The latest Producer Price Index (PPI) data for intermediate manufactured goods indicating a further improvement in selling price inflation in the Metals and Engineering (M&E) sector for March 2019 is encouraging, says the Steel and Engineering Industries Federation of Southern Africa (SEIFSA).
The data, recently released by Statistics South Africa (Stats SA), shows that the annual percentage change in the PPI for intermediate manufactured goods – which is a proxy for selling price inflation for the M&E cluster – improved alongside the PPI for final manufactured goods. On a year-on-year basis, the PPI for intermediate manufactured goods increased to 6.3 percent in March 2019, from the 3.9 percent recorded in February 2019. The main contributors to the annual rate of 6.3 percent were basic and fabricated metals and chemicals, rubber and plastic products. Contemporaneously, the PPI for final manufactured goods for the broader manufacturing sector also registered an increase of 6.2 percent in March 2019 from 4.7 percent in February 2019.
“Against the backdrop of stalled domestic demand, unpredictable energy supply, ballooning petrol prices which add to increasing logistics costs, the improvement in the PPI for intermediate manufactured goods augurs well for the sub-components of the M&E cluster, which now have more leeway to manoeuvre around high operational and intermediate costs,” SEIFSFA Chief Economist Michael Ade said.
He added that the second-round effects of fuel price increases are usually difficult for small and medium enterprises. Given that businesses in the value chain and service providers – including logistics companies – gradually pass the increases in fuel prices on to their customers, resulting in high operational costs, the improvement in PPI is encouraging.
Ade said better selling prices enable businesses to improve on existing margins and it is, therefore, imperative that a positive differential between input cost inflation and selling price inflation be maintained.