The seasonally adjusted Kagiso Purchasing Manager’s Index (PMI) declined steeply by 7.4 points to 49.1 in September, reversing the gains of the past few months.
The index also fell below the key 50-point mark for the first time since March and was lower than the PMI data of China and the Eurozone.

While the declines were quite broad-based across the major subindices, the two largest weighted subcomponents of the PMI, business activity, which declined from 59.2 points to 46.7 points, and new sales orders, that lost 9.4 points in September, largely accounted for the headline PMI decline, Kagiso Asset Management head of research Abdul Davids said.

The Steel and Engineering Industries Federation of South Africa (Seifsa) pointed out that the business activity index, which was of particular importance to the metals and engineering sector, declined by 21% month-on-month in September.

“The sector is directly exposed to the mining, motor and construction sectors, which were all affected by industrial action that crippled demand during September. This affected output from the steel and engineering sector in the short term and may continue to do so for some time, owing to unresolved issues in the automotive components industry,” Seifsa chief economist Henk Langenhoven said.

He added that, although the index for September had declined by 21%, Seifsa hoped that this was a short-term overreaction.

Langenhoven pointed out that the decline in the index in the year to date was only 3% when compared to the same period in 2012, while the 12 months ended September 2013 saw a 6% improvement year-on-year, which was nearly three times better than the actual metal and engineering production increase over the same period of 1.2%.

Further, Davids said the decline in the new sales orders index reflected the knock-on effects of the prolonged strike in the vehicle-manufacturing sector on the wider manufacturing sector.

“Intermittent mining sector disruptions and fears about future industrial action may be weighing on manufacturers,” he added, noting that an end to the vehicle component strike and a quick resolution to the Association of Mineworkers and Construction Union’s strike at Anglo American Platinum should lead to a rebound in sales activity and orders.

Meanwhile, Manufacturing Circle executive director Coenraad Bezuidenhout commented that the PMI decline was “a wake-up call that a myopic and reckless approach to industrial relations will lead to reversals in manufacturing recovery and, ultimately, to job losses”.

He added that, should industrial peace not prevail to support other positive developments in the manufacturing sector, such as the weaker rand and local procurement traction, it could markedly impact on the growth of the economy  and could lead to employment losses as manufacturers contract or mechanise to stay afloat.

Bezuidenhout stated that the way in which labour market outcomes undermined the South African economy’s ability to recover should be viewed as a national emergency that required resolute political action.

“The fact that we have recently, again, seen eleventh-hour concessions to labour demands in Parliament for an even more punitive employment dispensation in relation to labour relations and employment equity amendments, as well as the Employment Services Bill means the ranks of the unemployed will grow and the sustainability of our economy will deteriorate,” he said, adding that this environment would also limit any positive impact that the newly tabled Employment Incentives Bill could have on growing youth employment, as it would undermine overall employment growth.

The employment index declined by 1.7 points in September to 49.5, with quarterly employment data suggesting that a recovery in factory sector employment was unlikely over the short term; however, the third-quarter average of 49.4 was a solid improvement on the 44.7 recorded in the second quarter.

The price index, which had experienced significant upward pressure owing to higher fuel, electricity and labour costs, declined by 4.5 points to 82.7 in September, as a result of a more stable oil price during the month.

However, the index remained at a relatively high level.

“We expect this index to remain high as Brent crude oil prices remain elevated and the rand exchange rate fluctuates around the R10/$ level,” Davids stated.

Meanwhile, the index measuring expected business conditions in six months’ time lost four points to reach 51.8, which indicated that purchasing managers were less optimistic about future prospects.

“This weaker sentiment suggests that producers will not be ramping up production anytime soon or investing in the expansion of capacity,” Investec commented.

This weaker sentiment was supported by the PMI leading indicator, which remained below one in September, Davids concluded.