The lack of month-on-month change in the Kagiso Purchasing Manager’s Index (PMI) from April to May indicates that manufacturers are “holding the fort” in tough trading conditions, asserts local industry body the Manufacturing Circle.

According to figures released earlier on Monday, the seasonally adjusted PMI remained unchanged at 50.4 in May, which Kagiso Asset Management said indicated that the sector was struggling to gain any real momentum.

“Kagiso is correct in its assessment that slow international and local demand, as well as significant cost pressures, remain significant challenges, but inventory improvements also show that manufacturers are overcoming first-quarter supply-side constraints in steel, tinplate and high-grade coal,” the organisation said in a statement.

While the new sales orders index fell 2.6 points to 51.1 in May, the inventory index rose by nearly eight points to 54.7, recovering most of the ground it lost in April.

Meanwhile, in response to a 4.4-point gain by the price index to 82.4, the Manufacturing Circle added that manufacturing costs were still chiefly driven by rapid, administered price increases, and that productivity had not kept pace with salary increases.

This would lead to “unavoidable” margin squeeze, most notably where the local manufacturer was unable to pass the cost increase on to the consumer, as a result of a competitive domestic environment that was driven by "unfairly incentivised imports".

“However, most manufacturers agree that the competitive levels at which the rand has recently been trading at has helped to relieve destructive margin squeeze, thereby bolstering the resilience of the sector,” said the organisation.

Meanwhile, it said that systemic supply-side constraints, such as security of electricity supply and inbound and outbound port and rail capacity, could also keep growth momentum at bay in the manufacturing sector.

Critical to sustained manufacturing growth, the Manufacturing Circle added, was tackling numerous domestic policy challenges, increasing eurozone and US demand, improving access to Asian and South American markets, and resolving the challenges associated with expansion into Africa.

The organisation cautioned that, while the employment outlook in the manufacturing sector remained stable at present, with the Kagiso PMI employment index at 47.2, industrial unrest in the upstream mining and agriculture sectors remained a significant risk.