Speaking after the release of these figures, SEIFSA Chief Economist Henk Langenhoven said although production during the first quarter of 2016 was slightly higher than during the last quarter of 2015, this was attributable to inventory replenishment during the last six months and pre-emptive domestic orders in anticipation of price increases.

Mr Langenhoven said that the Purchasing Managers’ Index (PMI) for April 2016 and the Bureau for Economic Research Manufacturing (BER) Survey data for the first quarter of the year show that inventories in the sector declined over the last six to 12 months. He said that recent announcements of tariff protection for several basic ferrous products and the weakening of the exchange rate had sparked a frenzy of orders from downstream manufacturers to replenish their stock levels in anticipation of imminent price increases. As a result, both production and factory capacity utilisation increased slightly, with the PMI business activity sub-index also strengthening in April.
Mr Langenhoven cautioned that these short-term improvements were not expected to continue. He said that the BER Manufacturing Survey (MS) shows several negative future trends for the sector.

“Expected business conditions for the metals and engineering sector over the next 12 months deteriorated substantially. This is in line with the trend in the PMI business activity sub-index, despite the April number having improved slightly,” Mr Langenhoven said.

He pointed out that MS respondents had reported that both domestic and export orders for the next six months had declined for every sub-industry in the sector, with the exception of metal product exports to Africa. He said that in the short term domestic orders from within the sector had increased, causing upstream activity to increase, thus resulting in a slight improvement in the PMI employment sub-index.

Mr Langenhoven cautioned that this trend was unlikely to be sustained over the medium term owing to the extreme pressures experienced by the sector’s main clients: mining had recorded an 18% decline, construction activity was languishing, major civil works were declining and the automotive sector had reported year-to-date declines in vehicle sales of nearly 10%. This was on top of a 7% decline in manufacturing production.

Mr Langenhoven said that cost pressures were a much bigger concern than was the case last year. Average input costs recorded by SEIFSA were on a steep upward trend since the middle of 2015, which has roughly been in line with the exchange rate depreciation (due to 40% of sector costs being dollar based) over the same period.

“In addition, both merchant and producer prices have been in decline during 2015 caused by very weak demand. These price trends have changed sharply from the beginning of 2016 and have increased to between 3% and 9% inflation. The same trends have been observed in both the intermediate producer price index published by Statistics South Africa and the intermediate price index for metals and engineering specifically,” said Mr Langenhoven.

He said that it looked like medium-term demand for the sector’s products will not improve and that companies would not be able to pass on production costs experienced at the moment.

“The conclusion, therefore, must be that company viability will remain under extreme pressure. The few positive signs of a possible early bottoming out of the slump seem to have originated from within the sector and not from demand from its main clients. Regrettably, the sector remains in a critical condition,” Mr Langenhoven said.