Captains of the manufacturing sector are reeling from the cuts of a thousand knives as continued load-shedding and the Reserve Bank rates hiking cycle drive the sector’s confidence to lows not seen since the Covid-19 pandemic.
The Bureau for Economic Research (BER) and Absa released their survey on manufacturing confidence on Wednesday. The quarterly survey, conducted at Stellenbosch University in May, covers about 700 businesspeople in the manufacturing sector.
The confidence index ranges between zero and 100, with zero reflecting an extreme lack of confidence and 100 representing extreme confidence where all participants are satisfied with business conditions. Second-quarter confidence levels remained unchanged at 17, compared to the first quarter.
The central bank’s decision to increase the repo rate by 50 basis points to 8.25% in May was followed by a weakening of the rand against the dollar, raising the cost of imports and weighing down the buying power of factories.
The Absa Manufacturing Survey said load-shedding was responsible for constraining manufacturing, as confidence levels in the sector remain near the low points of previous business cycles. The survey last posted confidence levels over 50 around 2005.
Head of manufacturing at Absa relationship banking, Justin Schmidt, said while sentiment had improved since the Covid-19 pandemic it reached a low of five points, historical data show that confidence has been at these levels only a handful of times.
“Electricity supply disruptions not only directly weigh on production and capacity and hurt profitability due to the costs associated with load-shedding mitigation measures such as diesel generators, but also hurt sentiment.”
The silver lining is that as additional generation capacity comes online, business conditions will improve over the longer term
— Justin Schmidt, head of manufacturing at Absa relationship banking
Schmidt said with confidence levels remaining at the low levels recorded in the first quarter, the effects of load-shedding are visible across manufacturing subsectors, which can easily spread to other sectors. He said the majority of manufacturers expect conditions to deteriorate further in the next 12 months.
“As the intensity of load-shedding remains high, its cost in the form of both production downtime and diesel purchases for generators is causing margin pressure.
“In the short term, business conditions are likely to worsen as there is an expectation of increased load-shedding in winter. However, the silver lining is that as additional generation capacity comes online, business conditions will improve over the longer term,” he said.
Schmidt stressed that manufacturing remained vital to the growth of the economy — as first-quarter GDP figures showed. Stats SA's quarterly GDP report said the manufacturing sector increased by 1.5%, contributing 0.2 of a percentage point to 0.4% GDP growth.
“Four of the 10 manufacturing divisions reported positive growth rates in the first quarter. The food and beverages division made the largest contribution to the increase in the first quarter. The petroleum, chemical products, rubber and plastic products division also made a significant contribution to the growth in this industry,” the Quarterly GDP report said.
Miyelani Mkhabela. founding director and CEO of Antswisa Management Group, said the complexity to manufacturers’ load-shedding woes is worsened by the repo rate hiking cycle, which adds to the costs of borrowing for factories’ credit lines.
“The problem South Africa primarily has with regard to manufacturing and business confidence is that factories have bigger challenges regarding unstable electricity. We don’t have energy security and without that factories struggle to maintain their plants to client satisfaction.
“While we are experiencing this, we also find high borrowing costs as a result of inflation. Manufacturers will have to improve a lot of things in their plants, and it won’t be feasible in terms of the cost of borrowing. Companies that are established rely on credit facilities and if they are hit hard by credit costs and insecure power,” he said.
Some raw materials were still hard to source due to supply bottlenecks caused by the war in Ukraine.
Meanwhile, Stats SA reported a 2.3% year-on-year jump in mining production for April, marking a better start to the current quarter after 14 consecutive months of contraction.
The growth in mining output was driven mainly by stronger gold and coal production at 27.4% and 12.5% respectively. However, diamond production continued to falter for the seventh consecutive month falling 41%, with platinum group metals and manganese ore shrinking by 4.6% and 12.1% respectively.
FNB senior economist Thanda Sithole said despite intense load-shedding in April, the monthly increase in output mirrored resilience in the sector.
“If sustained, it could imply increasingly less reliance on the Eskom electricity grid. Nevertheless, logistics challenges and slowing external demand remain a near-term constraint on mining output.”
Transnet Freight Rail has faced challenges in meeting its capacity because of a shortage of spare parts required to fix locomotives lying idle at depots. Poor rail maintenance, theft and vandalism remain Transnet's biggest headaches. Investec economist Lara Hodes said the recovery in production partly reflected the impact of last year's floods in KwaZulu-Natal. “The already significant logistical challenges were worsened by the KZN floods, impeding production and exports,” she said.
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