Absa’s Retail and Business Banking Division’s head of new-sector development, Justin Schmidt, contends that while there has been a recovery in manufacturing-sector activity, inefficiencies linger, and these could be a stumbling block to the rebound

With the first two months of 2021 now behind us, there are some positive developments in terms of economic recovery, but various risks remain for the manufacturing sector. It will likely take a couple of years to recover the ground lost as a result of the Covid-19-induced lockdown and the devastation that 2020 had on the South African economy, and some of the inefficiencies facing manufacturers will need to be addressed to ensure manufacturing can deliver on the much increased focus government is putting on the sector.

In one of the past articles I wrote in this column, I put down a wish list for 2020 and the ‘premiumisation’ of the sector. There were already many headwinds facing the manufacturing sector. Although we have started seeing production volumes being clawed back following our lost ‘decade of production’, we need to see increases in the private- and public-sector capital that is channelled into infrastructure and greater electricity generation capacity as a result of private-sector investment, as well as coherent and supportive government policies which enable manufacturing (especially those subsectors and products where we have competitive advantages).

Positively, the focus is on manufacturing to support our Covid-19 recovery efforts. Localisation remains a priority, there has been good progress on masterplans, and we have seen recent successes in the automotive sector in terms of attracting substantial investments. There are, however, inefficiencies that need to work their way out of the sector and the general economy to support similar successes.

Easing of Lockdown Restrictions

The latest Absa Manufacturing Purchasing Managers’ Index (PMI) indicated an improvement in manufacturing-sector activity in February. The seasonally adjusted business activity subindex of the PMI bounced back into expansionary territory in February at 52.1, compared with just 43.5 in January. The improvement is likely attributable to the easing of one of the major headwinds facing the sector – lockdown restrictions. Easing lockdown restrictions at the start of February, especially in the alcohol manufacturing value chain, naturally supports greater levels of output but also eases some of the supply chain bottlenecks that increased in 2020. Therefore, it is crucial for the sector that the Covid-19 vaccination programme is rolled out fast and efficiently and that we avoid a third wave of infections or a string of further lockdown restrictions.

Consistent Energy Supply

The second major inefficiency that South African manufacturers face – which is worse now than when I penned my wish list for 2020 – is the lack of a consistent energy supply. While we saw fewer instances of load-shedding in February, compared with January, the availability of energy in South Africa has frequently been below 60%. There is a high risk that load-shedding will be with us for the remainder of the year, especially during the winter peak for energy demand. While private-sector participation in the energy sector is encouraged and there are some positive developments in terms of self- generation investments, as well as the issuance of licences by the National Energy Regulator of South Africa, unfortunately, there have been delays in procuring utility-scale renewable energy – one of the levers that should have been pulled, despite the lockdown. Therefore, more and more manufacturers will need to look at investing in energy self-generation in 2021 and beyond, including the integration of generators and batteries, to address these issues.

Cost Pressures

Another major inefficiency faced by manufacturers is that of rising cost pressures associated with electricity tariff increases, fuel price increases and other cost pressures linked to raw material shortages and supply chain bottlenecks.

The cost pressures faced by manufacturers have been increasing, as was evidenced by the purchasing price subindex of the PMI in February, which likely reflected the sharp increase we have seen in local fuel prices. With the increasing fuel levies, as well as the likely increase in direct Eskom customer tariffs of 15% from April 1 and the 18% increase that municipal clients will face from July 1, manufacturers will see more cost pressures for the remainder of the year.

Addressing Inefficiencies

In the latest PMI, manufacturers were generally upbeat about the outlook. This was indicated by the index measuring manufacturers’ expectations six months into the future, which remained unchanged in February at a relatively optimistic 59.2. Fortunately, we know what needs to be done to support the sector and have the plans mapped out. Hopefully, we will be able to replicate the successes of the automotive sector by quickly implementing these plans and addressing any bottlenecks.

Schmidt heads New Sector Development in Retail and Business Banking at Absa – justin.schmidt@absa.africa