Industrial production costs up 20%-40% on pricier capital goods

Various industrial sectors – including grain milling, iron and steel, dairy products, sugar, animal feed, transport equipment, motorcycle, food products, basic metals, and wooden furniture – have witnessed 20%-40% surge in production costs in the wake of a 13%-17% hike in capital goods prices over the last one year, according to the Bangladesh Bureau of Statistics (BBS).

Besides, the manufacturing sector, the mainstay of the country's economy, has contracted for the first time in the last few years due to an increase of about 8% in the cost of intermediate goods and intermediate capital goods.

According to the latest Industrial Production Statistics (IPS) of the BBS, the Quantum Index of Medium and Large-Scale Manufacturing Industry fell by 10.28 points or 2.03% year-on-year this September.

While the index has been growing at over 14% annual rate for several years, the growth rate dropped to 1.5% in FY20, the first year of the Covid-19 pandemic, which is the first time that the production of the manufacturing sector has declined after the positive growth trend.

Economists and industrial entrepreneurs said that the production cost of the industrial sector is increasing due to the increase in the prices of all types of materials including energy and fuel in the global market.

At the same time, the cost has also increased due to disruption of production due to power supply. Again due to the rise in the price of the product, the domestic demand has also decreased, which caused a drop in the production of the industrial sector.

A review of the IPS shows that the production of jute products in the first quarter of the last financial year was 51,391 tonnes. Production fell by 7.38% to 47,600 tonnes in the first quarter of the current fiscal. At the same time, production of yarn decreased by 3.55% to 65,919 tonnes from 68,343 tonnes.

Besides, fertiliser production declined by around 4.12% to 2,26,626 tonnes and production of petroleum products decreased by 2.05% to 3,82,628 tonnes. In the first quarter of the fiscal year, edible oil production fell by around 16%, the soap and detergent sector by around 17% and tea production by over 7%.

However, the report claims that the production of the products in terms of money has increased considerably. It said the production of garments increased by 32.44% to Tk43,839.9 crore in the first quarter of the year from Tk33,101.9 crore.

During the same period, the production of knitwear increased from Tk43,880.5 crore to Tk53,550.6 crore, a growth by 22.04%. At the same time, the value of production in the drugs and pharmaceuticals sector increased by 11.41%.

Production index drops in nine sectors

The BBS calculates the Medium and Large Scale Manufacturing Production Index for 22 sectors. Among them, nine sector indices decreased while 13 increased. The production index in chemicals and chemical products, computer, electronic and optical products and other transport equipment sectors has decreased by 50%-60%.

At the same time, the production index in the food products sector decreased by 8.25%, fabricated metal products except machinery sector by 13.17% and beverages sector by 18%.

Paper and paper products sector accounted for 92.71% growth in the production index but contributed only 0.33% to the entire manufacturing sector. However, leather and related products, which contributed 4.4% to the manufacturing sector, grew by 26.09%. Motor vehicles, trailers and semi-trailers and machinery and equipment sectors have good growth, but the contribution of these two sectors is less than half a percent in the entire manufacturing sector.

Among the major industrial products, production cost of iron and steel mills increased by 31.89%. Motorcycle production cost increased by 21.84%. Production cost of other transport equipment increased at the same rate.

How production cost increases

In the BBS' Producer Price Index (PPI) report released for the month of August, 70 out of 88 products have seen a rise in production costs. The production cost index of 12 remained unchanged, while the cost of the other six fell.

According to the report, the cost of production of Dairy products increased by 23.64% due to the increase in the price of animal feeds (Poultry Feeds) by 23%.

In the same year, the cost of grain milling increased by 35.79%, the cost of sugar production also increased by 23.33%. Altogether, the cost of Manufacture of food products increased by 21.13 percent.

What experts and businesses say

Monzur Hossain, research director of the Bangladesh Institute of Development Studies (BIDS), told TBS that due to the disruption in the supply chain due to Covid-19, the production of many products was severely disrupted. And before recovering from the effects of the war in Russia and Ukraine, import costs have risen sharply due to rising material prices, dollar and currency exchange rates. As the cost of production has increased due to this, the production of the sector has also decreased.

In this situation, he thinks that the real situation has emerged in the report of the BBS. He also said that the domestic demand may have decreased slightly if people's incomes did not increase in line with the increased prices.

He commented that this situation will not deteriorate if the supply of materials including gas and electricity is not fixed in the future. If this trend continues, the future GDP growth will decrease and it will be difficult to maintain people's income and employment, this economist believes.

Fazlul Hoque, managing director at Israq Spinning Mills Limited and vice-president of the Bangladesh Textile Mills Association (BTMA), told TBS that a crisis of gas and reduced demand from the international buyers was the main reason for the decrease in yarn production in the first quarter of the current fiscal year.

He said, "Currently, the demand is increasing, thanks to an improvement in the gas supply situation, but it is not up to the mark still now."

Rashedul Karim Munna, a renowned jute goods producer, thinks that the Russia-Ukraine war was the main reason for a decrease in jute goods output. Not only that, the next three months also may decrease the output due to decreasing demand.

"If the international situation does not improve within a short time, there is no hope for jute goods production," he added.