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ECONOMY: Manufacturing Gains Momentum


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Stellenbosch's BER’s latest Manufacturing Survey indicated that manufacturing business confidence increased by 11 index points to reach 41 during 2010Q4. Although the results reflect an improvement in demand, manufacturers’ profitability remains under considerable pressure.

The results showed a continued improvement in domestic sales volumes, with the indicator reaching a three-year high. However, the domestic order volumes indicator reflected a decline in the pace of new orders.

One of the main highlights of the survey results was the better than expected export performance. The net majority reporting a decrease in export sales volumes declined notably to reach levels last witnessed in 2003.

The results indicate that the demand for specific South African exports improved during the survey quarter, namely in the transport, machinery, chemical and base metals industries. However, export selling prices came under pressure, likely due to the export competition, the firmer rand exchange rate, and low inflation in our main export destinations,” said BER economist Nkanyiso Hlongwa.

Production volumes rose notably during the fourth quarter – with the indicator reaching the highest reading since 2007Q4. “This was possibly driven by the improvements in domestic and export demand as well as the normalization of production in the transport sector post the industrial action in August and September,” said Hlongwa.

Although production volumes improved, profitability remained under pressure during the fourth quarter. The net majority reporting an acceleration in per unit total cost inflation declined marginally – but remained elevated. However, those reporting decelerations in the average rate of increase in domestic and export selling prices rose. In fact, the indicator for the change in the rate of increase in domestic selling prices reached a new all time low – signaling significant downward pressure on selling prices. “The pressure on domestic selling prices may be driven by the stronger import competition, lower input costs and lower domestic inflation,” says Hlongwa

The combination of a slight deceleration in total cost inflation and a sharper slowdown in the rate of increase in selling prices implies added pressure on manufacturers’ profitability. The derived profitability indicator suggests that the profitability of manufacturers is currently at the lowest level on record since 2000.

Manufacturers’ expectations reveal some uncertainty, with business conditions expected to deteriorate in 12 months time. Fixed investment in real machinery and equipment is also expected to contract over this horizon. Furthermore, exports are forecasted to decline, whilst imports are expected to continue rising. “The impact of the stronger rand exchange rate may have contributed to the weaker export expectations in particular,” says Hlongwa.

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