The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has welcomed the latest Producer Price Index (PPI) data, released by Statistics South Africa (Stats SA) on Thursday, which showed growth in two subsectors.
 
However, the steel industry body also expressed concern regarding the absence of meaningful long-term gains.
 
While Stats SA’s data indicated that the PPI for final manufactured goods rose by 6.6% in October, compared with the same period last year, the PPI for intermediate manufactured goods rose by 6.2% in October, year-on-year. It is also down 6.8% from the comparative September 2015/16 readings.

Seifsa senior economist Tafadzwa Chibanguza cautioned that the PPI for intermediate manufactured goods had to be viewed with concern, as the metals and engineering sector represented 70% of the composition of this index.
 
“This is indicative of struggling growth in the PPI for the intermediate manufactured goods index and makes for a very good proxy for the metals and engineering industry,” he noted.
  
Chibanguza explained that the PPI for manufacturers was a measure of selling price inflation.
 
“An increasing trend in these indices would provide companies with the opportunity to try and repair profit margins. Some of the subsectors in the metals and engineering sector have been recording negative margins,” he said.
 
Chibanguza added that the trend had backtracked in October 2016, meaning a further deterioration in margins.
    
He stated that when the October 2016 PPI was read in conjunction with a number of other data sets, the picture got gloomier.

“Seifsa’s composite input cost index, which models the input cost trend for the metals and engineering sector, measured an annual increase of 11.5% in October 2016. This was a clear representation of input cost inflation outstripping selling price inflation. Therefore, the disinflationary pattern in the October 2016 PPI would have put further cost pressure on the sector,” said Chibanguza.

He added that Seifsa’s latest capacity-use reading for the metals and engineering sector was 76%, which is below the capacity-use benchmark of 85%, meaning an increase in the total unit cost through fixed costs.  

Chibanguza further pointed out that, on a 12-month seasonally adjusted trend, the metals and engineering sector had contracted by 4.18%.

This is a clear indication that the markets the sector supplies are very thin, with insufficient activity in the economy to arrest this slow-falling trend. It also hinders companies in the metals and engineering sector from transferring increasing costs into higher-production volumes.

“However, we welcome both the PPI for final manufactured goods and the PPI for intermediate manufactured goods, which have positive readings sitting above zero. Our concern is more directly with the disinflationary pattern in the annual rate of increase between the October 2016/2015 and September 2016/2015 readings, which will add to greater pressure in the system,” concluded Chibanguza.