisa Moyo allayed fears of price increases saying that it was not always that manufacturers pass additional costs to consumers as in the short term it was possible to absorb losses.

Mr Moyo said some businesses were grossly affected while some were just mildly affected and others were unaffected as they are on a higher ring-fenced tariff.

“Companies are somehow forced to keep prices the same as there is competition which means that if their goods become too expensive compared to similar products there are chances of losing out on consumers. Locally produced goods also face competition from imports thus businesses cannot afford to increase prices so for now there will not be any price increases,” said Mr Moyo.

Zimbabwe’s manufacturing sector is still re-teething as they have been trying to grow from the overspill of problems from the hyperinflation era where production nose-dived to below 10 percent of capacity. Most companies are operating at around 35 percent capacity and have been complaining that imports were also affecting their growth.

Mr Moyo said business could not afford any additional charges at this stage as the high cost environment made it impossible.
He said most of the businesses that were affected were those with continuous processes of manufacturing whereby a disruption in power means a loss of products.

“Uncertainty can lead to higher costs but it is not always a direct relationship between costs and pricing,” he said.

He, however, said if the problem of power persisted, companies would be forced to factor in additional input costs to the consumer leading to price increases.

“Power cuts if not dealt with are likely to cause cost increases in the long term and only then will consumers be affected,” said Mr Moyo.

Buy Zimbabwe economist Kipson Gundani said under normal circumstances, increased input costs push prices up as prices are a function of costs. He said judging from the deflationary tendencies in the environment, it would be impossible for companies to increase prices.

“On the other hand, there are cheap imports flooding the country. It is unlikely that companies will change prices and it will not be surprising in some cases for prices to go down,” said Mr Gundani.

A market researcher with a local stock broking firm said companies could not afford to push up prices as they risked losing margins as already they are operating in an environment that has costs which are 66 percent higher than competitors in the region.

“Companies would rather sell at low margins which will not be sustainable in the long run rather than lose customers to competitors who are already at an advantage. It is an impossible situation for manufacturers but they have to choose the lesser of the two situations they are faced with,” said the market researcher.

Zimbabwe National Chamber of Commerce Matabeleland region vice-president Mr Crispen Mugova said although factories were facing high production costs, demand across all sectors was very weak hence making it impossible to review prices upwards.

“Although it makes sense for companies to recover from the selling price, the environment is not conducive for that. Increasing prices of goods will only worsen demand so basically in the short term companies are being forced to absorb costs but if it persists in the long term, we will definitely see prices being adjusted upwards,” said Mr Mugova.

Zimbabwe is facing a serious power shortage that has seen the power utility company, Zesa introducing tight load shedding schedules with some areas going for more than 18 hours without power. Demand for electricity in Zimbabwe is estimated at 2 200 megawatts but generation is below 1 000MW.

Companies are also facing funding problems as banks have tightened their lending rates often availing short term loans which are not ideal for recapitalisation. Most of the companies are running on obsolete equipment some outdated resulting in frequent breakdowns.