Weak rand will be insufficient to spark revival of SA manufacturing

21st February 2014

By: Anine Kilian

Contributing Editor Online

  

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The South African manufacturing industry has been under pressure for a number of years and the outlook for 2014 remains subdued, despite the tailwind being provided by the weaker rand. Close observers forecast that the sector is set to register growth of close to 2%, which represents only a modest improvement on last year’s performance.

Investec chief economist Annabel Bishop states that manufacturing production is expected to improve because the global economy is gaining momentum and the rand has weakened – factors that will spur demand for South Africa’s more competitively priced products.

However, higher interest rates could also weaken domestic demand for manufactured items, and the bulk of manufactured goods are consumed domestically.

“Last year’s outlook was poor; there was weak global demand and pervasive strike action, which led to weak gross domestic product (GDP) growth. Manufacturing production growth was negatively affected, despite the weakening rand,” says Bishop, explaining that the sector did not benefit significantly from the currency’s weakness in 2013.

“Rand weakness should improve competitive- ness in 2014 and is one of the reasons we do not now see materially weaker growth than in 2013,” she points out.

But, while currency weakness for exports is helpful, it will increase the cost of imported goods, which will increase living costs and fuel demands for higher wages.

Interest rate hikes implemented by the South African Reserve Bank will add to local manufacturers’ woes, and economic growth is now likely to only average 2.4% year-on-year in 2014, Bishop forecasts. But GDP growth will be even weaker, at close to 1.5% year-on-year, if strike action proves to be as pervasive in 2014 as it was in 2013.

Manufacturing Circle CEO Coenraad Bezuidenhout agrees that there is upside potential in terms of higher expected demand from the eurozone, which should be supported by the weak rand.

The surge in the purchasing managers index’s (PMI’s) price subindex from 80.1 to 89.3 indicates not only rising input costs, but also pricing confidence on the side of manufacturers. This means the margin squeeze is being ameliorated in a sector that has hitherto been contending with the triple challenge of rapidly bunched-up administered price and wage increases, a strong rand and low demand.

Steel and Engineering Industries Federation of South Africa (Seifsa) chief economist Henk Langenhoven concurs that the short-term signals indicate that benefits could be derived from the global recovery, as well as domestic spending on infrastructure.

LABOUR CONCERNS

However, conditions remain challenging, as reflected in the Manufacturing Circle’s third-quarter 2013 survey of manufacturing business conditions. The survey indicates that 29% of manufacturers are expected to decrease their employment complement over the next 12 months and that 7% of that percentage are expected to do so by more than 15%. The survey also indicates that mechanisation may now be part of the competitiveness planning of an increasing number of manufacturers.

“Previously, only 3% indicated expected employment reductions of 15% or more over the next 12 months,” explains Bezuidenhout, adding that concerns driving the likely mechanisation tendency will be strengthened by recent developments in the platinum sector, where the Associa- tion of Mineworkers and Construction Union (AMCU) has embarked on a protracted strike.

Labour, emphasises Bezuidenhout, is pricing itself out of the market and the trend for the next few years could be that manufacturers are aiming to mechanise, instead of having to rely on a workforce.

“To become more globally competitive, the local manufacturing sector needs to rectify the problems in the labour force. Training is especially important to give rise to more artisans,” he says.

The reality, comments Bishop, is that there is a need for working conditions, salaries and living conditions to be improved in some instances. However, the number of days and the amount of time worked cannot be continuously impacted on each year, as this reduces productivity. The default to strike action and so work stoppages is a trend that needs to be turned around.

“Until the country sees rising productivity trends instead of stagnant to declining ones, we will not see much of an improvement for the outlook,” she warns.

Chronic skills shortages also weigh on future prospects, with the industry battling to secure the technical expertise it requires. Rising remune- ration is also not being sufficiently matched by productivity gains, which translates into another competitive challenge – high operating costs.

CONSTANT PRESSURE

“High electricity and water tariffs and property rates and taxes, as well as higher labour costs, are other major impediments the manufacturing sector is facing,” Bishop asserts.

Bezuidenhout adds that slow business activity, mounting inventories and low domestic demand are the other challenges currently weighing down the manufacturing sector.

The lack of demand is because of a weakened consumer market and resumed labour instability in upstream sectors, such as platinum and gold, he explains.

“To grow manufacturing, we need to increase volumes and reduce costs; to grow demand, we need quicker and more even roll-outs of government’s National Infrastructure Plan and more even implementation of government’s local procurement efforts. We also need to work harder at easing market access into the rest of Africa, China and Brazil for our manufactured goods,” he states.

More attention should also be given to bringing administered costs down as part of a broader fiscal review that benchmarks the way the country funds, finances and recoups costs for infrastructure and services against key competitor economies. The security of electricity and water supply, particularly by municipalities, also needs to be improved rapidly.

One aspect that government could consider to boost competitiveness is to further support the private business sector to increase the ease of doing business, focusing less on State-owned enterprises, red tape and control, for start-up businesses and the easy operation of current businesses in South Africa, says Bishop.

Bezuidenhout adds that government can also assist the manufacturing sector in opening new export markets.

“China and Brazil do not buy manufactured goods from South Africa. In the Brazil, Russia, China, India and South Africa business council, the Manufacturing Circle is trying to reach an agreement with China, whereby that country agrees to consider buying manufactured goods and investing in manufacturing in South Africa,” he explains.

He notes that government has budgeted for infrastructure and local procurement, of which the latter needs local enforcement, adding that, despite there being some traction, some areas still need significant improvement.

“Currently, one-third of local manufacturers benefit from local government procurement. The Manufacturing Circle survey respondents feel that it needs to be increased to two-thirds of manufactures,” he says.

Langenhoven also stresses the importance of government and State-owned companies actually delivering on their infrastructure promises, as the programmes could offer an important fillip to manufacturers.

“Public-sector investment in infrastructure is expected to grow by more than 5% over the next two years, accelerating over time, while private-sector investment growth is expected to increase after 2015,” he says.

“The domestic market for the steel and engineering sectors represent about 44% of the total market, which is geared towards intermediary products going to the automotive sector and investment products going to the mining and construction sectors,” Langenhoven points out.

However, the international economic climate remains important to the South African sector, which exports 60% of its production and competes for 56% of the domestic market with foreign suppliers.

Also increasingly important in the overall mix is the performance of the rest of Africa, which accounts for the lion’s share of South Africa’s nonmineral exports.

In fact, the World Bank’s latest ‘South Africa Economic Update’ shows that, once mineral ores, metals and fuels are stripped out, sub-Saharan Africa accounts for 29% of South Africa’s exports, up from 19% a decade ago. Including Southern African Customs Union exports, Africa currently accounts for around half of South Africa’s nonmineral exports, dwarfing the European Union, whose imports have fallen from more than 41% to 28% over the period.

COMPETIVENESS CONCERNS

But Langenhoven warns that the international competitiveness of the South African sector has deteriorated, making it vulnerable to import competition and placing it in a weaker position to take advantage of rising African demand and recovering global demand.

“Seifsa estimates the trade deficit to have widened to more than R44-billion during 2013. Export volumes decreased by 2% during 2013 and import volumes increased by 1% in 2012,” Langenhoven says, adding that nominal export earnings increased by 8.2% and imports increased by 11.4%, proving that imports had become more expensive.

Bishop advocates that, for South Africa to capitalise on the strong growth taking place on the rest of the continent, links between South Africa and Africa need to be improved.

She adds that some operators might consider moving to other African countries to take advantage of growth in these regions and lower labour costs, or increasingly mechanise.

But to secure growth and employment prospects in the manufacturing sector, there has to be fewer strikes. “Manufacturers need to have a reliable workforce to meet delivery deadlines and labour disruptions do not improve reliability. Another challenge is that productivity levels need to increase. There are fewer working days at higher costs, which is not positive for employment,” Bishop says.

The potential for industrial unrest, together with the prospect of a series of interest rate hikes and persistent infrastructure bottlenecks, remains ever-present dangers for the sector and for South Africa’s economic outlook. On the other hand, the weaker rand is offering the prospect of some much-needed relief. Most observers agree, though, that the exchange rate alone will be insufficient to ignite a sustainable manufacturing recovery.

Edited by Creamer Media Reporter

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