Confidence levels in the manufacturing sector remain near the low levels reached during previous business cycles, as loadshedding weighs on sentiment, financial services firm Absa's Manufacturing survey for the second quarter shows.
“Electricity supply disruptions not only directly weigh on production and capacity and hurt profitability owing to the costs associated with loadshedding mitigation measures, such as diesel generators, but also negatively impact sentiment,” says Absa Relationship Banking manufacturing sector head Justin Schmidt.
“With confidence levels remaining at the same very low levels seen in the first quarter, the effects of load shedding are visible across manufacturing subsectors,” he says.
Although sentiment has improved significantly since the record low recorded during the Covid-19 pandemic, which was five points, historical data show that confidence has only been at these levels a handful of times. The second-quarter confidence level was unchanged at 17, which is lower than the trough of 20 reached during the global financial crisis.
Further, forward-looking expectations also highlight significant pessimism, namely that a record majority of manufacturers expect that business conditions will deteriorate further over the next 12 months.
“In the short term, business conditions are likely to worsen as there is an expectation of increased loadshedding during the winter season. However, the silver lining is that as additional generation capacity comes online, business conditions will improve over the longer term,” Schmidt says.
As the tough economic environment continued to constrain household disposable income, manufacturers were faced with a reduction in sales volumes and were also seeing a slowing of price inflation with regard to selling prices in both the local and international markets, he highlighted.
Compared to the first quarter, domestic sales dropped by 22 and the domestic selling price per production unit dropped by 19 points, while export sales showed a 15-point decline and export selling price per production unit dropped 14 points, says Schmidt.
Further evidence of the impact of loadshedding was visible on the lower levels of production and the increased level of capacity underutilisation.
“As the intensity of loadshedding remains high, the cost of loadshedding in the form of production downtime and diesel purchases for generators is causing margin pressure,” he says.
“Manufacturing remains vital to the growth of the South African economy, as evidenced by the growth recorded in the first-quarter gross domestic product figures released by Statistics South Africa. Given the current energy crisis faced by the country, manufacturers’ investments are focused on remaining in operation while investments into additions or expansions remain on hold,” Schmidt notes.
Absa remains committed to support manufacturers on their journey to becoming energy resilient, he adds.