The seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) is a useful indicator of the state of health in manufacturing. It did recover slightly in October, increasing to 50.7 points from a revised 50 points in September. Despite the improvement, the index remains below the average reading of 52.7 recorded during the third quarter of 2013. What do our experts make of it?
Odette Smith, Industry Analyst: Manufacturing and Mining, RMB:
The manufacturing sector is still struggling. While it is beginning to show signs of improvement, it is too soon to say it has turned the corner as there are still many factors putting the sector under pressure. On the positive side exports in terms of value have improved, partly helped by the weaker rand and the Eurozone, which has just come out of recession. But, on the negative side, the weaker rand has also increased the cost of imports. Since imports have become integral to the manufacturing sector this will exert cost pressure. Manufacturers who have high local content in their products will derive greater benefit from the weaker rand and their competitiveness against imports is expected to improve. The sector is also facing local costs pressures as wage settlements have generally been above inflation, and electricity prices continue to rise at a level also above inflation.Capacity utilisation remains below its long-term average but has ticked up slightly. If the rand remains weak, capacity utilisation is likely to rise further. While manufacturing business confidence is showing signs of improving, it is still low.
Craig Pheiffer from Absa Investments:
The PMI is useful from a number of fronts because it talks to the underlying demand for goods in the economy from both domestic and international consumers. The improvement in the headline PMI is to be welcomed from a neutral (revised) reading last month but although it is in positive territory, it is only modestly so and highlights the ongoing fragility of the sector. The expectation that a weaker rand will save the domestic manufacturing sector as it makes our goods more competitive on the global stage is a little misguided, and to date the benefits of the weaker currency haven’t given the sector a dramatic boost. The increases in the sub-PMI’s for Business Activity and New Sales Orders are encouraging but the most encouraging element is the improved sub-PMI for Expected Business Conditions – that leapt from 51.8 points to 62.2 points and is probably predicated on an improved outlook for global growth in 2014 over 2013 and by extension, a greater demand from offshore for our locally produced goods.
Coenraad Bezuidenhodut of the Manufacturing Circle:
The recovery in the Kagiso Purchasing Management Index’s overall rating from its lowest point in five months in September (50.0, seasonally adjusted) to a fragile but stronger 50.7 shows that while the prolonged strikes in the automotive sector had severe impacts on manufacturing, the sector is on the rebound. In the wake of the recent Quarterly Labour Force Statistics release (showing manufacturing to have shed in excess of 60 000 jobs), a further drop in the Employment Index (from 49.5 to 49.4) is a worrying sign. It is, however, consistent with concerns raised earlier in the year that weak demand, increasing input costs (particularly as a result of rising administered prices), productivity that does not keep abreast of remuneration increases and the affordability of capital make mechanisation a necessary consideration where manufacturers are forced to act to protect their competitiveness. The Manufacturing Circle’s survey for the third quarter (to be released on 14 November) may provide a clearer picture in this regard. The decline in the price component (from 82.7 to 80.8) may not only be indicative of reduced input price pressure, but may also indicate that the opportunity afforded by the weaker rand for manufacturers to feed through these costs to the consumer and export buyers may have run its course. This may exacerbate margin squeeze again and undermine the sustainable performance of manufacturers. There are also still lagging effects of the recent auto sector strike, as suggested by the decline in the index component for supplier performance which dropped from 53.6 to 47.9, which rhymes with the sequence of the strikes.
Manufacturing is still wobbling along, and once again the employment situation is negative. This is just one indicator to watch, but there is no cause for champagne corks to start popping just yet.
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