Manufacturing businesses in South Africa are bracing for a tough six months ahead as the country’s energy crisis and a fragile global environment plunged production to a one-year low in July.
The Absa Purchasing Managers’ Index (PMI), released yesterday, fell by a further 4.6 points, from 52.2 points in June to 47.6 points in July, as a result of crippling power cuts.
This was the first reading below the neutral 50-point threshold – which separates contraction from expansion – since July 2021, when the looting and unrest in KwaZulu-Natal and Gauteng hurt output.
This also meant that the manufacturing sector experienced a tough start to the third quarter following a weak second quarter.
Absa said electricity supply disruptions were the likely cause of the drop in production last month, while the less supportive international environment also affected the headline index.
Power supplier Eskom ramped up its rotational power cuts to Stage 6 last month as its generation capacity deteriorated to the weakest levels since December 2019.
Absa said that at the same time, the international environment was also less supportive, with many developed countries’ PMI readings also weakening of late.
China, South Africa’s largest trading partner, saw its PMI falling to contractionary levels in July as well, the lowest in three months, as manufacturers continued to wrestle with high raw material prices and disruption caused by Covid-19 lockdowns.
Manufacturing activity also contracted for the first time since June 2020 in the Eurozone as new orders for goods decreased for a third successive month.
“Indeed, local purchasing managers turned decidedly more downbeat about business conditions going forward amid local electricity woes and concerns about global growth,” Absa said.
The index tracking expected business conditions in six months’ time dipped to 49.4 in July, its weakest since the strictest phase of Covid-19 lockdown as respondents expected conditions to worsen going forward.
However, the vast majority of responses were received before President Cyril Ramaphosa announced significant energy market reforms last week, which was generally well received and could have countered some of the pessimism.
Last week, Ramaphosa announced a raft of measures to secure energy supply in the immediate future, including cutting the red tape on electricity generation regulations, procuring surplus electricity from independent power producers and additional capacity from neighbouring countries.
Absa also said business activity and new sales orders indices were the big drivers of the decline in the headline PMI as both indices were deep in negative terrain, pointing towards weak domestic activity and demand.
Export sales were also lower, although to a lesser degree. In addition, the employment index dipped, albeit less so than activity.
On the cost front, the purchasing price index signalled the slowest pace of cost increases since the start of the year.
The inventories and supplier deliveries indices stayed above 50, returning to levels in line with those seen in May.
Investec economist Lara Hodes said there was some improvement being realised in certain aspects of the PMI.
“The supplier delivery index reading improved somewhat, suggesting that supply side challenges, while still heightened, have likely eased modestly,” Hodes said.
“Moreover, the purchasing price index reading although still elevated, weighing on manufacturers’ profitability, indicated the slowest pace of cost increases since the start of the year.”