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Manufacturers hopeful but cautious about 2023 after bruising 2022

Jamaican manufacturers are singing a hopeful tune but with a note of caution as they look forward to 2023.

It was a year in which producers were beset by the continued high cost of freight, which impacted the cost of goods, and logistical nightmares relating to delayed shipment or untimely delivery of raw materials that led to panic ordering of inputs by producers.

“This caused quite a bit of lost sales in the first half of 2022, and what companies started to do as they panicked was to buy as much raw material as possible, which put them into an overstock position when shipments started to come in,” said John Mahfood, president of the Jamaica Manufacturers and Exporters Association, JMEA, and CEO of tea maker Jamaican Teas Limited.

The knock-on effect of the overstocking was a shortage of warehouse space and higher operational costs from having too much inventory, he said.

The overinventorying, in turn, led to cash-flow problems, but the effect of it began to be moderated around June,which portends well for the coming year, the JMEA president noted.

“What we’ll see in 2023 is that companies will work off those inventories, which should translate to positive cash flow,” he said in an interview with the Financial Gleaner, looking at the year behind and the year ahead.

Seprod CEO Richard Pandohie is also optimistic about 2023, especially regarding the opportunities from a regional standpoint.

“COVID-19 has created a certain level of deglobalisation. Countries like Jamaica can take advantage of the nearshoring opportunities that logistical arrangements can afford us,” Pandohie said, while urging industry players to consider low-competitor manufacturing, in addition to processing, in order to service regional markets.

“The key for our sector will be agro-processing. I cannot understand why the Government is not jumping all over that, but we need agro-processing to replace massive imports into this country,” he said.

One of the hopeful signs for manufacturing seen by Mahfood lies in data.

Since August, the Producers Price Index, PPI, has been on a downward trend. The PPI is the average change in the selling prices received by domestic producers of goods and services over time. They are usually basic prices, which exclude GCT and all other taxes and subsidies on products sold, according to the Statistical Institute of Jamaica, which compiles the index.

The JMEA head says that while the phenomenon of high freight costs continued for most of 2022, there was an observable decline towards September.

Statin reported that producer prices for the manufacturing sector that month declined by 0.3 per cent. This was close to the report for August, where output prices for the sector declined by 0.4 per cent.

For October, manufacturing PPI had its largest dip of 1.0 per cent while the November data also saw prices contracting by another 0.3 per cent.

Based on the amelioration of prices, Mahfood said his expectation, going into 2023, is that barring any unexpected occurrences, freight and other input costs will continue to moderate, with normal freight costs returning by the end of March 2023.

The expectation is behind recent price decreases, according to Pandohie. Both Seprod and poultry producer Jamaica Broilers Group have been known to cut prices in recent months.

Hugh Graham, CEO of Paramount Trading Jamaica, says that as a chemicals, lubricants, and bleach manufacturer, his company is relying on the principle that a rising tide lifts all boats.

With large and small companies putting in serious levels of investment during the downturn, on expectation that the economy would eventually recover, it means that Paramount would benefit since they provide precursor inputs that are further processed into finished goods or produce in bulk on behalf of other companies.

“My experience is that when big companies make that kind of investment, then they take other companies along with them because they will need supply services, and so on,” Graham said.

He notes, too, that from his vantage point, there was a higher than normal number of foreign investors scouting for opportunities.

Mahfood doesn’t only see promise in the business inflation data, but consumer prices as well.

Ahead of the Bank of Jamaica’s Christmas surprise hold on its more than yearlong series of interest rake hikes, Mahfood had been optimistic that the central bank would have exercised restraint and was proved right — albeit that he and the central bank ended up with different rationales for holding the policy rate steady at 7.0 per cent.

The BOJ was partly influenced by a decline in core inflation, which discounts fuel and food prices, while Mahfood was optimistic that the retreat in consumer prices since the end of summer, specifically a dip in November inflation to 0.4 per cent, would have carried weight.

Inflation also appears set to dip in other countries with which Jamaica trades.

“With the moderating inflation in the First World, it will impact us positively, and my expectation is that we can look to reasonably low rates of inflation, which would be more in line with the BOJ target of six per cent,” Mahfood said regarding his 2023 price outlook.

Another of the hopeful signs for manufacturers is the continuing recovery of the tourist industry, with 6,000 new rooms either planned or under construction, and the peak winter season looking like a rebound to pre-pandemic levels. Additionally, the outsourcing or BPO sector — which, like tourism, is also a high-volume employer — has reportedly grown to about 60,000 workers.

“So when you take those things into account, we’re looking at a much improved 2023 over 2022,” Mahfood said.

That, for him, includes what he sees as signals from the central bank pointing to the likelihood of decreased interest rates.

At the same time, however, the JMEA president and others are concerned about the shortage of labour. The problem is seen to have its roots in the pandemic, which provoked massive job layoffs amid lockdowns and reduced commercial activity.

Mahfood said workers who were laid off in the entertainment and tourism industries are apparently not responding to the entreaties of sector managers to return to their jobs.

As for the manufacturing sector, it is now facing competition from the outsourcing sector for skills.

“The manufacturers are losing experienced people to the BPO sector, who are paying better wages, and the entry-level people are not coming into the working world as we would have expected,” Mahfood said.

Pandohie said the expectation for higher wages is driven largely by rising inflation, which is currently at an annual rate of 10.3 per cent.

But he argues that there needs to be a greater appreciation of the link between the need for higher wages and productivity, saying that higher productivity leads to better compensation for workers.

He also urged the manufacturing sector to keep accelerating productivity through the application of appropriate technology and upgrading of their workforce.

“We need to move from low-value labour to more premium labour to increase output. That is how we can compete in this global marketplace,” Pandohie said.

At Paramount, Graham also noted that double-digit inflation was pressuring the pockets of workers, whose cost of living has climbed.

“They’re requiring a liveable wage to deal with necessities such as bus fare, which can be higher when they have to take multiple modes of transport. That can be anywhere from $1,000 to $2,000 per day, and we’ve still not added lunch,” Graham said.

A quick survey of the wages in the manufacturing sector found that entry-level pay is in the order of $9,000, which is the national minimum wage, to about $13,000 per 40-hour work week. President of the Private Sector Organisation of Jamaica, Metry Seaga, recently voiced his concern about the fairness of the minimum wage and wants it hiked to about $15,000.

However, like Pandohie, he feels that it must be accompanied by productivity improvements.

“What we want is a liveable wage. At the same time, a business may be hampered in meeting the new level, and so whereas you may be able to employ three at present levels, then we may be talking about one or two persons at the higher wages. The real answer then is increased productivity,” Seaga told the Financial Gleaner.

For JMEA head Mahfood, success for the manufacturing sector in 2023 hinges on the ability to find suitable labour.

“If the country is going to grow, if the 6,000 hotel rooms are coming on stream, if the BPO sector is supposed to grow, you’re going to need a lot of employees and people ready to work. That may be what will slow us down,” he warned.

Companies like Seprod are already finding it difficult to fill vacancies at the entry level and for specialised technical persons. The shortage is compounded by migration of workers within the high-level skills pool, but Pandohie also noted that manufacturers are unable to retain even entry-level workers.

“I don’t know what it is, but there is definitely a very high rate of turnover at the lower levels, and that’s not going away any time soon,” he said.

Part of the answer, the Seprod CEO reiterated, lies in companies looking towards the adoption of technology.

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