The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) welcomes the increase in the Producer Price Index (PPI), as per the data released by Statistics South Africa (Stats SA) today, and hopes that businesses will benefit from the positive trajectory via higher selling prices.

SEIFSA Chief Economist Michael Ade described the data as encouraging, especially considering that selling prices have been rising since April and May, spanning the COVID-19 pandemic-induced economic lockdown levels four and five.  He said the selling price inflationary trend augurs well and should help in reducing operational cost pressures on businesses and boost margins, since companies will now have a leeway to pass cost increases to intermediate and final consumers.

The data released by Stats SA indicates that the annual percentage change in the PPI for intermediate manufactured goods increased from 2.4% in July to 3.2% in August. The increase is consistent with the annual change in the PPI for final manufactured goods, which also increased from 1.9% in July to 2.4% in August, generally spelling good news for local manufacturers.

“It has been a tough year for local producers. Businesses have operated under increasingly difficult conditions, unpredictable electricity supply, distortions in the local and regional supply chains, insufficient domestic demand, variable input cost prices and persistent operational costs, despite not manufacturing or selling,” Dr Ade said.

He added that the latest PPI data would build on last month’s progressive data and continue to provide distressed businesses with the opportunity to manoeuvre around cost-push inflation, towards their sustainability.

However, Dr Ade said companies cannot invariably increase selling prices due to countervailing factors like insufficient demand and poor consumer spending. These factors remain significant challenges to the Metals and Engineering (M&E) cluster of industries, where the demand for their intermediate goods is a derived demand.  This means that the demand for the goods produced in the industry is usually based on the demand for consumer goods, which they help to produce. Therefore, an increase or decrease in consumer demand and a corresponding increase or decrease in consumer spending will further boost or hinder production in the M&E sector, he explained.

Dr Ade cautioned that the prevailing uncertainty from the Coronavirus pandemic and a significant decrease in household final consumption expenditure by 49.8% in the second quarter of 2020 could pose major challenges to the M&E industry since the highlighted constraints may lead to a further slowdown in growth, employment and gross fixed capital formation.

“Nevertheless, we recommend that business executives continue to prioritise both the economy and the health of all employees, given the need to remain sustainable in the so-called ‘new normal’ environment. Companies should take advantage of rising selling prices and the impending uptick in demand from inter-linked industries in order to boost capacity utilisation and production,” Dr Ade said.

He said SEIFSA remained hopeful that South Africa’s transition to lockdown alert level one and the opening up of more local businesses will have positive implications for the M&E sector. He said the resumption of regional and internal flights this week is bound to lead to a significant improvement in the M&E sector trade, with more goods being exported.