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MANUFACTURING SECTOR QUARTERLY SURVEY
FIRST QUARTER 2015
MANUFACTURING CIRCLE OF SOUTH AFRICA MEETING
14 May 2015
Dr Iraj AbedianPAN-AFRICAN INVESTMENT & RESEARCH SERVICES
MANUFACTURING ENVIRONMENT IN Q1 2015
Q1 2015 business confidence was lacklustre…
Source: BER and PAIRS
RMB/BER Business Confidence Index, Q1 2011 – Q1 2015i ii iii iv i ii iii iv i ii iii iv i ii iii iv i
2011 2012 2013 2014 2015
25
50
75
inde
x po
ints
…so was the tempo of manufacturing activity over the quarter
Source: BER and PAIRS
Quarterly average Kagiso PMI (index points)
Q1 2015
PMI 49.9Business activity 50.6
New sales 50.7Backlog of order sales 35.1
Inventories 55.1Purchasing commitments 53.9Suppliers' performance 50.7
Prices 63.4Employment 44.6
Expected business conditions 64
Q1 2015 manufacturing production contracted
Source: StatsSA and PAIRS
SA manufacturing production, Q1 2015, Q/Q growth (per cent, seas. adj.)
Manufacturing division Weights , 2012 2015 Q1
Food & beverages 24.44 0.6
Textiles, clothing, leather & footwear 3.17 -1.1
Wood, paper, publishing & printing products 12.65 -2.8
Petroleum, chemical & rubber products 22.13 -2.6
Glass & non-metallic mineral products 3.91 1.1
Basic iron & steel, non-ferrous metal products & machinery 19.59 2.0
Electrical machinery 1.7 -1.2
Radio, tv communication apparatus & professional equipment 1.41 -22.0
Motor vehicle parts & accessories & other transport equipment 7.39 4.3
Furniture & other manufacturing division 3.61 -3.0
Total 100 -0.6
The international price of oil remained depressed on balance in Q1 2015…
Source: IHS Econocast and PAIRS
Brent crude oil price (USD per barrel), Apr’14 – Apr’15
Apr-14
May-14
May-14
Jun-14Jul-1
4Jul-1
4
Aug-14
Aug-14
Sep-14
Sep-14
Oct-14
Oct-14
Nov-14
Nov-14
Dec-14
Dec-14
Jan-15
Jan-15
Feb-15
Feb-15
Mar-15
Mar-15
Apr-15
30
60
90
120
…contributing to a modest producer price inflation outcome for the quarter
Source: StatsSA and PAIRS
PPI inflation for final manufactured goods, South Africa, 2013 Jan – 2015 Mar20
13 Ja
nFe
bM
arAp
rM
ay Jun Jul
Aug
Sep
Oct
Nov Dec
2014
Jan
Feb
Mar
0
3
6
9
12
Per c
ent
Avg. = 5.6
5.4
6.76.2
7.68.5
7.36.3
3.1
At the same time, the rand remained weak and volatile
Source: IIHS Econocast and PAIRS
Rand per US dollar exchange rate, 01Jan14 – 04May15Ja
n-14
Feb-
14
Mar
-14
Apr-
14
May
-14
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
9.5
10.5
11.5
12.5
SUMMARY OF SURVEY RESULTS
2015 Q1 RESPONDENTS’ PROFILE
A record number of (77) firms participated in the Q1 2015 survey
Number of survey respondents, Q1 2011 - Q1 2015 Manufacturing Circle Surveyi ii iii iv i ii iii iv i ii iii iv i ii iii iv i
2011 2012 2013 2014 2015
0
20
40
60
80
100
18
56
73
50
68
53
64
77
Mostly small to medium survey participants
What was your company’s turnover in Q1 2015?
How many employees did your company have in Q1 2015?
< 500
500 to < 1000
1000 to < 2000
2000 to < 50005000+
56
14 16
95
Share of Repsondents (%)
< R300m
R301m to R999m
R1bn to R3bn
R3bn to R6bn
R6bn to R10bn
> R10bn
61
22
14
3
0
0
Share of Respondents (%)
OVERALL MANUFACTURING BUSINESS CONDITIONS
Q1 2015 manufacturing conditions were generally downbeat
How do you perceive the manufacturing sector’ conditions?
Poor Fragile/weak Stable Modest to good
Strong
9
46
37
7
0
17
41
26
12
4
Q1 2014
Q1 2015
Share of Re-spondents (%)
1. Electricity supply disruptions
2. Crime (e.g. bouts of business robberies)
3. Slow government spending for infrastructure programme
4. Restricted access into the US market (AGOA-related)
5. Chronic factors ( rand volatility, inputs shortages and elevated competition from imports)
Factors that undermined business conditions include:
DEMAND CONDITIONS
Domestic sales outperformed exports
What is the proportion of your production that is “sold domestically” / “exported”?
0% 1-20% 21-40% 41-60% 61-80% 81-100%
14
7
16
26
46
13
51
1612
4 4
Sold domestically
ExportedShare of re-
spondents (%)
Less than half of respondents reported a positive performance of both domestic and export 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%
8
4
15
22
22
18
5
2
4
19
9
9
22
7
18
3
4
9
Q1 2015 Q1 2014
Share of Respondents (%)
< -15%
-15 to -11%
-10 to -6%
-5 to -1%
0
1 to 5%
6 to 10%
11 to 15%
> 15%
6
2
2
14
36
16
6
6
12
12
5
6
12
23
24
8
1
9
Q1 2015 Q1 2014
Share of Respodents (%)
Domestic sales were downbeat due to:
1. High consumer debt (partly owing to seasonality)
2. Weak performance in the motorcar and mining industries
3. High competition from sub-standard imported goods
Despite a generally soft outcome, the following factors supported export performance for some firms:
1. A competitive rand exchange rate
2. Increased reorientation towards international markets given the weak domestic demand
3. Buoyant demand from Africa
SUPPLY CONDITIONS
The majority of respondents reportedelevated input costs
What is the percentage change in imported and total input costs?
< -15%
-10 to -6%
0%
6 to 10%
> 15%
7
4
4
4
9
41
16
9
6
9
0
3
9
16
28
19
8
8
Imported Input Costs Total Input Costs
Share of respondents (%)
1. Overpriced imported inputs due to a weak rand exchange rate
2. Exorbitant labour costs
3. High electricity tariffs.
Some drivers of elevated input costs
1. Electricity
2. Water
3. Steel
4. Copper
5. Sugar
Reported shortages of inputs concerned:
UTILITIES SERVICES CONDITIONS
While municipalities supplied electricity for majority of respondents…
Do you buy your electricity for your plant/s from Eskom or from local/municipal
Eskom13%
Municipal84%
Both3%
…Direct clients of Eskom bore the brunt in terms of production days lost due to electricity supply disruptions
Please provide an estimation of how many production days lost at your plant/s due to
Eskom MunicipalitiesElectricity disruptions Water disruption
4
2
1
Sample average production days lost by categories
Respondents widely rescheduled production or relied on own-generation capacity as a strategies to cope with electricity
disruption What alternatives have you employed to mitigate against electricity
shortages/inconsistencies at your plant/s?
On-site generation capacity
Rescheduling production
Reducing production
Closing down production lines or substituting local manufacture for imports
Other
47
55
24
16
15
Share of respondents (%)Note: A respondent could choose more than one option.
COMPANY LEVEL COMPETITIVENESS CONDITIONS
Most surveyed firms did not upgrade plant capacity over the quarter…
Have you upgraded any existing capacity at your plants over the last quarter?
Yes37%
No63%
…those that upgraded capacity, did so for varied reasons, e.g. to cater for new product innovation or to increase efficiency
If the previous answer was yes, what are the main reasons for the upgrades?
New product innovation
Introduction of advanced manufacturing capacity
Mechanisation of functions that were previously done manually
Greater productivity
Greater efficiency (energy and water)
Other
21
18
18
18
19
6
Share of respondents (%)
EMPLOYMENT, SKILLS DEVELOPMENT & LABOUR PRODUCTIVITY CONDITIONS
Employment conditions were muted over the quarter, partly due to high labor costs
What was the change in employment level?
< -5%
-5 to -1%
0
1 to 5%
> 5%
8
20
41
31
0
15
31
32
18
4
Q1 2015 Q1 2014
Share of Respondents (%)
Meanwhile, the skills stock within manufacturing industries remains inadequate on balance
How do you describe the status of skills availability in your industry?
Poor Less than adequate Adequate Good
14
49
35
2
19
58
22
1
Q1 2014
Q1 2015
Share of Re-spondents (%)
Despite the skills shortage, the majority of surveyed did not meaningfully invested in skills development in Q1 2015
As a percentage of turnover, how much does your company invest in skills development?
0%>0-1%
>1-3%>3-6%
>6%
4
37
33
13 13
Share of re-spondents (%)
SETA-sponsored as well as government-sponsored programmes account for the bulk of skills
development initiativesWhich of the following skills development programmes does your company make use
of?
Government-sponsored learnerships
Government-sponsored lnternships
Seta-sponsored programmes
Other
35
25
57
22
Share of respondents (%)Note: A respondent could choose more than one option.
The level of labour productivity remained static on the whole
How do you describe the level of labour productivity over the quarter?
Deteriorated Same Improved
24
60
16
28
52
20
Q1 2014
Q1 2015
Share of Re-spondents (%)
PROFITABILITY AND ACCESS TO CREDIT CONDITIONS
About one half of surveyed firms reported a rise in profits (due in part to expenditure and debt control), albeit of a
lower magnitude relative to a year ago, in generalWhat is the percentage change in operating profit before cost of funding over the
quarter?
< -15%
-15 to -11%
-10 to -6%
-5 to -1%
0
1 - 5%
6 to 10%
11 to 15%
> 15%
8
9
19
10
9
17
9
4
15
23
2
9
9
9
26
16
3
3
Q1 2015 Q1 2014
Share of Respondents (%)
About 77% of firms in Q1 2015 (previously 68%) were geared
What is your firm’s debt to equity ratio over the quarter?
Ungeared
1 to 25%
26 to 49%
50 to 64%
> 65%
23
27
27
4
19
32
30
17
8
13
Q1 2015 Q1 2014
Share of Survey Respondents (%)
The increase in the proportion of firms that accessed funding at rates equal to or above JIBA +3% suggests tighter credit
conditions in Q1 2015 relative to Q1 2014 Short-term funding rate
< JIBAR + 3% JIBAR + 3 to + 6% > JIBAR + 6%
76
22
2
52
38
10
Q1 2014Q1 2015
Share of Re-
spond-ents (%)
< JIBAR + 3% JIBAR + 3 to + 6% > JIBAR + 6%
76
22
2
55
36
9
Q1 2014Q1 2015
Share of Re-
spond-ents (%)
Long-term funding rate
LOCAL PROCUREMENT
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%
03
16
21
3129
0
6
14 14
41
25
Q1 2015Q1 2014
Share of re-spondents (%)
On balance, most firms considered government local procurement as being at least important to growth but…
How important is the government’s local procurement programme to the maintenance of growth in your manufacturing concern?
Very Important Important Neither important nor unimportant
Unimportant Not important at all
28
19
26
11
16
3329
22
12
4
Q1 2015
Q1 2014
Share of re-spondents (%)
…most respondents said they did not benefit from such programme
Does your manufacturing concern currently benefit from the government’s local procurement programme?
Yes No
31
69
31
69
Q1 2015
Q1 2014
Share of re-spondents (%)
MANUFACTURING OUTLOOK
The tempo of manufacturing activity in SA has retreated further recently
Purchasing Managers’ Index, SA vs. major trading partners, 2012 Jan – 2015 Jan (50 = no change)
Source: BER, Markit, NBS, ISM and PAIRS.
J F M A M J J A S O N D J F M A2014 2015
40
50
60
China US Germany South Africa
inde
x po
ints
Expansion
Contraction
About one half of surveyed firms expect stagnant labour market over the next quarter and falling employment levels
over the 12-month horizonWhat is the planned percentage change in employment?
< -15%
-10 to -6%
0%
6 to 10%
> 15%
9
1
13
21
28
22
4
1
1
5
0
6
26
50
12
0
0
1
Next 3 months Next 12 months
Share of respondents
In all, respondents remain pessimistic about expected manufacturing conditions going forwardRise in surveyed firms’ pessimism (“fragile/weak” or “poor” outlook)
Horizon
Proportion of pessimistic respondents (in per cent)
Q1 2014 Q1 2015
6 months 67 66
12 months 48 64
24 months 32 45
1. Challenges in the domestic power sector
2. The likelihood of strikes in 2016
3. The uncertainty surrounding the course of commodity prices
Some factors informing respondents’ downbeat outlook
CONCLUDING REMARKS
1. Overall business confidence and the tempo of manufacturing activity remained flat in Q1 2015.
2. On balance, demand conditions were largely muted both at the domestic and international levels.
3. High input costs, skills shortages and credit access tightening exerted additional strain on the performance of the SA manufacturing sector in Q1 2015.
4. Challenges in SA’s power sector pose a substantial and urgent risk to the country’s re-industrialisation drive and by extension, to the short and long term overall economic performance. It is vital that appropriate policies be implemented to address this critical blockage.
Concluding remarks
