Slow pace of recovery in manufacturing sector
The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) is concerned about the slow pace of recovery in the manufacturing sector, as depicted by the lower manufacturing PMI index number of 50.9 in January, which is lower than the 2020 fourth-quarter average.
According to the Bureau for Economic Research, South Africa’s Absa Manufacturing PMI rose slightly to 50.9 in January from 50.3 in December 2020. Despite the improvement, the latest reading is much lower than the average recorded in the final quarter of 2020. Indeed, the business activity index declined for a fourth consecutive month, pointing to a further loss of momentum in recovery. Meanwhile, there were gains in the sub-indices tracking new sales orders and expected business conditions in six months’ time.
The manufacturing sector remains key to the growth and development of South Africa due to its multiplier effect into other sectors of the economy, such as the construction sector, especially through the Metals and Engineering (M&E) industry as a supplier of crucial inputs such as steel. According to SEIFSA Chief Economist Chifipa Mhango, the signs of this slow pace in recovery show that the sector is in for a bumpy ride in 2021.
He said the price trends for intermediate products, which were discouraging new investment into the manufacturing sector, were also a concern. “Prices are a key component of decision-making by businesses on how revenue will be generated, either taking the approach of growing price or volume. Within the manufacturing sector, historical patterns show that on average, since January 2013, prices of goods have increased below 10% year on year. This is for both final manufactured goods and intermediate goods, of which most M&E products are part,” Mhango said.
Producer price index data suggests that in 2020 electricity prices increased at a much faster pace than that of intermediate manufactured goods. However, prices for mining products increased more than both electricity and intermediate manufactured goods between January and December 2020. Mhango said this reflects the prevailing difficulty in the operating environment, characterised by rising intermediate inputs costs from the mining sector.
He said there is a prevailing discouraging trend of generally decreasing price patterns in both the intermediate and final manufactured goods PPI since 2016.
“It is important to keep electricity price increases under control in order to ensure business’s sustainability since their negative effect on turnover can lead to the shutting down of businesses and more job losses in the short to medium term.”SEIFSA Chief Economist Chifipa Mhango
He said the massive surge in prices of mining input products to 32.5% in 2020, according to Statistics South Africa, which is above price increases of intermediate manufactured goods, was a concern for the survival of the M&E sector. Had said the high electricity prices had compounded the existing gap between the selling prices for M&E intermediate goods and production.