Possible Rise in Metals and Engineering Profit Margins

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The Steel and Engineering Industries Federation of Southern African (SEIFSA) welcomed Statistics South Africa’s announcement that the producer price index (PPI) for intermediate and final manufactured goods increased by 6,7% and 5,9% respectively in January 2017, saying this boded well for profit margins in the ailing metals and engineering sector.

SEIFSA Economist Roberta Noise.

SEIFSA Economist Roberta Noise said the 6,7% increase in the January PPI for intermediate manufactured goods and the 6,4% increase in the January composite input cost index tracked by SEIFSA indicated that profit margins are likely to show an improvement in the sector.

SEIFSA compiles the composite input cost index by tracking a basket of input costs related to the metals and engineering sector. The index (6,4%) reduced by 53% in January 2017 when compared to January 2016 (13.6%). “Within the metals and engineering sector, PPI for intermediate manufactured goods tracks price movements better than PPI for final manufactured goods since the sector represents 60% of the weight in the index. Therefore, the increase in PPI for intermediate manufactured goods directly affects the sector and shows slight recovery prospects for producers, given the 6.4% composite input cost index recorded in January 2017,” Noise said.

Statistics South Africa (StatsSA) announced that the PPI for final manufactured goods increased by 5.9% when January 2017 is compared to January 2016. This is down from the year-on-year 7.1% recorded a month earlier. Noise said that contributions to the January 2017 reading included, in order of magnitude, food, beverages and tobacco products (3,1%) and coke, petroleum, chemical, rubber and plastic products (1,6%).

According to the StatsSA data, the PPI for intermediate manufactured goods increased by 6.7% when January 2017 and January 2016 are compared, down from the 7.3% recorded a month earlier. Contributors to the January 2017 increase include chemicals, rubber and plastic products (2.8%), sawmilling and wood (1.5%) as well as basic and fabricated metals at 1.2%.

Noise said the fact that the PPI for both final and intermediate manufactured goods showed an upward trajectory was a welcome development for the metals and engineering sector, which had experienced a terrible 2016 because of exchange rate volatility and a slowdown in commodity price increases, among other factors. She said the relative stability that has since taken place in the exchange rate and the recent uptick in commodity prices have had a significant impact on the PPI and its direction.

“Therefore, the current movement in PPI for both final and intermediate manufactured goods will help in the metals and engineering sector’s growth expectations relative to the easing in the composite input cost index,” Noise concluded.

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