Weaker Rand Will Further Reduce Margins Of Metal And Engineering Companies

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Manufacturers continue to face serious headwinds despite the recent decision by the South African Reserve Bank to cut the repo rate by 25 basis points, which was an expansionary monetary policy move to reduce costs and stimulate demand, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Michael Ade said recently.

SEIFSA Economist Marique-Mari Kruger

Ade was commenting on the latest seasonally adjusted Absa Purchasing Managers’ Index (PMI) which declined by 3.8 points to 42.9 in July 2017, with all five of the PMI subindices performing poorly. This is a second consecutive monthly decline from 46.7 in June, and also the weakest since the second half of 2009. The seasonally adjusted business activity sub-index performed the worst, declining to a low 39.3.

“The data point is largely driven by souring of sentiment, including low executive, business and consumer confidence. These feed into poor month-to-month changes in demand and factory activity. A further consequence of the generally low confidence is a depreciation of the rand against the dollar, despite a strong performance in July,” he said.

Ade said the poor PMI data and the weakening of the rand against the dollar would increase input costs and add pressure on the bottom line of companies in the metals and engineering (M&E) sub-component.

“This does not augur well for business, especially given that the M&E sub-industry is at a crucial phase of wage negotiations. Businesses are in a very dynamic environment of increasing costs and diminishing returns, which heightens the level of uneasiness,” he said.

SEIFSA Economist Marique-Mari Kruger said the PMI reading, which came well below the 50 mark, signaled a contraction in the manufacturing sector. “This is disappointing when compared to the performance of our important trading partners in the Eurozone and the US, with the countries generally scoring PMI indices of above 50,” she said.

However, Kruger said there was still hope because, while the PMI index dropped in July 2017, compared to June 2017, the movement was better than the downward 4.8 index points recorded from May 2017 to June 2017.

Ade and Kruger said next month’s data could improve, provided there was increased focus on the Government’s economic policy implementation, improved business and market sentiment, continued positive inflation outlook and a speedy resolution to the wage disputes in the metals and engineering industry.

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