Electricity costs, wages weigh on outlook for SA factories

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Workers in a clothing factory in Newcastle, KwaZulu-Natal. Picture: FINANCIAL MAIL
MANUFACTURING activity expanded in South Africa last month, but analysts warned the sector still faced increasing electricity and labour costs, despite support from a weaker rand.

The Kagiso purchasing managers’ index (PMI), a gauge of manufacturing activity, rose unexpectedly last month, suggesting the country’s second-biggest sector may have started the second quarter on a positive note.
The 1.2 point rise in the Kagiso PMI to 50.5 from 49.3 in March was mainly due to strong gains in the business activity and new sales orders sub-indices.
A reading of above 50 suggests an expansion in manufacturing activity.
Although the PMI has traditionally been a good indicator of manufacturing production data, it has not correlated much with actual manufacturing production data in recent months.
The latest available manufacturing output data for February showed that production fell 2.9% year on year whereas the PMI for the same month was at 53.6 points.
Manufacturers reiterated the challenges posed by sluggish demand coupled with rising costs for the sector. The weaker rand, they said, was supportive.
“While manufacturing remains under pressure due to cost-push inflation, the support from the weaker rand shines through in terms of lower inventories, increased business activity and sales orders,” Manufacturing Circle executive director Coenraad Bezuidenhout said.
The business activity sub-index regained the ground it lost in March and rose 4.5 points to 52.2 last month.
The local manufacturing sector’s recovery still depends largely on the economic recovery in its largest export markets, including the eurozone and US.
Capital Economics Africa economist Shilan Shah said recent data for the eurozone, such as its April PMIs, suggested there was still little hope of an economic recovery in the region this year.
Preliminary PMI results for April show the eurozone reached a four-month low of 46.5 while China dropped to a two-month low of 50.5.
Mr Shah suggested sluggish demand would offset gains from the weaker rand. “High wage settlements also weigh on profitability and competitiveness in the sector, while growing concerns around electricity could constrain output.”
Employment prospects for the sector were not looking very bright, reflected in the continued downward trend of the employment sub-index last month — at 42.1 at its lowest level since July 2011.
“This is still a big worry. We are on the eve of a new round of wage negotiations. Employers are cautious to employ,” said Andre Coetzee, MD of Chartered Institute of Purchasing and Supply Africa, which helps to compile the PMI.

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