The seasonally adjusted Kagiso Purchasing Managers Index (PMI) deteriorated further in October, falling to 47.1 points from an upwardly revised 48.3 points during September. This suggests a notable loss in the local manufacturing sector’s growth momentum.
A three-month decline
The index averaged just above 50 in the third quarter of the year and rose to 51.1 during July, but declined for three consecutive months thereafter and was currently at the lowest level since July 2011.
Chartered Institute of Purchasing and Supply Africa (CIPS) MD Andre Coetzee noted that the two largest weighted sub-components of the PMI, namely business activity and new sales orders, accounted for the decline of the headline index.
“Both indices lost three points with business activity falling to 43.2 index points. The level of the index suggests a notable decline in manufacturing production at the start of the fourth quarter. The new sales orders index measured 45.3 in October, which is indicative of soft demand for factory-sector goods.”
Several contributing factors
Coetzee added that the weak performance of the two indices likely reflected subdued manufacturing output trends in South Africa’s key trading partners and could also be a result of domestic constraints.
Initial indicators were that the PMIs in South Africa’s key export markets, China and the European Union (EU), remained below the 50 mark in October.
“On the local front, the prolonged strikes in the mining sector and isolated industrial action in the vehicle manufacturing sector might have contributed to the weakness in the South African PMI during the month,” said Coetzee.
Manufacturing Circle executive director Coenraad Bezuidenhout said unfairly incentivised and illegal imports into the domestic market, as well as into the markets of South Africa’s even-more vulnerable African trading partners, were also weighing on local manufacturing conditions.
“From the private sector’s side, we need to recognise the importance of growing our domestic market, start to monitor local procurement and target real improvements over time in this regard,” he urged.
Growth into Africa problematic
Bezuidenhout added that expansion of local manufacturers’ businesses into Africa was still being limited by transport-logistics inefficiencies and various non-tariff barriers.
Rising energy costs a worry
Discussing reasons behind rising factory input costs, Bezuidenhout said energy costs were playing a significant role, especially owing to the dominant position enjoyed by Sasol and Eskom in the supply of gas and electricity.
“Water tariffs and labour are also significant contributors,” he noted.
Bezuidenhout said the country would have to take assertive steps to level the trade playing field and make material progress in terms of infrastructure roll-out tenders from government and the private sector.
“There is concern over our competitiveness position compared to competitor economies such as Brazil, where bold steps to support manufacturing, such as 28 percent cuts in electricity tariffs for industrial users, are implemented without the institutional inertia we are saddled with in South Africa,” Bezuidenhout said.
He said domestically, the government’s success in executing its infrastructure spend, reining in administered prices, while maintaining momentum in electricity capacity generation and bulk-water infrastructure investments, would be crucial.