Persistent low levels of capacity use in the manufacturing sector and low demand for locally manufactured goods are “worrying” trends compounding the prevailing Covid-19 restrictions that are limiting operations at industrial plants, says the Steel and Engineering Industries Federation of Southern Africa (Seifsa).
Data released by Statistics South Africa (StatsSA) on May 6 shows that manufacturing capacity use in South Africa was 74% in the first quarter of this year, compared with 77.5% in the first quarter of 2020.
Within the metals and engineering (M&E) sector, capacity use was, however, only marginally down to 76.1% in the period under review, compared with 76.8% in first quarter of 2020. This was mainly as a result of insufficient demand, with maintenance and shortages of raw material such as oxygen and steel also contributing to the under-use of production capacity, states Seifsa.
Overall, it points out that the manufacturing sector remains weak in terms of production patterns, with a year-to-date production decline of 3.1% as at end-February.
The federation notes that manufacturing has been under pressure for some time, with data depicting a low yearly average production growth rate of 0.1% in the past four years to 2019, coupled with a significant decline of 13.7% in 2020.
In the past five years to 2020, total capacity use in the manufacturing sector had averaged 79.8%, with that of the M&E sector at 77.5%, states Seifsa.
While manufacturing capacity use dipped to 59.8% overall and to 52.8% for the M&E sector in the second quarter of 2020 amid Alert Level 5 lockdown restrictions, Seifsa says it improved in the latter quarters of 2020 as the restrictions were eased, reaching 79.3% and 74.6%, respectively, in the fourth quarter of 2020.
In 2020, capacity use for the manufacturing sector and M&E sector was 72.3% and 67.6% respectively.
Seifsa chief economist Chifipa Mhango reveals that weak manufacturing production amid the lockdown regulations contributed to the economy contracting by 7% in 2020.
However, he says there are encouraging signs of a slight recovery as evidenced by Absa’s manufacturing purchasing managers index, which Mhango says is in an expansionary trajectory of above 50, even though there was a marginal decline from 57.4 in March, to 56.2 in April.
“We, do, however, reiterate that any recovery in manufacturing production will be driven by the government’s efforts to revive the economy. It is, therefore, critical, that the government speed up the implementation of its economic recovery plan.”
The speeding up of the recovery plan is “particularly critical” for the recovery of the M&E sector, which has experienced a worrying decline in levels of employment and investment, he says.
In this regard, Mhango notes that the M&E sector is heavily reliant on demand from key government infrastructure projects to boost its production and sales, especially for products such as steel and other related downstream products such as roofing material.
As such, an increased level of domestic industrial demand is required for manufacturers to reboot capacity use levels to above 80%.
Meanwhile, he adds that it is “imperative” that the South African government efficiently roll-out its Covid-19 vaccination programme to enable the economy to open up further and restore industrial production.