The drop in the selling prices of domestic intermediate products will put a further strain on companies in the metals and engineering (M&E) sector, given the direct implications of these prices on their margins and profits, says Steel and Engineering Industries Federation of Southern Africa (Seifsa).
Responding to the producer price index (PPI) published by Statistics South Africa on July 30, Siefsa chief economist Dr Michael Ade says the PPI reflects a slowdow in selling price inflation of goods manufacturing by the M&E cluster of industries for June, compared with May.
The data shows that the annual percentage change in the PPI for intermediate manufactured goods – which is measured in factory gate prices – dipped to 1.4% in June, from 1.7% in May, as derived demand from consumers continued to contract in a difficult economic environment.
Ade says that decreasing consumer consumption patterns, poor domestic demand, increasing operational costs and ongoing Covid-19 challenges are making it difficult for businesses to pass on cost increases to the market.
“Although decreasing selling prices for intermediate manufactured goods benefit consumers and buyers of inputs who can purchase more goods for the same amount of nominal income over time, the trend is worrisome for largely selling businesses that have to absorb sudden price shocks in order to keep their clients,” he explains.
Ade adds that this is a difficult situation for businesses in the M&E sector, which are largely domestic price takers, since they produce goods of intermediate nature that are used in the production of final goods.
Variations in factors affecting supply, exchange-rate volatility and uncertainty from the Covid-19 contagion are some of the drivers of selling price changes.
Generally, a continual deterioration in selling price inflation has the potential to further dampen any existing differential between input cost inflation and selling price inflation for manufacturers, also jeopardising their sustainability in the medium to long term.
Ade explains that as business activity continues to slow down during these difficult times, Seifsa recommends that stakeholders and policymakers fast-track efforts to boost infrastructure development, which is a key enabler if businesses are to expand and make a significant contribution to economic growth.
“Efforts to boost demand through increased infrastructure spending will, no doubt, exert an upward pull on selling prices as demand outstrips supply in the short term, prior to market adjustments,” Ade says, adding that the initiative will also cause a significant shift to the right, as companies use excess productive capacity to meet new domestic orders, thereby creating a significant number of part-time and full-time jobs in the process.
Importantly, the initiatives to boost demand should be complemented by unceasing efforts to boost regional and global trade, especially given the opening up of global value chains of key trading partners, following prolonged periods of economic lockdown from the pandemic.
Increased export activity will add an additional dimension to consumption patterns, as external demand increases, also boosting the production potential of local companies.