Manufacturing sector recovery gaining traction as conditions normalise

01 December 2014

The seasonally adjusted Kagiso PURCHASING MANAGERS’ INDEX™ (PMI™) rose to 53.3 points in November (its best level since August 2013), marking its fourth consecutive monthly improvement. According to Abdul Davids, Head of Research at Kagiso Asset Management, the fact that the average PMI for the first two months of the fourth quarter is higher than the average for the third quarter suggests that the recovery in the manufacturing sector, after a strike-ridden year, is finally taking hold.

Supported by a continued normalisation of domestic mining demand conditions, the new sales orders index rose by 4.8 index points to 55. But while domestic demand is improving, the global environment deteriorated over recent months, creating renewed headwinds for local manufacturers targeting the export market. The Eurozone manufacturing PMI remains just barely above the neutral 50-point mark and the Chinese preliminary figure for November came in at 50, the weakest level in six months. Other economic indicators suggest that these two economies, important trading partners for South Africa, may continue to struggle in the near term. While the US is still outperforming the rest of the world, the country’s preliminary manufacturing PMI declined for a third consecutive month to 54.7 from 55.9 index points in October.

In line with improving local demand, the business activity index rose substantially from 50.3 to 56 index points, reaching its highest level since February 2012.  Manufacturers appear to have been caught off guard by the rise in demand, as evidenced by the sharp increase in the backlog of sales orders index. Davids cautions that the current bout of electricity supply disruptions could hamper output in December.

“The improvement in the new sales orders and business activity indices was expected given that domestic demand (mainly from the mining sector) is recovering from disruptive strikes earlier in the year which, in turn, boosts output growth,” Davids says. “This should therefore be seen as a normalisation in the manufacturing sector, and not necessarily as a significant outperformance.”

The price index fell sharply from 76 to 67.8 index points. This moderation was mainly driven by significantly lower international oil prices, resulting in lower local petrol and diesel prices and have countering the upward price pressures stemming from the weak rand/dollar exchange rate. Davids points out that another petrol and diesel price cut is on the cards for December and, at this stage, international oil prices are expected to remain relatively low, which bodes well for the cost price profile going forward.