While SA has been gripped by the positive mood following the change in politics and governance under President Cyril Ramaphosa, the long-suffering manufacturing sector is not yet convinced that a turn in their fortunes soon beckons.
The manufacturing sector has been unstable over the past ten years and has underperformed global manufacturing as overall levels of production remain low. World Bank data indicates that manufacturing has struggled to pick up in recent years, with the sector generating 13% of gross domestic product in 2017, from 24% the early 198os.
Along with promising to reform public finances, busting corruption, fixing governance at state-owned entities, the Ramaphosa presidency plans to ramp up industrialisation and manufacturing investments to boost economic growth. After all, SA’s economic recovery hinges on new investments or expansionary capital expenditure in sectors including manufacturing and infrastructure.
While manufacturers are encouraged by Ramaphosa’s promises, they are not yet willing to commit to new investments. The Manufacturing Composite Investment Tracker (MCIT) for the first quarter of 2018 shows that new investments and capital expenditure in the sector have been declining.
Although the MCIT composite tracker remained above the 50-point mark in the first quarter 2018, it fell from 60 points compared with 63 points in the fourth quarter of 2017.
A reading above 50 points indicates an expanding manufacturing sector while below 50 points indicates a decline. The MCIT tracker monitors investment trends in the manufacturing sector on a quarterly basis, measuring actual expenditure patterns in property (land and buildings), plant and equipment, human capital and research and development.
Other research points to a similar declining trend in the manufacturing sector.
Towards the end of the first quarter, the Absa’s Purchasing Managers’ Index, which gauges activity in the sector, fell sharply to 46.9 in March from 50.8 in February. However, it has returned to the neutral 50-point mark since then.
Surveyed respondents in the MCIT tracker operate Gauteng businesses – with 41 000 employees – in the iron and steel, nonferrous metal products, metal products and machinery and packaging sub-sectors of manufacturing. “Cost savings and cutbacks in investment and capital expenditure have characterised the recent past. Where there have been investments, it has been for small projects, minor upgrades and required maintenance,” said Manufacturing Circle executive director Philippa Rodseth.
Stanlib chief economist Kevin Lings supported this view, adding that maintenance capital expenditure (meaning maintenance on property, machinery or equipment) will likely continue in the next two years rather than businesses taking on large new investments.
The new political leadership under Ramaphosa and recent rand strength will prompt businesses to start thinking about renewing or maintaining their equipment/machinery rather than expanding their capacity or employing more people, said Lings.
“This is equipment/machinery they should have looked at three years ago but decided to patch or repair it and not replace or renew it. Businesses are now in a position to renew and contribute positively to the growth rate overall.”
Little future investments
The Manufacturing Circle anticipated little or no change in investment in the second quarter.
Manufacturing Circle chairman Andre de Ruyter, who is also the CEO of packaging company Nampak, said until demand for manufacturing products returns to the market, manufacturers are likely to remain cautious about new investments.
“While we have seen a modest recovery in consumer confidence [since the Ramaphosa presidency], particularly for fast moving consumer goods, we have not yet seen demand rising sufficiently to support major new investments,” De Ruyter said on Tuesday at the reveal of the MCIT investment tracker findings.
“No one will build new factories and employ more people if there is insufficient demand to fully utilise existing capacity. Only once sufficient demand exists in the economy, you will actually see a major spurt in new investments,” he said.
The SA Capital Equipment Export Council’s Ross Hunter expects new investments to unlock only in 2019 as mining companies have scaled back on new projects and state-owned enterprises, which are bedeviled by corruption issues, are not committing to new infrastructure projects.
Brought to you by Moneyweb