PMI off to slow start for 2014 as activity remains subdued

3rd February 2014

By: Leandi Kolver

Creamer Media Deputy Editor

  

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Amid persistent challenges, the seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) started the year unchanged at 49.9 points, while the business activity and new sales orders indices weakened, as demand remained subdued.

The business activity index fell for the second consecutive month in January to reach 48, its lowest level since March 2013.

“Business activity at such a low level is not conducive to actual manufacturing production growth in the first quarter of 2014,” Kagiso Asset Management head of research Abdul Davids said.

The Manufacturing Circle (ManCirc) stated that slow business activity, mounting inventories and low domestic demand were currently weighing down the sector, adding that the lack of demand was owing to a weakened consumer and resumed labour instability in upstream sectors.

However, in contrast, the eurozone’s manufacturing sector was in much better shape than expected, Kagiso said, stating that the preliminary PMI reading showed that underlying demand for manufactured goods in the eurozone was at its strongest level in nearly three years, lifting the headline index to a 32-month high of 53.9 points.

ManCirc executive director Coenraad Bezuidenhout said there were upsides in terms of higher anticipated demand from the eurozone, which should be supported by the weak rand.

Further, banking group Investec pointed out that, while manufacturing activity increased in the eurozone, activity receded in the US and China, which suggested that the global recovery would proceed at an uneven pace, implying a similar pattern would be reflected in South Africa's export growth trajectory.

Meanwhile, the deterioration in the business activity and new sales orders indices was balanced by a more pronounced improvement in the employment and inventories indices.

After declining by five points in December, the employment index rose to 50.7 points in January.

Davids said the index had been hovering around the 50-point mark for a few months, which could signal a stabilisation in labour demand after continued job shedding following the 2008/09 recession.

However, Bezuidenhout said while the employment index showed some recovery, downside risks owing to low productivity, upstream labour instability and the threat of mechanisation remained.

Further, the inventories index rose from 46 points to 53.9 in January; however, the rebound in inventory levels without an accompanying improvement in new sales orders did not generally bode well for production in future, Kagiso said.

Davids pointed out that manufacturers might have stocked up in anticipation of further input price increases.

Meanwhile, the price index surged from 80.1 in December to 89.3 in January – its highest level since mid-2008.

“This sharp increase is likely owing to the weaker rand elevating the costs of imported input goods. Increased input prices will place pressure on manufacturers’ profitability levels and will also filter through to higher prices for consumers,” Davids explained.

Investec added that the high level of the price index also reflected that cost pressures at factory level remained strong during January.

Further, despite tough conditions, manufacturers were still optimistic, as the index measuring expected business conditions in six months’ time rose by 3.5 points to 61.4.

“Given that local demand is likely to remain relatively weak, manufacturers may be expecting a boost [in] exports due to improved demand from the eurozone and a possible competitive edge from the weak rand,” Davids said.

However, he cautioned that the combination of higher inventory levels and weaker orders did not bode well for future production.

Bezuidenhout stated that to grow, manufacturing volumes had to be increased and costs pushed down.

“To grow demand we need quicker and more even roll-out of government's infrastructure build programme 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.

“[Further, to] push down [costs] we need to focus on bringing administered costs down as part of a broader fiscal review that benchmarks the way we fund, finance and recoup costs for infrastructure and services against key competitor economies, [as well as] rapidly improve security of electricity and water supply by municipalities in particular,” he concluded.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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