Absa’s Retail and Business Banking Division’s head of new-sector development, Justin Schmidt, highlights that, while there has been a rebound in the manufacturing sector, headwinds such as supply chain disruptions could hamper the nascent recovery

The manufacturing production figures for March that were released recently by Statistics South Africa (Stats SA) surprised on the upside: month-on-month manufacturing output rose, after falling in both February and January. With the strong March rebound, manufacturing saw continued quarter-on-quarter recovery and growth during the first quarter of this year.

This bodes well for South African gross domestic product growth in the first quarter and indicates that, on average, the manufacturing sector has recovered well from the Covid-19 lockdown shock. However, while production is now at or above prepandemic levels in several subsectors, many headwinds continue to pose risks to the nascent recovery.

The Absa Purchasing Managers’ Index (PMI) shows that the recovery is likely to have continued in April, although the pace of improvement may have slowed down. The business activity index of the Absa PMI, which is an indicator of output, reflected further improvement in production during April, but the pace of the increase was a lot slower than in March, which, hopefully, is not a sign of manufacturers missing out on a larger potential recovery.

Supply Chain Disruptions

Supply chain disruptions were a major constraint on the manufacturing sector in the first quarter of this year and continue to be a hurdle on manufacturers’ road to recovery. It was previously noted that raw material shortages are a major damper on manufacturers’ current activity.

Manufacturers are seeing greater positivity in terms of future exports and sales, leading to increased investment in inventories. The supply chain, however, could become a stumbling block as manufacturers continue to restock inventory to meet forward-looking demand. If this restocking continues to lag demand for final goods, there could be lost sales. This is highlighted by the Absa manufacturing survey for the first quarter, which highlighted that stocks of finished goods were at a low level, relative to expected demand. Raw material shortages were again cited as a major constraint on current activities.

Another major concern that has been highlighted globally is the shortage of shipping containers, but we have also seen supply issues with respect to microchips, metals and other key components used by many manufacturers. All this adds to the risk of products not being completed to meet the forward-looking demand.

Margin Pressure

The inefficiencies that remain in the system, as well as supply shocks, could also result in pressure on margins in the manufacturing sector. Evidence of this is the steady increase in producers’ prices highlighted by elevated levels in the PMI’s purchasing price index (although there was a slight rise in March from a five-year high). If these cost pressures in the manufacturing sector cannot be passed through to the end-consumer, manufacturers are likely to see their margins come under pressure. Most manufacturers have their energy supplied by municipalities and will, therefore, face further cost pressures when energy tariffs go up by about 18% in July.

Excess capacity remains in the sector, as highlighted by Stats SA’s report on the utilisation of production capacity by large enterprises. Excess capacity can place further pressure in terms of the companies covering their fixed costs and spreading these over greater sales volumes. Therefore, if the risk from supply chain disruptions and raw material shortages results in missed future sales opportunities, this would further add to the cost pressures that manufacturers will face in the short term.

While we’ve seen some positive momentum and reports of positive expectations from some manufacturers, there are potential risks in the coming months relating to supply chains and other external factors, such as the energy crisis, which could impede the conclusion of sales orders, as well as cost pressures that are likely to affect the short-term margins of manufacturers.