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Press Release - 2014/09/18: RELIABLE ENERGY SUPPLY KEY TO UNLOCKING SOUTH AFRICA’S ECONOMIC GROWTH POTENTIAL

Speaking at a two-day “Powering African Industry Conference”, being held in Nasrec, SEIFSA Chief Economist Henk Langenhoven said irrefutably reliable energy supply was vital for a thriving economy.

“On average, energy costs in the metals and engineering sector account for about 8% of intermediary input costs. It stands to reason, therefore, that without reliable energy supply, the sector cannot exist or expand,” said Mr Langenhoven.

He added that it was unfortunate that even right now the sector could not operate at full capacity as a result, among other things, of energy constraints.

“Actual or realized economic growth in the South African economy has fallen substantially below its potential. While energy provision should support our growth ambitions, there appears to be a real danger of the two gradually drifting apart,” Mr Langenhoven said.

Definitive studies published estimated South Africa’s potential economic growth rate to be around 3,5%. In reality, growth only averaged around 1,5% during the nineties, and then accelerated to 3,7% on average during the first decade after 2000.

Mr Langenhoven said that South Africa was now seriously in danger of falling below a 2,5% average in this decade. This is mostly owing to the fact that although the economy had grown faster in the past decade (2000/2010) than recorded during the seventies, South Africa missed the last super cycle and completely under-estimated the economy’s accelerated energy demand over this period.

“Regrettably, electricity generation has become a significant physical constraint that hampers the economy’s ability to grow at a faster rate. It can be argued that this situation runs counter to the Government’s stated intention to stimulate local manufacturing and value addition,” Mr Langenhoven said.

He added: “In fact, manufacturing’s share of the economy has been steadily declining over the last three decades, with investment patterns in the sector far more worrying than the former. Reliable energy supply is absolutely vital to turn the situation around.”

According to the South African Reserve Bank, the sector is 29% larger today than 10 years ago, 66% larger than 20 years ago and 71% larger than 30 years ago. However, its share of the economy declined first from 20% in 1983 to 19% in 1993, and then further still to 18% in 2003 and eventually to 16 % in 2013.

“So, manufacturing has decline by a percentage point each decade in South Africa. Needless to say, this does not bode well for our economy. Increasingly, we have become a country that imports equipments and components that used to be manufactured here at home, in the process leaving many people unemployed.”

Mr Langenhoven said that energy provision was a long-term assignment, with 2025 a pivotal year when large portions of current generation capacity will reach the end of their useful life.

“As a country, we need to tackle this challenge with a single-minded determination as though we were going to war. Without a sufficient and secure supply of energy – and, in this case, electricity – it is not possible for South Africa to be globally competitive,” he concluded.

by SEIFSA .

Press Release - 2014/09/17: CONSUMER INFLATION RISES ABOVE EXPECTATIONS

The index pointed to a 6.4% increase when August 2014 is compared with August 2013. This represents a 0.1% point increase on the corresponding annual increase recorded a month earlier and a 0.4% increase between July 2014 and August 2014.

SEIFSA Economist Tafadzwa Chibanguza said that while this was not a significant increase from the 6.3% recorded a month earlier, it was certainly significant when looked at in light of the consensus expectation of between 6.1% and 6.2%.

“Most expectations had been informed by the disinflationary trend we have observed over the past two readings, which we anticipated to continue, an easing of the brent crude price (which in August decreased about 4% in dollar terms), a relatively stable currency (averaged $1/R10.66 in August), the expected effects of the two interest rate hikes from earlier this year and poor growth in the South African economy,” said Mr Chibanguza.

The food and non-alcoholic beverages sub-component of the CPI was the only positive contributor to the annual increase, while the transport sub-index contributed a decrease to the overall index, with the other subcomponents remaining flat.

Given that international food prices have also been on an easing trend, the conclusion one reaches is that this increase in the food and non-alcoholic beverages component would stem from domestic retailers passing on administered price inflation such as electricity and transport costs, among others. 

The big question becomes; what the South African Reserve Bank (SARB) will do tomorrow (Thursday) with the rates decision, on the premise of this new data and the current environment. 

“We are still of the view that the Rand poses the biggest risk to inflation, and the recent spike to the $1/R10:95-$1/R11:00 does not bode well for inflation. Similarly, the interest rate guidance expected out of the United States tonight is expected to determine the direction the Rand will go,” Mr Chibanguza said. 

He added: “Should the US Federal Reserve rates be kept on hold for a while longer, the currency should maintain a relatively stable level therefore decreasing the probability of a move on rates by the SARB. The reverse of this scenario also holds true.” 

by SEIFSA .

Press Release - 2014/09/12:RECENT STRIKE TOOK A TOLL ON THE METALS AND ENGINEERING SECTOR

SEIFSA Chief Economist Henk Langenhoven said that the metals and engineering sector will almost certainly contract when 2014 is compared to 2013, with growth dropping from 3,5% by the end of May to 0,8% by the end of June, and -3,5% by end of July.

“These numbers reflect the short-term effect of the production disruptions. The medium- term implications for employment could be as detrimental, either through lay-offs or through capital intensification, which would be a reversal of declining capital intensity in recent years,” Mr Langenhoven said.

The longer-term impact on production capacity will be driven by several factors, namely:

• The negative effect on already-low profit margins will cause company casualties;
•  Fixed investment in the sector has suffered a further blow after 16 years of declining investment-to-output ratios;
• The damage to confidence in the sector as secure suppliers to international customers will only show in time, with the possibility that the sector could lose exports which represent 60% of its market.

The inter-relationships amongst metals and engineering and the motor vehicles, parts and accessories and other transport equipment sectors is very evident, with production in the latter two declining by nearly 30% on June numbers.

“Taking into account the sub-industries most affected, one also understands the shortages developing in the construction sector over the period. The three sectors combined were responsible for 7% of the 7,9% drop in manufacturing output,” Mr Langenhoven said.

The following were the worst hit sub-industries within the metals and engineering sector in July:

“SEIFSA has previously stated that the third-quarter performance of the sector may not be much better than it was in the first half of the year. This will depend on accelerated production in August and the pace of recovery, as well as the statistical base effect. The labour unrest was the last thing the sector needed,” concluded Mr Langenhoven.

by SEIFSA .

Press Release - 2014/09/02:PMI RESULTS INDICATE RENEWED HOPE TO METALS AND ENGINEERING INDUSTRIES

The seasonally adjusted index improved 6% when compared with July, boosting much needed confidence levels for the sector.

SEIFSA Chief Economist Henk Langenhoven said that the PMI’s business activity sub-index was of interest to the metals and engineering sector since it leads production trends by between a year and 18 months. This index improved by 20% when August is compared with July 2014.

“However, confidence levels are highly volatile and very fragile. Although the monthly improvement is very good news, comparisons looking at the eight months of 2014 relative to last year, and the 12 months ending in August compared to the same period last year are all still negative, albeit not as bad as measured in July,” Mr Langenhoven said.

The PMI results indicated that: 

• The average level for the first eight months of the year was 11% lower than the same period during 2013, 
• The August 2014 level was 18% lower than August 2013, and 
• On a 12-month comparison, the average level by the end of August was 5% lower than a year ago.

The July PMI data were surveyed during the month of the strike in the metals and engineering sector. The latest data reflect the recovery of confidence during August when compared to July.

“If the improvement in the overall expected business conditions in 12 months recorded is anything to go by, then the recovery will continue. Purchasing commitments also improved strongly, indicating some resilience in demand in the economy. Inventories recovered somewhat, which may show that the return to normal production levels will take some time,” Mr Langenhoven said.

He added: “There are clearly some signs of recovery in the manufacturing sector generally and in the metals and engineering sector specifically, which we hope indicates the bottom of the trough.”

by SEIFSA .

NEASA’S STRIDENT PROPAGANDA SHOWS GROWING DESPERATION

Responding to yet another so-called open letter from NEASA addressed to the “SEIFSA leadership”, Mr Nyatsumba dismissed “with the utter contempt that they deserve” the series of misleading claims made by NEASA. Two such fallacious claims are that the settlement agreement signed on 29 July was “negotiated with NUMSA behind NEASA’s back” and that SEIFSA represents mostly large companies.

“It is absolutely baffling that an organisation with any ounce of self-respect would perpetuate blatant untruths in an effort to market itself and to rubbish a settlement agreement reached within the Metal and Engineering Industries Bargaining Council (MEIBC). Such action shows total desperation and reflects poorly on the organisation’s integrity,” Mr Nyatsumba said.

The truth, Mr Nyatsumba said, remained that:

•  All parties to the MEIBC were involved in the negotiations from the time when they started in March until when an agreement was eventually reached. NEASA was one of those parties and had an opportunity to articulate its views throughout the process.
• While there are big companies in some of the Associations affiliated to SEIFSA, the fact remains that the overwhelming majority (up to 63%) of the companies that SEIFSA represents are small, each employing fewer than 50 people.

Mr Nyatsumba said that NEASA’s claim that SEIFSA has no role to play in the affairs of the MEIBC is laughable.
“As anybody who understands the history of the Bargaining Council will know, SEIFSA was formed in 1943 by the employer associations that are its members, with its mandate from the beginning being to represent the associations in wage

negotiations. Unlike NEASA, SEIFSA was a founding party to the Bargaining Council in 1944 and has been an active participant in its affairs since then,” Mr Nyatsumba said.
He said that while SEIFSA would have preferred a different outcome to the negotiations, the fact remained that “we do not negotiate with ourselves, and that is something that NEASA has yet to accept”. He said that a settlement was

reached through negotiations, and not through shouting at everybody from the roof top and desperately seeking to impose one’s wishes on those with whom one negotiated.
“As NEASA CEO Gerhard Papenfus can attest, we at SEIFSA worked closely with him and his team, in the form of a joint employer caucus, throughout the negotiations. We, too, wanted a wage settlement in the region of 8%

in order to save jobs in the sector and to give the sector an opportunity to be internationally competitive, but the unions were vehemently opposed to that proposed percentage.
“Our members could have chosen to be dogmatic, thus leaving our economy to bleed indefinitely as a consequence of an on-going strike. Fortunately, they were very mature in their approach and put the country’s interest

s first. It is a fact that we accepted the Ministerial Proposal reluctantly, and we made no secret of that fact then, but we did so in South Africa’s interest,” Mr Nyatsumba said.
He added that NEASA’s claims regarding the number of employers that it allegedly represents and, by extension, the number of people that they employ were a subject of an arbitration process that has long been stalled by that organisation.

“That arbitration process has now been scheduled for the last week of October. We hope that NEASA will ensure that it is finalized this time,” said Mr Nyatsumba.

by SEIFSA .

Press Release - 2014/08/08: FEARS BECOME REALITY AS SECOND QUARTER DATA SHOWS CONTRACTION

The first quarter confidence levels (measured by the purchasing managers’ sub-index for business activity) were strongly negative (-5%), and have now been followed by equally disappointing production numbers for the second quarter. Actual production for the sector fell by 5% on the second half of 2014 (seasonally adjusted -2%).

“Having hoped for better growth than the 2% recorded during 2013, these numbers indicate that 2014 production could actually be lower than that of 2013, says Mr Langenhoven, adding that the third quarter started even worse with production in July dramatically lower due to industrial action”.

• June production was 3% higher than May 2014, due to pre-emptive stock building.
• On a 12 month basis, growth slowed down to 0,8% (12 months ended in June vs similar period ending in June 2013).
• June 2014 production was 1% lower than June 2013.
• The basic ferrous, non-ferrous, other fabricated metal products, electrical machinery and equipment and the household appliance sub industries saw some growth on a 12 month basis.

Production capacity utilisation numbers show similar downward trends, with overall utilisation declining by 0,1% over 12 months.

Other comparisons are;

• The second quarter 2014 was 1,1% lower than the first quarter,
• The first half of 2014 was 0,1% lower than the first half of 2013, and
• The second quarter was nearly 2% lower than the second quarter 2013.

“It is expected that the third quarter of 2014 will not be much better, although the survey capacity utilisation will be done in August, the month immediately after the July strike,” Mr Langenhoven said.
He added that accelerated production may be the result of compensation for losses incurred in July.

by SEIFSA .

Press Release - 2014/08/01: SEIFSA WELCOMES EASING IN PRODUCTION PRICE INFLATION

The manufacturing sector, and in particular the metals and engineering industries, finds itself under extreme cost pressures and any data showing signs of cost relief are to be welcomed, said SEIFSA Chief Economist Henk Langenhoven.

The most important index to the metals and engineering industries is the Producer Price Index for Intermediate Manufactured goods, which recorded a 9% increase when June 2014 is compared to June 2013. This is down from the annual reading of 9.8% recorded a month earlier. This easing trend has been evident since February 2014 when the index peaked at an annual rate of 10.5% (when previous highs of 2013 are excluded).

The Production Price Index for Final Manufactured goods presented a similar pattern, recording a year-on-year 8.1% increase in June 2014, down from the year-on-year 8.7% recorded a month earlier.

Mr Langenhoven said that these trends are positive for the economy, although one of the drivers is weak demand from an ailing economy. He said notwithstanding demand-pull inflation (demand outstripping supply) being absent, the easing of cost-push pressures also contributed to the strengthening of the currency.

Mr Langenhoven said that the Rand strengthened in June on the back of talks to end the five-month-long platinum strike and inflows of capital through the financial account of the balance of payments. He said both the intermediate and final manufactured goods indices are highly sensitive to currency fluctuation, with the currency accounting for 88% and 84% respectively of the fluctuations in the indices.
Mr Langenhoven added that the continuation of these positive trends is uncertain, with the outlook clouded by a number of factors:

• Given that wages account for 75% of value add in the metals and engineering sector, the recent above-inflation wage increases are likely to add upward pressure to production prices (and downward pressure on profits);
• Increases in developed-market interest rates are likely to change the fundamentals for the Rand, with rand weakness anticipated as the yields rise further;
• And further possible electricity price increases to ESKOM by NERSA will also have a significant impact on production prices.

“SEIFSA sincerely hopes that the net effect of these diverse factors will not be unduly negative and that, with some luck, they will be at least neutral in the coming months,” Mr Henk Langenhoven concluded.

by SEIFSA .

Press Release - 2014/08/01: PMI RESULTS INDICATE POSSIBLE BOTTOMING OF THE TROUGH IN BUSINESS CONFIDENCE

Speaking after the release of the PMI figures, Mr Langenhoven added that confidence remains at its lowest in three years.

The crucial sub-index for‘business activity has not declined much on June 2014 (0,3%) and has only deteriorated slightly (-1,7%) when measured on a 12-month basis (i.e. 12 months ended in July 2014 compared to 12 months ended in July 2013). The first seven months of the year, however, were 10% lower than the same period in 2013. The activity index in July 2014 was still 24% lower compared to July 2013 (the same decrease as recorded for June).

Mr Langenhoven said that the July PMI numbers are gauging the worst of the impact of the metals and engineering strike. Production in the sector increased up to April and then declined in May for pre-emptive inventory and export purposes, according to the latest trade figures released recently. The new-orders sub-index stabilised in July and, coupled with lower production, caused inventory levels to be somewhat run down. The latter trends are expected to continue for a short period as production ramps up in the sector.

Costs in terms of value added lost within the metals and engineering sector is estimated at R6 billion, with the strike lasting 20 working days (ignoring 24-hour, seven-days-a-week operations). The direct impact on employment is yet to be felt going forward, Mr Langenhoven added.

The PMI employment sub-index declined by 11% between June and July 2014 and is 8% lower compared to July 2013. For the year to date (7 months), it improved by four percent and, on a 12-month basis, by 2,6%. This is explained by the higher production and employment measured in the run-up to the strike.

“The jury is out on what the impact of the last month will be on the economy. It is sincerely hoped that this was the bottom of the trough,” Mr Henk Langenhoven concluded.

by SEIFSA .