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.