South African manufacturing improves

5 March 2013

The seasonally adjusted Kagiso purchasing managers’ index (PMI), a leading indicator of activity in South Africa’s manufacturing sector, increased for the second month running in February, while rising above the key 50-point mark for the first time since August 2012.

In February, the index increased by 4.5 index points to reach 53.6, Kagiso Asset Management research head Abdul Davids said in a statement on Friday.

The headline PMI was largely driven by improvements in the new sales orders (+9.3 points) and business activity (+2.6 points) indices.

“The significant improvement in new sales orders may reflect a turnaround in demand for locally manufactured goods,” Davids said.

“Tentative indications of an improvement in the European Union and United States economies at the start of this year may have contributed to the increased demand for manufactured goods and a sustained recovery in demand will require improved GDP growth in these regions.”

Davids said the weaker rand exchange rate since the start of the year could have also improved local producers’ short-term price competitiveness on international markets.

The employment sub-index gained 3.4 points to reach 45.7. While this was the first index increase since November 2012, the index still remained significantly below its pre-crisis peak of 60.6.

The PMI leading indicator rose above 1 (1.08) for the first time since March 2012, suggesting improved business conditions in future.

The price index was the only sub-index to disappoint, Davids said.

Mounting input cost pressures saw the index gaining four points to reach 86, its highest level since March 2011.

Sustained rand weakness and the high oil price were the key drivers of higher input costs.

However, on a positive note, electricity price increases would be much lower than initially expected following the National Energy Regulator of SA’s decision to grant Eskom electricity tariff hikes of eight percent, and not 16 percent, over the next five years.

“Electricity is a significant input in the manufacturing process and Eskom’s sustained programme of substantial electricity price hikes over the last few years has adversely impacted the local manufacturing sector’s competitiveness.

“The lower than expected tariff increases are therefore welcomed and should assist in improving the sector’s global competitiveness,” Davids said.