The recent sharp decline in the rand is yet to filter through to the manufacturing sector, but new Manufacturing Circle executive director Philippa Rodseth is cautiously optimistic that the depreciation will result in increased exports in the coming months.
However, she warns that it cannot be seen as a “silver bullet”, noting, too, that a number of countries outside Europe and the US have faced similar currency depreciation, meaning that the domestic industry’s relative competitive position may not have changed as materially as would have been thought.
Nevertheless, the Manufacturing Circle, which has argued since its founding in 2008 that a competitive currency remains a key element of enhancing competitiveness, believes a “window of opportunity” may be opening on the export front.
Speaking to Engineering News Online amid signs that manufacturing output in the fourth quarter of 2015 probably contracted with the December Purchasing Managers' Index (PMI) showing continued weakness, Rodseth said a competitive currency was insufficient in itself to stimulate a revival in the sector’s fortunes.
The seasonally adjusted Barclays PMI rose to 45.5 index points in December, up from a six-year low of 43.3 points in November. However, it was still indicative of a contraction in manufacturing activity and suggestive of ongoing production pressure for the fourth quarter as a whole. Statistics South Africa reported earlier that manufacturing output declined by 1.2% in November, having fallen by 1.7% in October.
Questions were being asked, however, as to why the steady depreciation of the rand in 2015, which has accelerated since December was not resulting in an improved performance from domestic manufacturers, with the currency offering natural protection at home and bolstering competitiveness abroad.
“It’s not the silver bullet and it’s complicated further by the volatility of the rand, which makes planning extremely difficult,” Rodseth asserts, noting that many domestic manufacturers also have imported inputs.
Another key problem relates to weak demand, particularly for manufacturers either directly or indirectly supplying into the domestic or global resources sector.
Respondents to the Manufacturing Circle’s third quarter survey reported muted domestic sales, with only 41% of the 88 respondents reporting an increase and 46% a decrease in domestic sales during this period. Export sales fared better, with 44% of the manufacturers experiencing an increase during the period.
Nevertheless, Rodseth acknowledged that prevailing rand weakness could offer a tailwind from some manufacturers in 2016 and that she was also keen to prioritise actions that sought to improve export market access and knowledge in the coming months.
“The effect of rand weakness takes time before customer supply chain obligations can be unwound and switched to South African goods – this could be six months or more.”
Another key priority would be to seek a “holistic” approach to protection in the steel sector. While the Manufacturing Circle agreed that efforts should be made to shore up domestic primary steel producers such as ArcelorMittal South Africa (AMSA), which is a member, it wanted a solution that was not detrimental to downstream steel fabricators and consumers.
AMSA had submitted ten applications to the International Trade Administration Commission of South Africa (Itac) for an increase in duties from zero to the 10% bound rate allowed for under South Africa’s World Trade Organisation obligations – protection had already been granted for wire rod and rebar, as well as galvanised and colour-coated steel. It was also pursuing “specific safeguard duties” on bars and rods, rebar, wire rod, hot rolled coil, cold rolled coil and plate.
In response, a working group comprising the Manufacturing Circle, the Steel and Engineering Industries Federation of Southern Africa, the South African Iron and Steel Institute and the Southern African Institute of Steel Construction had been established to survey downstream users on the possible implications.
The results indicate that protection could be deleterious for some downstream companies unless “concomitant” levels of protection are extended to them. It was unclear, however, whether Itac, which was fast-tracking its processes with regard to steel protection, would respond as quickly to the needs of downstream manufacturers.
“We believe there needs to be an integrated and holistic solution.”