The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has welcomed the latest Absa Purchasing Managers’ Index (PMI) outcome, which reflects an increase in overall business activity in the broader manufacturing sector for March.
The composite PMI data for March shows that industrial activity improved to 48.1 points, up from the 44.3 points recorded in February. This moved the index closer to the benchmark level of 50, which separates expansion from contraction.
Seifsa economist Marique Kruger says it is encouraging to note that the majority of the seasonally-adjusted subcomponents registered increases in March, compared with February.
Asset manager Investec is more pessimistic about the result, saying that the increase in March does not signal an actual improvement in manufacturing sector conditions.
Of the PMI’s five subcomponents, Kruger explains that the supplier performance subindex increased the most, surging from 58.6 points in February to 67.4 points in March, while the worst-performing subindex was the business activity subindex, decreasing from 33.7 points in February to 30.7 points in March.
“As such, the impact of the coronavirus pandemic started to influence business conditions for SA manufacturers at the end of the first quarter.”
Investec explains that the PMI survey report noted that the suppliers’ performance subcomponent reflects slower delivery times “caused by global supply-chain disruptions. This phenomenon is observed in PMIs worldwide, but amplified in the South African manufacturing PMI as this component has a bigger weighting.
The asset manager adds that, also adding to the increase in the headline PMI was a rise in the prices subcomponent; the rate of input cost inflation accelerated, with currency weakness as the main factor.
An assessment of the remaining survey variables confirms that recessionary conditions prevailed in the sector in March. Specifically, output, new sales orders and purchasing remained at 2009 lows on weak aggregate demand, Investec says.
Additionally, the domestic lockdown implemented from March 26 will have disrupted production.
Looking ahead to the second quarter, Investec points out that the manufacturing sector is certain to experience a significant downturn, possibly with the exception of the food and pharmaceutical manufacturing sectors.
“The output gauge was at its lowest since 2009 and the new orders subindex will likely suffer further declines as businesses and consumers pull back spending amid the implementation of tough global and local measures to contain the spread of the coronavirus,” Investec adds.
Further, despite the improvement overall in the PMI, Kruger points out that the trend is still very volatile and shows the underlying constraints facing businesses.
“Companies still have to deal with fluctuating input costs, increasing energy costs, volatility in the exchange rate and the global corona virus pandemic,” Kruger says.
She adds it also remains to be seen what impact the 21-day national lockdown to curb the spread of Covid-19 will have on the country's manufacturing industry.