SA factory activity improves but Transnet, load shedding challenges persist

South African factory activity improved in October according to the Purchasing Managers’ Index (PMI), but the challenges persist in the form of the fallout from the Transnet strike, faltering global demand and of course load shedding that is not only curtailing production, but also demand.

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) rose from 48.2 index points in September to 50 in October, which was slightly better than the average recorded in the previous quarter when it stood at 49.6. However, the Transnet strike and faltering global demand probably hurt exports, while persistent load shedding capped the recovery in activity and demand.

The PMI is an economic activity index based on a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.

However, as the intensity of load shedding was less severe compared to September, the business activity index did improve from the previous month. At 48.8 points, it still indicates weak output, but this was the best reading since March 2022.

ALSO READ: PMI plunges again due to load shedding

Employment index

More bad news is that the employment index dropped sharply in October, moving against the improvement in business activity, reaching its lowest level in about two years. “Given the history of this series where sharp declines reverse in subsequent months, we need to be careful to not read too much into the drop. However, for now, this remains a worrying development.

“At 41.5 points, the index signals the fastest pace of job shedding in two years,” Lisette IJssel de Schepper, senior economist at the BER, says.

Although the new sales orders index bounced back in October, it remained stuck in negative terrain for a fifth consecutive month and some respondents highlighted that, in addition to curtailing their production, load shedding is also hurting demand for their products. Some respondents also made this comment in September.

Due to the Transnet strike, exports remained poor, while global demand is faltering and IJssel de Schepper says PMI readings from Europe, an important SA trading partner, point to a sharp slowdown in activity at the start of the fourth quarter.

“Indeed, worries about the strength of global growth going forward may help to explain the downtick in the expected business conditions index. The index tracking business conditions in six months slipped to 49.2, the most pessimistic purchasing managers have been about the outlook since May 2020.”

She says the persistence of load shedding and little hope that it will be alleviated over the near term likely also weighed on sentiment.

ALSO READ: Absa PMI shows some recovery for factories, thanks to less load shedding

Purchasing price index lower

Fortunately, there was some positive news as the purchasing price index moved lower for a fourth month, to about 20 points below a record high reached in March this year. “As foreshadowed by the PMI, which measures prices of goods coming into the factory, official data for factory-gate prices has started to trend lower.”

IJssel de Schepper also points out that while producer price inflation (PPI) remains elevated, it seems clear that input cost pressures have peaked.

“That said, with a hefty fuel price hike to come into effect later this week, controlling costs remains a challenge, especially for factories using diesel generators during times of load shedding.

The business activity index rose by 9 points to 48.8 in October, in line with the average of this subcomponent so far in 2022, although this of course masks a lot of volatility with a stellar first quarter and dismal second quarter, followed by a lacklustre third quarter.

“Even so, it is a better start to the fourth quarter than the third quarter average, which bodes well for actual manufacturing output in the final quarter of the year.”

ALSO READ: Marked decline in business activity illustrates true cost of load shedding

New sales orders and inventories

Although the new sales orders index continued to mirror the business activity movements and improved in October, it remained stuck in negative terrain, signalling weak underlying demand.

IJssel de Schepper says beyond the impact of load shedding on domestic demand, exports were affected by the Transnet strike, while slowing global growth could become a bigger constraint on export growth going forward.

“To be sure, the PMI readings from Europe point to a sharp slowdown in activity at the start of the fourth quarter,” IJssel de Schepper says.

The inventories index ticked down somewhat from recent elevated levels and the index has been a key support of the headline PMI during the second half of 2021 and 2022 as it has stayed well above 50 points since July 2021.

The supplier deliveries index inched slightly higher in October and IJssel de Schepper says given the disruptive impact on the movement of goods due to the Transnet strike, the index could easily have increased by more. She points out this happened because the index is inverted and therefore a slowdown in deliveries increases the index, while in normal times it is a sign of improved demand when there are no supply-side constraints.