With tough economic conditions continuing to impact on manufacturers, the Manufacturing Circle Investment Tracker (MCIT) index for the second quarter of 2018 saw a marginal decrease from 59 index points to 58.

Despite this marginal decrease, Manufacturing Circle (MC) executive Philippa Rodseth pointed out that companies were optimistic, going forward, about improved expenditure in the various subsectors of the index.

The objective of the MCIT, she explained at a recent presentation, was to develop and derive insights about manufacturing investment patterns in the South African economic environment.

Rodseth further pointed out that 65% of the respondents reported that their investment spending in the second quarter was within budget, and, overall, investment in seven out of the eight subindices had increased during the period.

Companies invested more in human capital, as well as on plant and equipment for expansion, upgrades, replacement and maintenance, while spending on inventories decreased.

Despite the drought in the Western Cape having had a major impact on some manufacturers, others were starting to see a pleasing increase in demand, she noted.

“It is encouraging that the composite index remains solidly above the 50-point mark, which indicates that expenditure is increasing, even though it has dropped below the average of 62 index points, which was recorded over the past six quarters.”

Meanwhile, in line with the expectations from the first quarter, the latest composite index shows moderated investment by manufacturers, compared with the preceding quarters.

The year-on-year MCIT investment by manufacturers reduced by eight index points, to 58, compared with 65 in the second quarter of 2017.

This decline, Rodseth explained, was due to a decrease in investment in inventories and a reduction in the replacement and maintenance of property, plant and equipment, as well as a decline in human capital training and development.

Some respondents, she said, noted that the effects of the drought in the Western Cape had had negative outcomes for production volumes.

In addition, she pointed out that subdued demand and production overcapacity had affected inventory investment.

Further, she lamented that the risk of land expropriation without compensation discouraged agricultural companies from further investing in new property.

Capital expenditure in the sector, on acquiring new plant and equipment, declined by 13 index points to 67, from 80 index points in the second quarter of 2017.

Investment on maintenance and/or the replacement of existing plant and equipment dropped by 16 index points to 54.

Expenditure on expanding existing property or buying new buildings recovered by 6 index points to 48, up from the revised 42 points in the first quarter of this year, but disappointingly remained below the 50-point mark, where Rodseth noted it had been since this time last year.

The quarter-on-quarter growth, she added, was mainly a result of a new production facility in the electrical machinery and electronics sector to boost the local production of prepaid electricity meters.

MC chairperson André de Ruyter, meanwhile, welcomed the draft Integrated Resource Plan (IRP), citing it as “a very positive step in the right direction”.

“We hope there will be local content requirements, similar to what underpinned the motor industry’s development,” he explained, highlighting that there were a number of South African manufacturers with the capacity, and which were able to supply major components into the renewables sector.

The IRP, he added, provided an opportunity for renewable energy to enter the playing field, which would, in turn, create additional opportunities for local manufacturers.

Further, although spending on maintenance and the replacement of property fell year-on-year from the first quarter of the year, investment recovered sharply by 11 points, from 49 points in the second quarter of 2017 to 60 in the second quarter of this year.

Additionally, manufacturers are more optimistic about investment spending on existing property and new buildings, as well as maintenance or the replacement for the third quarter of this year, projecting growth by 12 and 2 points to 60 and 62 index points respectively.

The improved export demand for textiles, clothing and leather goods is one of the reasons manufacturers are expecting to increase investment in the third quarter.

Other manufacturers, such as those in the packaging and paper sector, plan to increase capital spending on new property to increase capacity to optimal levels, minimise production costs, use less water and harness the benefits of new technology.

Expenditure on inventory, meanwhile, fell to 52 index points in the period, compared with 54 this time last year and dropped 9 points since the previous quarter.

Manufacturers are anticipating a further decline to 46 points in the third quarter, mainly owing to reduced turnover and lower demand as a result of customers with cash flow problems and the increase in customer liquidations or business rescue.

Food, beverage and tobacco producers in the Western Cape continued to face lower crop levels, which they expected would persist, resulting in reduced inventory levels, Rodseth pointed out last week.

She added that, in the basic iron and steel sector, import pressure and the lack of adherence by government to designation had led to lower inventory levels. In the diverse sectors producing chemicals, minerals, energy and water, as well as defence and security-related products, companies have inventory build-ups owing to customers delaying taking delivery of goods.

Investment in research and development (R&D) rose slightly to 58 index points in the second quarter and was higher than in the same quarter last year.

Encouragingly, Rodseth pointed out, manufacturers planned to increase spending on R&D to the highest level since the start of the MCIT composite index – 68 index points – in the third quarter of the year.

In contrast, some in the electrical machinery and electronics sector plan to reduce expenditure on R&D in the third quarter, owing to having fewer orders in the pipeline. Manufacturers in food products, beverages and tobacco products were adopting cost-containment measures to mitigate the effects of the drought, Rodseth said.

She further pointed out: “Right now, the South African manufacturing sector has significant underutilised capacity, and urgent demand-side interventions are required to slow the rate of job losses and deindustrialisation before real growth is observed and new jobs are created.”

Until, and unless, adequate demand is created for the current capacity, Rodseth lamented, the sector could not expect to attract significant additional investment.

“We need a collaborative approach to drive demand-side interventions,” she said.