JOHANNESBURG, 29 MARCH 2018 – The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) is concerned about the latest Producer Price Index (PPI) figures released by Statistics South Africa (Stats SA) today given the importance of the indicator, the Federation’s Chief Economist, Michael Ade, said today.
“The PPI trend provides insight into costs of raw material and labour employed by businesses, including other production costs. However, despite the role of the PPI in capturing production costs, most companies still incur additional costs such as transportation costs, or value-added costs at various stages of production in the value chain,” Dr Ade said.
The annual percentage change in the PPI for final intermediate manufactured goods was 0,4% in February 2018, compared with 1,5% in January 2018.
“The decreasing trend is worrisome because if there is not enough lee-way for companies to pass on these additional costs in the form of higher prices into the market, it becomes problematic. This is because the PPI basically forestalls the direction of prices of goods and services sold to consumers in the up-coming months and also reflects prices of manufactured goods at the level of the first significant commercial transaction.
“For instance, prices of imported goods are measured at the point of entry into the country, and not at the point of sale to consumers. Similarly, prices of goods are priced at factory gate prices when they leave the factory, and not when they are sold to consumers,” said Dr Ade.
He said the declining trend in PPI for intermediate manufactured goods is generally of concern to producers in the M&E sector since the PPI for intermediate manufactured goods measures selling price inflation. While falling prices are beneficial to buyers of the M&E sector’s products, the same cannot be said of mainstream businesses in the cluster that are struggling to improve on declining operational surpluses and profit margins.
Dr Ade said the majority of companies in the M&E sector were price takers, as small companies, hence they have little or no influence over the prices at which they can sell the products they make. He said these companies were too small to be able to step out of the norms of the official PPI pronouncements and demand that customers pay more for the products they sell as a result of a rise in their input costs.
“The declining trend is uncomfortable to businesses and has the potential to render business conditions difficult,” he said.
He added that the expectation was that the improving domestic sentiments and a stronger rand would help to mitigate business costs in the medium to long term, boost production and provide a basis for companies to increase selling prices towards better growing margins. He also hoped that the lag effects of low inflation, improving consumer demand and business and consumer confidence would start to filter through, and ultimately improving companies’ bottom lines..
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