Following a robust increase in August, the Absa Purchasing Managers’ Index (PMI) ticked up further to 58.3 index points in September, with the shift to a lower lockdown level mid-month likely having driven the further improvement in business conditions in the local manufacturing sector.
However, financial services provider Absa cautions that, despite the level of the PMI now being above pre-pandemic levels, it “does not directly translate to official manufacturing activity being back to pre-pandemic levels”.
Absa explains that although the high level means that conditions continue to improve, with more respondents reporting an increase in output month-on-month, instead of no change or a decline compared with the previous month, this can still be consistent with the level of output remaining well below that recorded prior to the lockdown.
It also points out that some respondents have noted that conditions “remain far from normal, although improving”.
Purchasing managers remain optimistic about business conditions going forwards, it adds.
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has welcomed the continuous rise in overall business activity and says the PMI data provides a positive outlook for companies in the metals and engineering sector.
Seifsa chief economist Dr Michael Ade comments that the improving PMI offers hope for the broader manufacturing sector and can "be seen as a preview to enhanced industrial activity".
“There is a need for continuous improvement in business activity, given the challenging operating business environment, amid prevailing low levels of domestic demand and increasing input costs, as a result of a generally weak exchange rate.
"This is important as the extended benefits will include an increase in employment in the various subcomponents of the metals and engineering industry,” he says.
Meanwhile, the index tracking expected business conditions in six months’ time ticked up to 64.5 index points from 63.4 in August, and a low of 27.3 index points in April. However, to gauge the implications of the PMI results for official production data, Absa says “it is important to note the quarterly trend in the business activity index specifically”.
According to the PMI, the business activity index fell back slightly in September, but continued to signal a monthly expansion. Additionally, important from a manufacturing gross domestic product perspective, the index averaged around 64.6 index points in the third quarter, compared with 37.6 index points in the second quarter.
This, Absa explains, suggests that the sector “should record a sizeable quarter-on-quarter rebound from the second-quarter slump”. The sharp 7.6% month-on-month increase for actual manufacturing production in July supports this narrative.
Further, although the headline PMI also improved on a quarter-on-quarter basis, the increase in the business activity component is more pronounced and “probably better reflects the pure output dynamics at this stage”.
Another positive development was that the new sales orders index stayed at an elevated level in September. Some respondents mentioned that customer restocking boosted orders, although export sales softened somewhat. The purchasing inventories index rose back above the neutral 50-point mark for the first time since mid-2019.
The employment index remains the main drag on the PMI, but a further increase in the index does suggest that the pace of job losses has slowed.
The new sales orders index declined marginally but stayed at an elevated level, historically speaking. As was the case in August, the shift to a lower lockdown level mid-month likely contributed to an uptick in demand, while export demand softened somewhat in September, but remained in positive terrain.
Although still lagging the activity index, the employment index rose for a second straight month. At 44.5 index points, it still points to lower employment, but suggests that the pace of retrenchments has slowed. Statistics South Africa’s Quarterly Labour Force Survey showed that the sector lost 185 000 formal-sector jobs in the second quarter.
Following a solid increase in August, the inventories index rose by a further 4.3 index points in September. The two consecutive increases brought the index to the highest level in more than four years.
The supplier deliveries index fell to 60.9 index points in September. Although still elevated, this is the lowest level since February.
“It is important to explain that this subcomponent is inverted. If goods are less readily available and purchasing performance worsens, this is normally a sign of increased demand for manufactured products,” Absa explains.
Therefore, it says that “such a situation actually lifts the index”, despite goods still being less readily available owing to supply chain disruptions caused by local and global production stoppages and other trade-related disturbances.
“Nevertheless, it is surprising to see supply-chain disruptions remain such an issue on a month-on-month basis.”
The purchasing price index rose for a second month and reached the highest level since September 2019, despite a decline in the diesel price at the start of the month and the rand exchange rate, on average, trading somewhat stronger in September compared to August.
A hefty diesel price decline expected next week could alleviate some pressure on costs in October.