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Press Release – 2016/09/02: SEIFSA CONCERNED ABOUT SERIOUS DISTRESS FOR THE METALS AND ENGINEERING SECTOR INDICATED BY LATEST PMI

By 1st Sep 2016Sep 20th, 2019No Comments

After analysing the data, SEIFSA Chief Economist Henk Langenhoven said: “The steeper decline in the downward trend reflected by the August purchasing managers’ business activity sub-index yet again indicates a further delay in any possible metals sector revival.”

Mr Langenhoven explained that the PMI, which leads metals and engineering production by 12 to 18 months, declined by 10% on a month ago, as against 8% during July on the previous month.

“This confidence index is now also 10% lower than during August 2015,” he added.

Mr Langenhoven said that that the acceleration in this downward trend is also evident in other comparisons. The year-to-date (January 2016 to August 2016) level of the index is now 3% lower than during the same period last year, as against 1,7% up to July this year. Over the past 12-month period ending in July this year, the decline was 4%, whereas one month later (ending in August 2016) the decline is 5,5%.

He highlighted five key data points that demonstrate the intricate dynamics playing out in pushing the trend south:

  • New sales orders declined by 22% on last month, thus bringing the 12-month period into negative territory;
  • New sales orders and business activity move in unison and the former explains the latter;
  • The PMI leading indicator (ratio between new sales orders and inventories) declined below 1. New sales orders declined faster than inventories, explaining this result. It is known in the sector that inventory levels have been dropping for some time.
  • The price sub-index continued to decline (-10%) in August this year, also indicating softer demand conditions. This is apart from the positive cost impact of a slightly stronger Rand exchange rate. It is known that domestic primary steel prices will be kept constant during September 2016, on their August 2016 levels. It is expected that prices may even decline due to persistent low domestic demand, further suppressing orders.
  • The uncertainty regarding the possible introduction of safeguard measures for steel products also has a dampening effect on imports. The perception is that Import orders placed today will only land on South African shores after the introduction of safeguards, increasing prices by the added duty and making the products uncompetitive in an already depressed market.

Mr Langenhoven said that these prevailing uncertainties in the metals and engineering market may very well result in inaction from companies.

“Weak domestic and export demand, coupled with the 2016 year-end period closing in, further contributes to the possibility of weak activity for the rest of the year,” he added.

Mr Langenhoven said SEIFSA expected a 3% contraction in production during 2016 on last year; data releases later in September will hopefully show improved performances than the 5% year-to-date actual declines measured up to now. He said that PMI survey respondents were 11% more optimistic about the next 12 months in August than was the case in July this year.

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