The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) laments the release of key data, namely, the capacity utilisation figures for the metals and engineering (M&E) sector, which indicate deterioration for the third quarter of 2019 and manufacturing output for the month of September 2019, Chief Economist Michael Ade said this afternoon.

According to Statistics South Africa (Stats SA), manufacturing capacity utilisation regressed by 2.2 percentage points between Q2 and Q3, from 79.8 percent to 77.6 percent.

“The overall performance is worrisome, especially given the current state of the economy, underpinned by stagnant domestic demand, nondescript high-frequency data and increasing intermediate input costs, including the prices of raw materials,” Dr Ade said.

He lamented this deterioration and cautioned that capacity utilisation remained well below the full capacity benchmark of 85 percent and 81 percent for both the M&E industry and the broader manufacturing sector respectively. He said the performance of the data is cause for concern when viewed over a longer timeframe.

Dr Ade said on a quarterly year-on-year basis, capacity utilisation for the M&E cluster has alarmingly registered two consecutive years of decrease from 80.0 percent (2017Q3) to 79.6 percent (2018Q3) before perching at 77.6 percent (2019Q3).

“Disconcertingly, limiting ourselves to Q3 2019 the capacity utilisation data expresses something worrisome about the performance of the M&E sector, reflective of the depressing mood around businesses and the prevailing uncertainty,” he said.

Dr Ade said there was a general decrease in capacity utilisation by all sub-sectors except for two sub-components, when Q2 and Q3 of 2019 are compared. Noteworthy increases in capacity utilisation were recorded in the electrical machinery sub-cluster, where it increased by 0.2 percentage points and in the motor vehicles, parts and accessories sub-component, where it increased by 0.1 percentage point, in Q3 compared to Q2 of 2019.

One sub-component (the motor vehicles, parts and accessories) performed above the benchmark level, recording capacity utilisation of 85 percent, while the rest mostly recorded levels below the required benchmark.

Dr Ade attributed capacity under-utilisation in the sub-components to insufficient demand and increasing intermediate input costs. He said although the designation of structural steel and electrical products has been in place for several years, it does not seem to be helping the prospects of capacity utilisation in sub-industries via increased demand.

“Government policy towards enforcement of designation requirements - with minimal cost of law enforcement - may add some relief and ensure that companies see the benefit from the designation via increased production,” he said.

Moreover, Dr Ade said the current capacity under-utilisation largely explains the poor year-on-year performance in production in the broader manufacturing sector for September 2019 when compared to August 2019. The poor manufacturing output for September also aligns with the end of quarter 3, which captures the nondescript capacity utilisation of its key sub-clusters. Manufacturing output decreased to -2.4 percent in September 2019 from -1.5 percent in August 2019. On a month-on-month basis, output in the broader manufacturing sector was -2.4 percent in September 2019, compared to 1.3 registered in the month of August 2019.

Despite the generally poor performance in both capacity utilisation and manufacturing output, Dr Ade remains hopeful about improved business activity in the short term as captured by the recent uptick in investor sentiments underpinned by the on-going investment conference.

“Hopefully, the euphoria surrounding the investment conference will provide more impetus and serve as a basis for companies to increase the current capacity utilisation and maximize production towards better profit levels,” he said.