JOHANNESBURG, 30 JULY 2020 – The drop in the selling prices of domestic intermediate products will likely put a further strain on companies in the Metals and Engineering (M&E) sector, given these prices’ direct implications for the sector’s  margins and profits, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Dr Michael Ade said today. 

The producer price index (PPI) published by Statistics South Africa (Stats SA) today reflects a slowdown in selling price inflation of goods manufactured by the M&E cluster of industries for the month of June relative to May. The data shows that the annual percentage change in the PPI for intermediate manufactured goods, which is measured in factory gate prices, dipped to 1.4% in June from 1.7% May as derived demand from consumers continues to contract in a difficult economic environment.

“Decreasing consumer consumption pattern, poor domestic demand, increasing operational costs and the ongoing coronavirus pandemic are making it difficult for businesses to pass on cost increases to the market,” Dr Ade said.

Although decreasing selling prices for intermediate manufactured goods benefit consumers and buyers of inputs who can purchase more goods for the same amount of nominal income over time, the trend is worrisome mostly for selling businesses that have to absorb sudden price shocks in order to retain their clients.

Dr Ade said this is a difficult situation for businesses in the M&E sector, which are largely domestic price takers since they produce goods of an intermediate nature which are used in the production of final goods.

Dr Ade said variations in factors affecting supply, exchange-rate volatility and uncertainty from the coronavirus contagion are some of the drivers of selling price changes. Generally, a continual deterioration in selling price inflation has the potential to further dampen any existing differential between input cost inflation and selling price inflation for manufacturers, thus jeopardising their sustainability in the medium to long term, he said.

As business activity continues to slow down during these difficult times, SEIFSA recommends that stakeholders and policy makers fast-track efforts to boost infrastructure development, which is a key enabler if businesses are to expand and make a significant contribution to economic growth.

“Efforts to boost demand through increased infrastructure spending will, no doubt, exert an upward pull on selling prices as demand outstrips supply in the short term, prior to market adjustments,” Dr Ade said.

He added that the initiative will also cause a significant shift to the right, as companies use excess productive capacity to meet new domestic orders, thereby creating a significant number of part-time and full-time jobs in the process.

“Importantly, the initiatives to boost demand should be complemented by unceasing efforts to boost regional and global trade, especially given the opening up of key trading partners’ global value chains following prolonged periods of economic lockdown from the pandemic. Increased export activity will add another  dimension to consumption patterns as external demand increases, also boosting local companies’  production potential,” Dr Ade concluded.