JOHANNESBURG - The paper and automotive sectors will boost economic growth in KwaZulu-Natal (KZN) next year with linkage effects to other sectors of the regional economy.
KZN has a well-diversified regional economy, so it tends to do well when the national economy is moving ahead. The largest sector is manufacturing with a 16.2% share and is based on the vehicle manufacturing by Toyota at Durban, the aluminium smelting at Richards Bay and the steel making at Newcastle, but there is a host of smaller enterprises active in food processing and clothing.
The survey by the Manufacturing Circle (MC) showed that manufacturers are upbeat about 2019 prospects. The Manufacturing Circle Investment Tracker (MCIT) was 58 in the third quarter, the same as the second quarter. A reading above the neutral 50-point threshold indicates that expenditure is expanding; below the neutral 50-point threshold indicates that expenditure patterns are declining.
The MCIT noted that the most buoyant sectors seem to be in paper and packaging, as well as the automotive sector.
Philippa Rodseth, the MC executive said it was pleasing to note that all results this quarter are on or above the 50 point threshold, despite the country being in a recession in the first half of the year.
Data released by Statistics South Africa in September showed that although the South African economy entered a technical recession due to two consecutive quarters of contraction in gross domestic product in the second quarter, once one excludes the change in inventories, then real final sales grew by 2.0% in the second quarter on a quarter-on-quarter seasonally adjusted annualised basis after a 3.1% contraction in the first quarter.
Economists look at real final sales to gauge how strong or weak underlying trends are. Changes in inventories are important as they show how responsive domestic producers are to changes in demand. The second quarter inventory drawdown was concentrated in the manufacturing and mining sectors, indicating that these sectors have not been sufficiently responsive to a surge in external demand as exports jumped by 14%, while imports only grew by 3.1%.
The MCIT showed that investment on inventory rose to 61 in the third quarter from 52 in the second quarter. In particular, metals, wood, packaging & paper, chemicals and transport equipment sectors contributed to this increase, so we are likely to see an expansion in the economy in the third quarter.
According to the survey, paper and packaging manufacturers are counteracting rising input costs by raising prices and responding to increased demand for special packaging. They plan to invest further in property, plant and equipment expansion, maintenance and replacement projects and high quality products to remain competitive.
Paper and forest products group Sappi has confirmed that it is considering a further expansion of its giant Saiccor dissolving wood pulp mill in KZN, having only recently made the decision to invest R7.7 billion to expand output at the mill by 110 000 tonnes per year. The expansion decision is likely in 2022 or 2023. The project is scheduled for completion by mid-2020 and, at peak, some 5 800 people will be employed in construction activities, who all need to be clothed and fed. The expansion will also result in a 9% rise in permanent jobs at the mill, which currently employs some 1 300 people.
The MC also noted that some companies foresee opportunities for diversified investment across manufacturing industry value chains, especially in the automotive sector where the demand for lightweight vehicles is increasing as the rise of the fourth industrial revolution intensifies. Manufacturers in the transport equipment sector continue to invest in collaborative strategic growth initiatives around the adoption of new technologies.
In its latest quarterly report, the National Association of Automobile Manufacturers of South Africa expects South African domestic new vehicle production to reach 604 050 units this year from last year’s 601 178 units. The association forecasts an 8.9% improvement to 657 650 units in 2019.