Western Cape Business News

Send  Share  RSS  Twitter  17 Jun 2010

MANUFACTURING: Rebound Loses Momentum


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After the patchy export led rebound in manufacturing business conditions during the first quarter, the latest BER Manufacturing Survey revealed some momentum loss. “The stimulus from exports and restocking seems to have waned to some extent and domestic demand remained weak – leaving the sector without the necessary growth momentum and resulting in broad based softness” said BER Senior Economist Christelle Grobler. Manufacturing business confidence declined marginally from 28 to 27 index points, and remains at a low level (currently 20 points below its long-term average).

Domestic sales and orders (compared to the same quarter last year) continued to fall, although the pace of decline decelerated. “Producers did not foresee further declines in domestic demand and were surprised on the downside” said Grobler.

Export performance deteriorated, with the export sales and orders indicators losing ground in the second quarter. Global uncertainty, recent Transnet strike action, as well as the relatively strong rand exchange rate, are likely to have impeded exports during the quarter.

In line with the disappointing demand for locally manufactured goods, production volumes did not recover. The majority of respondents continued to report declines in both production volumes and the number of factory workers employed – however, the pace of decline slowed further. “Manufacturers indicated a below average level of finished goods stocks (in relation to expected demand), which may bode well for production volumes going forward” said Grobler.

The rate of increase in average total cost per unit of production accelerated, with cost pressures such as electricity tariff hikes coming into effect during the quarter. Manufacturers managed to up the rate of increase in domestic selling prices in an attempt to defend profitability. “However, with sales frail and import competition active due to the relatively strong rand exchange rate, reliance on pricing to counter lower volumes might be hampering growth in local demand” said Grobler.

Despite a challenging demand environment and excess capacity, respondents reported rising fixed investment. “This may be attributed to manufacturers taking advantage of low global inflation and the relatively strong rand exchange rate to purchase imported machinery at competitive prices, as well as possibly some labour substitution in the wake of continued pressure on labour costs” said Grobler. Expected investment in machinery and equipment in 12 months’ time remains positive.

The rating for insufficient demand as a constraint on business activity continues to top the list of those constraints surveyed. Currently, the index of the percentage rating insufficient demand as a serious constraint lies at 73 – only 7 points below the historic high of 80 reached during 2009Q4. The rating of the political climate increased notably during the second quarter, replacing the shortage of skilled labour as the second most serious (of those surveyed) constraint on activity: the index of the percentage rating the general political climate as a constraint rose to 58 (from 45 previously).

Finally, renewed uncertainty (particularly on the global economic front) has negatively impacted producers’ expectations regarding business conditions in 12 months’ time, with only a small net majority of 4% now expecting an improvement – down from 22% previously.

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