MANUFACTURING CIRCLE QUARTERLY REVIEW

FOURTH QUARTER 2014

MANUFACTURING CIRCLE AGM

12 Feb. 2015

1. Introductory remarks

2. SA manufacturing environment in Q4 2014

3. Q4 2014 respondents’ profile

4. Overall manufacturing business conditions

5. Summary of survey results

6. Manufacturing outlook

7. Concluding remarks

Outline

INTRODUCTORY REMARKS

1. Despite mostly soft conditions, sales, confidence and activity improved somewhat in Q4 2014 relative to Q4 2013.

2. The status quo about, among others, elevated input costs, input shortages, inadequate skills, failure to benefit from government procurement programme prevailed in Q4 2014.

3. On the whole, surveyed manufacturers remain unenthusiastic about the sector’s outlook.

Introductory remarks

SOUTH AFRICAN MANUFACTURING ENVIRONMENT IN Q4-2014

Some improvement in business confidence

Source: BER and PAIRS

i ii iii iv i ii iii iv i ii iii iv i ii iii iv2011 2012 2013 2014

35

50

65

inde

x p

oint

s

RMB/BER Business Confidence Index, Q1 2011 – Q4 2014

Tempo of manufacturing activity up in Q4 2014

Source: BER and PAIRS

Quarterly average Kagiso PMI (index points)

Q4 2014

PMI 51.2

Business activity 51.5

New sales 52.6

Backlog of order sales 43.0

Inventories 54.8

Purchasing commitments 57.3

Suppliers' performance 51.0

Prices 69.0

Employment 46.9

Expected business conditions 57.9

Rebound in manufacturing production

Source: StatsSA and PAIRS

SA manufacturing production, Q4 2014, Q/Q growth (per cent, seas. adj.)

Manufacturing division Weights , 2011 2014 Q4

Food & beverages 23.8 1.0

Textiles, clothing, leather & footwear 2.9 2.4

Wood, paper, publishing & printing products 9.5 1.4

Petroleum, chemical & rubber products 22.5 4.5

Glass & non-metallic mineral products 4.4 -3.4

Basic iron & steel, non-ferrous metal products & machinery 20.4 3.8

Electrical machinery 2.4 11.1

Radio, tv communication apparatus & professional equipment 1.4 7.4

Motor vehicle parts & accessories & other transport equipment 8.6 3.4

Furniture & other manufacturing division 4.1 -5.6

Total 100 2.5

Depressed manufacturing employment

Source: StatsSA and PAIRS

Quarterly manufacturing employment, Q1 2008 – Q4 2014

Q/Q: +8 000

Y/Y: - 17 000

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV2008 2009 2010 2011 2012 2013 2014

1,650.00

1,750.00

1,850.00

1,950.00

2,050.00

Weak rand exchange rate

Source: I-Net BFA and PAIRS

Rand per US dollar exchange rate (daily close), 01Jan14 – 02Feb15

Jan-14Feb-14

Mar-14

Apr-14May-14

Jun-14Jul-14

Aug-14Sep-14

Oct-14

Nov-14Dec-14

Jan-1510.0

10.5

11.0

11.5

12.0

Low international oil price

Source: I-Net BFA and PAIRS

Brent crude oil price (USD per barrel), 01Jan14 – 31Dec14

Jan-14

Jan-14

Feb-14

Feb-14

Mar-14

Mar-14

Apr-14

May-14

May-14

Jun-14Jun-14

Jul-14Jul-1

4

Aug-14

Aug-14

Sep-14

Oct-14

Oct-14

Nov-14

Nov-14

Dec-14

Dec-14

40

60

80

100

120

Moderating producer price inflation

Source: StatsSA and PAIRS

PPI inflation for final manufactured goods, South Africa, 2013 Jan – 2014 Dec

2013 Jan

MarMay Jul

Sep

Nov

2014 Jan

Mar4.5

5.5

6.5

7.5

8.5

5.65.41845734479713

6.7

7.63751137726078

8.53552473983451

7.3496270151604

6.3

Per c

ent

2014 Q4 RESPONDENTS’ PROFILE

Sixty four firms participated in the survey

Number of survey respondents, Q4 2014

iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv

2010

2011 2012 2013 20140

30

60

90

20

48

7368

5462 64

Num

ber o

f Res

pond

ents

Average = 53

Mostly small to medium survey participants

What was your company’s turnover in Q4 2014?

How many employees did your company have in Q4 2014?

< R300m

R300m to R999m

R1bn to R3bn

R4bn to R6bn

R7bn to R10bn

> R10bn

0 10 20 30 40 50 60 70

55

30

14

1

0

0

Share of Respondents (%)

0

20

40

6052

1521

93

Shar

e of

Rep

sond

ents

(%)

OVERALL MANUFACTURING BUSINESS CONDITIONS

Mostly “fragile/weak” business conditions

How do you perceive the manufacturing sector’ conditions?

Poor Fragile/weak Stable Modest to good

Strong

17

39 37

70

13

50

2213

2

Q4 2013 Q4 2014

Share of Re-spondents (%)

1. Sporadic electricity supply

2. Low global commodity prices

3. Subdued consumer demand

4. Spillover effects from the Q3 2014 strike

5. Regulatory hurdles

6. Volatile rand exchange rate

7. Weak construction activity

Factors that undermined business conditions include:

SUMMARY OF SURVEY RESULTS

Most surveyed firms sold a significant share of their output domestically

What is the proportion of your production that is “sold domestically” / “exported”?

0

15

30

45

60

75

29 5 7

32

46

9

57

1811

05

Sold domestically Exported

Shar

e of

Res

pond

ents

(%)

Despite muted conditions, most respondents recorded increased sales

What is the percentage change in the volume of domestic sales?

What is the percentage change in the volume of export sales?

< -15%

-15 to -11%

-10 to -6%

-5 to -1%

0%

1 to 5%

6 to 10%

11 to 15%

> 15%

0 10 20 30 4012

88

2812

1210

46

10

66

2211

22

1166

Q4 2014 Q4 2013

Share of Respondents (%)

< -15%

-15 to -11%

-10 to -6%

-5 to -1%

0%

1 to 5%

6 to 10%

11 to 15%

> 15%

0 5 10 15 20 25 30 35 406

66

835

17

61

15

9

53

1820

219

213Q4 2014 Q4 2013

Share of Respondents (%)

Africa and Europe remained key export markets

What is the distribution of export shares to Africa and Europe?

0%1-20%

21-40%41-60%

61-80%

81-100%0

20

40

60

80

100

15

33

5 217

2822 27

2 4 4

41

Africa

Q4 2014 Q4 2013

Shar

e of

Res

pond

ents

(%)

0%1-20%

21-40%41-60%

61-80%

81-100%0

20

40

60

80

100

35 41

7 5 5 7

34 34

175 5 5

Europe

Q4 2014 Q4 2013

Shar

e of

Res

pond

ents

(%)

Negative

1. Downbeat consumer spending

2. Sluggish activity in the motor vehicle industry

3. Weak mining sector performance

4. Decreased number of tenders awarded

5. Increased competition from cheap imports and second hand products

Positive

1. Increased market coverage

2. Seasonal impulses

3. Extensive promotional campaign

Factors that affected domestic sales

Negative

1. Sluggish eurozone economy

2. Elevated corruption in some African countries

3. Subdued mining activity in Africa

4. Weak Russian economy

Positive

1. Weak rand

2. Increased focus on the global market

Factors that affected export sales

Most respondents experienced elevated input costs

What is the percentage change in imported and total input costs?

< -15%

0%

> 15%

0 10 20 30 40 50 605

00

1111

558

55

400

79

4023

611

Imported Input Costs Total Input Costs

Share of Respondents (%)

Above inflation increases in:

1. Electricity tariffs

2. Labour costs

3. Municipal charges

Some drivers of elevated input costs

1. Electricity

2. Water

3. Steel products

4. LPG gas

5. Recycled paper

6. Kraft linerboard

Shortages of inputs concerned:

Mostly unchanged employment level

What was the change in employment level?

< -5%

-5 to -1%

0%

1 to 5%

> 5%

0 5 10 15 20 25 30 35 40 45 5010

33

31

24

2

7

29

46

16

2

Q4 2014 Q4 2013

Share of Respondents (%)

1. Reductions in working hours

2. Automation of production processes

3. Rightsizing

4. Early retirements

5. Retrenchments

Courses of action taken to deal with high labour costs

Most firms sourced a considerable share of their inputs domestically

What percentage of your total purchase is locally sourced products?

0%1-20%

21-40%

41-60%

61-80%

81-100%0

10

20

30

40

0

8

19 17

28 28

0

1216

20

27 25

Q4 2014 Q4 2013

Shar

e of

Res

pond

ents

(%)

On the whole, government local procurement important to manufacturing growth but…

How important is the government’s local procurement programme to the maintenance of growth in your manufacturing concern?

0

15

30

45

26

1923

15 17

25

33

24

612

Q4 2014 Q4 2013

Shar

e of

Res

pond

ents

(%)

…most respondents did not benefit from the programme

Does your manufacturing concern currently benefit from the government’s local procurement programme?

Yes No0

15

30

45

60

75

90

25

75

31

69

Q4 2014 Q4 2013

Shar

e of

Res

pond

ents

(%)

MANUFACTURING OUTLOOK

SA PMI out of sync with that of key trading partners

Purchasing Managers’ Index, SA vs. major trading partners, 2012 Jan – 2015 Jan (50 = no change)

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J

2012 2013 2014 2015

40

50

60

China US Germany South Africa

inde

x po

ints

Source: BER, Markit, NBS, ISM and PAIRS.

Respondents more pessimistic relative to a year ago

Rise in surveyed firms’ pessimism (“fragile/weak” or “poor” outlook)

HorizonProportion of pessimistic respondents (in per cent)

Q4 2013 Q4 2014

6 months 63 64

12 months 47 57

24 months 27 40

Mostly stable employment level over the next quarter but job cuts envisaged over the next 12 months

What is the planned percentage change in employment?

< -15%

0%

> 15%

0 10 20 30 40 50 603

52

3234

202

02

07

416

55

142

0

2

Next 3 months Next 12 months

Share of Respondents

1. Regulatory hurdles

2. Electricity shortage

3. Weak mining activity

4. Faltering global economy

5. Uncertainty about SA’s AGOA status

6. Likelihood of strikes

7. No clarity on the government’s beneficiation strategy

Some factors informing respondents’ downbeat outlook

CONCLUDING REMARKS

Concluding remarks

1. The last quarter of 2014 posted some improvement in sales despite conditions being largely soft.

2. As has been the case in previous quarters, Q4 2014 supply conditions remain affected by a shortage of inputs and structural blockages e.g. lack of skills, high labour costs.

3. Local government procurement did not benefit the majority of respondents.

4. Most surveyed firms expect downbeat conditions for the foreseeable future due to both global and domestic factors.

Thank you for your attention

Q&A