Speaking after the release of the figures, SEIFSA Economist Tafadzwa Chibanguza said that while a lower inflationary environment is generally beneficial to domestic producers from an input cost point of view, most of the companies in the metals and engineering sector manufacture intermediate goods, hence a lower producer price reading also suggests lower earnings for these companies.
The final manufactured goods index recorded an annual 2.6% increase when February 2015 is compared to February 2014, down from the annual 3.5% recorded a month earlier. The intermediate manufactured goods index increased 1.5% in February 2015 when compared to February 2014, down from the annual 3.4% recorded in January 2015.
Mr Chibanguza said that producer inflation can be viewed as a proxy for domestic activity.
“It is very evident that the disinflationary pattern in these indices is, in addition to other factors, a function of weak domestic demand. This is the tenth consecutive disinflationary reading for the final manufactured goods index. Counting back takes us to April 2014 with the platinum strike, the metals and engineering strike and the beginning of load shedding all having impacted domestic demand over this period,” Mr Chibanguza said.
He added that the pattern was the same for the intermediate manufactured goods index, with only one reading higher than it was during the same period last year.
“As the metals and engineering sector, we watch this index very closely, given that the sub-industries that make up the metals and engineering sector constitute 70% of the make-up of this index. However, we anticipate that this could be the lowest point of this year for the final manufactured goods index, with upward pressure expected as soon as the next reading, particularly driven by the very weak rand against the dollar in March, and the impact this has also had on the Rand price of fuel, in addition to the fuel levies expected in the next few months,” Mr Chibanguza said.
The upward trajectory will, however, be limited to an extent by weak domestic and global demand. This will be evident particularly in the intermediate manufactured goods index, where commodity prices are anticipated to remain depressed for the remainder of 2015.
According to Mr Chibanguza, there is some positive news to read from today’s figures – and that is the benefit to downstream producers. A lower inflationary environment creates a classic case of lower input costs in an environment of a weak exchange rate, thus increasing the competitiveness of domestic producers internationally and improving the margins producers can earn, barring electricity supply as a constraint.
“We are of the view that the intermittent electricity supply remains the country’s most significant threat. Simply put, without energy, meeting export demand is impossible, and this negates some of the upside brought on by the lower inflation,” Mr Chibanguza said.
He added that, going forward, some upward pressure was anticipated. The primary driver of the upward pressure will be the inflationary pass-through from weaker currency and the shortage in the harvest of maize production caused by the drought. The latter was anticipated to put upward pressure on the final manufactured goods index.
However, weaker global and domestic demand is likely to offset the aggressiveness of the increase, mainly due to weaker mineral commodity prices.
“Given the dynamics highlighted above, the weaker inflationary environment and the very recent relative strengthening of the Rand to below $1/R12, it was widely expected that the South African Reserve Bank would keep the repo rate on hold,” Mr Chibanguza concluded.