April 2019 Encouraging for Manufacturing Production Lines

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The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) notes with optimism the increase in the seasonally-adjusted Absa Purchasing Managers’ Index (PMI) released for April 2019, as the rebounding indicator is encouraging for production processes, Chief Economist Michael Ade said today.

Based on a survey of purchasing executives, the composite PMI data for April 2019 show an improved level of industrial activity, recording 47.2 points compared to 45.0 points in March 2019. A reading above 50 indicates an expansion, while one below 50 indicate a contraction, compared with the previous months. The improving trend corroborates data released by Statistics South Africa (Stats SA) earlier this year, which still reflect a positively trending year-on-year growth in manufacturing volume, albeit slowing down.

“Encouragingly, the latest seasonally-adjusted preliminary data arrest a declining trend in vthe composite PMI since the beginning of the year, with the numbers moving from a nondescript 49.9 to 46.2 and a lower 45.0 points in the respective months of January, February and March of 2019. Moreover, the deterioration in production activity during quarter one of 2019, as a proxy by the aggregate PMI, contemporaneously mimics the slump in key indicators such as the business expectation, business confidence and consumer confidence indices.

“The current performance of the PMI is also against the backdrop of a rebound in expected business conditions in April 2019 and is reassuring,” Ade said.

Of greater concern, though, according to Ade, is the high volatility and heightened uncertainty in the trajectory of the PMI subindices – namely business activity, inventories, suppliers’ performance, employment and new sales orders – which do not provide much confidence to purchasing executives. He said particular references are made to the slight dip in suppliers’ performance and employment indices and the acute decrease in the inventories sub-index, recording 53.4, 41.9 and 42.5 points respectively.

Ade said the April reading of the inventory sub-index indicates a sharp contraction from an expansionary zone in March and is worrisome. He said the trend could delay or even clog chain manufacturing processes, thus spelling serious trouble for manufacturing production lines in a subdued domestic economic growth environment.

“Typically, manufacturing entails division of tasks and capital or labour is supposed to complete a particular task before a product moves to the next position in the production chain. In a situation where there is nonperformance by contractors, shortage of material, inventory or labour, including partial delivery as reflected by the divergent data of the PMI sub-indices, there will be a negative impact on a set of sequential manufacturing operations.

“These include negative effects on production lines in smelters, mills or factories, where inputs are refined to produce intermediate or final products, with grave implications for the broader economy,” Ade said.

He added that the improved performance of the composite PMI is encouraging, given the tough economic environment for local businesses, which must also worry about galloping petrol prices as well as rising energy and input costs, while planning production processes.

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