MULTIPLIER EFFECT The manufacturing sector remains key to the growth and development of South Africa owing to its multiplier effect on other sectors of the economy
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) is concerned about the slow pace of recovery in the manufacturing sector, as depicted by the manufacturing Purchasing Managers' Index (PMI) number of 50.9 last month – lower than the 2020 fourth quarter average.
According to the Bureau for Economic Research, South Africa’s Absa Manufacturing PMI January 2021 figure was nonetheless a slight rise from 50.3 in December 2020.
The latest reading is much lower; however, than the average recorded in the final quarter of 2020. The federation notes that the business activity index declined for a fourth consecutive month, pointing to a further loss of momentum in recovery.
Meanwhile, there were gains in the subindices tracking new sales orders and expected business conditions in six months’ time, says Seifsa.
The manufacturing sector remains key to the growth and development of South Africa owing to its multiplier effect on other sectors of the economy. Key in this regard are sectors such as construction, through which the metals and engineering (M&E) industry acts as a supplier of crucial inputs such as steel.
Seifsa chief economist Chifipa Mhango states that the signs of this slow pace in recovery show that the sector is in for a bumpy ride in 2021.
He explains that the price trends for intermediate products – which were discouraging new investment into the manufacturing sector – were also a concern.
“Prices are a key component of decision-making by businesses determining how revenue will be generated, either taking the approach of growing price or volume. Within the manufacturing sector, historical patterns show that on average, since January 2013, prices of goods have increased below 10% year-on-year.”
This, he says, is for both final manufactured goods and intermediate goods, of which most M&E products are part.
Further, producer price index (PPI) data suggests that in 2020, electricity prices increased at a much faster pace than that of intermediate manufactured goods.
However, prices for mining products increased more than both electricity and intermediate manufactured goods between January and December 2020.
Mhango highlights that this reflects the prevailing difficulty in the operating environment, characterised by rising intermediate inputs costs from the mining sector.
He advances that there is a prevailing discouraging trend of generally decreasing price patterns in both the intermediate and final manufactured goods PPI since 2016.
“It is important to keep electricity price increases under control to ensure business’ sustainability, since their negative effect on turnover can lead to the shutting down of businesses and more job losses in the short to medium term.”
Mhango warns that the massive surge in prices of mining input products to 32.5% in 2020, according to Statistics South Africa, which is above price increases of intermediate manufactured goods, was a concern for the survival of the M&E sector.
Moreover, the high electricity prices had compounded the existing gap between the selling prices for M&E intermediate goods and production which, Mhango concludes, has discouraged production.