QUARTERLY REVIEW€¦ · • Other non-metallic mineral products; • Textiles, clothing and...

MANUFACTURING CIRCLEemploy | produce | prosper

LOGOColour specifications: (BLACK: 100K; RED: 15C 100M 100Y; GREEN: 88C 20M 82Y 5K; BLUE: 95C 84M; YELLOW: 2C 23M 80Y)

Font: Helvetica Neue LT Std Condensed

Manufacturing Bulletin

QUARTERLY REVIEWTHIRD QUARTER 2015

EXECUTIVE SUMMARY

• The third quarter of 2015 (Q3 2015) Manufacturing Circle survey reveals that business conditions in the manufacturing sector remained fragile in line with the rest of the economy.

• Poor domestic and global economic conditions are mainly responsible for the manufacturers’ negative sentiments with regards to business conditions in the industry, and the survey shows that both the local and foreign markets are important for local manufacturing businesses.

• Sluggish demand, high input costs due to the weak rand and inadequate skills are some of the factors that had a negative effect on the manufacturing sector during Q3 2015. The weak rand however also provided some competitive edge for the manufacturers and therefore boosted exports over the quarter.

• Interestingly, the survey reveals that employment increased in the manufacturing sector during Q3 2015 from Q3 2014.

• The survey reveals that water is important for the manufacturing sector, and in terms of supply, the majority of the survey’s participants indicate that it is fairly reliable. However, concerns have been raised in terms of the on-going drought and the negative impact it is having on production as well as its potential impact on future water supply.

• Finally, the surveyed manufacturers expect conditions in the sector to stabilise somewhat going from the short to the medium term.

2

INDEX

Page Article

1. Executive Summary

2. Introduction: SECOND QUARTER 2015 MANUFACTURING CIRCLE SURVEY

3. Section 1: Overall Manufacturing Business Confidence

4. South Africa’s water risk

5. Section 2: SOUTH AFRICAN MANUFACTURING ENVIRONMENT: Q3 2015

6. Section 3: Q3 2015 SURVEY RESULTS

15. World Manufacturing Forum: Barcelona, 3-4 May 2016

16. Save our Steel- An Update on Tariffs and Downstream Industry Response

17. The Manufacturing Circle Appoints New Executive Director

Picture on cover courtesy Aspen Pharmacare and Peter Morey Photographic

INTRODUCTION: SECOND QUARTER 2015 MANUFACTURING CIRCLE SURVEY

BACKGROUND TO THE MANUFACTURING CIRCLE SURVEY

The Manufacturing Circle Survey is compiled by Pan-African Investment and Research Services (PAIRS) on behalf of the Manufacturing Circle. The purpose of the survey is to capture current and expected economic and business conditions in the domestic manufacturing sector.

This quarterly review covers the latest available trends in the domestic manufacturing sector, as gathered from key informants during the third quarter of 2015 (Q3 2015).

Profile of the Survey Participants

The survey contained quantitative and qualitative questions, completed by a total of 88 firms, varying from small to large South African manufacturing companies. The respondents represent different sectors of the manufacturing industry. Using the “Standard Industrial Classification” (SIC) of economic activities codes, the respondents of the Q3 2015 edition operate in the following industries:

• Basic metals, fabricated metal products, machinery and equipment and office, accounting and computing machinery;

• Coke, refined petroleum products and nuclear fuel; chemicals and chemical products; rubber and plastic products;

• Electrical machinery and apparatus not elsewhere classified;

• Food products, beverages and tobacco products;• Furniture; manufacturing not elsewhere classified;

recycling;• Other non-metallic mineral products;• Textiles, clothing and leather goods;• Transport equipment; and• Wood and products of wood and cork, except furniture;

articles of straw and plaiting materials; paper and paper products; publishing, printing and reproduction of recorded media.

In terms of company turnover as well as the size of the workforce, the results show that the majority of the participants in the third quarter of 2015’s manufacturing bulletin survey fall in the category - small to medium companies. For instance, Fig. 0.1 indicates that more than 6 out of 10 of the participating firms employed 500 people, while almost a quarter of the firms employed 500 to 2000 people. Moreover, Fig. 0.2 shows that almost 7 out of 10 of the participating firms had turnovers of less than R300 million, and almost 3 out of 10 had turnovers ranging from R300 million to R3 billion.

3

QUARTERLY REVIEW THIRD QUARTER 2015

Fig. 0.1: How many employees did your company have over the quarter?

66

6

18

6 5

0

10

20

30

40

50

60

70

Shar

e of

Rep

sond

ents

(%)

Fig. 0.2: What was your company turnover over the quarter?

69 15

14

1

0

1

0 10 20 30 40 50 60 70

< R300m

R301m to R999m

R1bn to R3bn

R3bn to R6bn

R6bn to R10bn

> R10bn

Share of Respondents (%)

SECTION 1: OVERALL MANUFACTURING BUSINESS CONFIDENCE

The Manufacturing Business Confidence measure is based on the Manufacturing Circle Survey and reflects the overall confidence of domestic manufacturers in the sector in relation to the respondents’ feedback.

MANUFACTURING BUSINESS CONDITIONS

The results from the latest survey indicate that business confidence in the manufacturing sector is currently low with the majority of respondents expressing a lack of confidence in business conditions. Twenty six and 49 per cent of the respondents said that they found business conditions in Q3 2015 to be “poor” and “weak,” respectively. Only 17 per cent said conditions were stable during this period, while a measly 7 per cent found business conditions either “modest to good” or “strong”. The Q3 2015 results represent a deterioration in the outlook on business conditions from Q3 2014 as only 7 per cent of the respondents perceived business conditions to be good (i.e. “modest to good” and “strong”) in the third quarter of 2015 compared to 12 per cent in 2014. The surveyed manufacturers that viewed business as stable, however, increased from 10 per cent during Q3 2014 to 17 per cent in 2015.

Fig. 1.1: How do you perceive the manufacturing sector’s conditions over the past quarter?

25

53

10 10

2

26

49

17

6 1

0

15

30

45

60

75

Poor Fragile/weak Stable Modest to good Strong

Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

Poor domestic and global economic conditions are responsible for the surveyed manufacturers’ negative sentiments with regards to business conditions in the industry. China’s economic conditions, which include lacklustre growth (i.e. for China’s standards and relative to its high growth years) and weaker demand for commodities in particular, has negatively impacted not only on South Africa and South African businesses, but also the rest of the world. Some respondents indicated that due to the generally muted global demand, Chinese producers are lowering their prices even further to become competitive, resulting in even further cheap imports entering the South African market at the detriment of local producers. Moreover, respondents indicate that factors such as the volatile exchange rate, labour unrests along with rigid labour laws, as well as the current drought are presenting challenges in the business environment. Eskom’s continued inability to provide the country with a reliable electricity supply continues to come up as a reason for the dampened business confidence. Concerns have also been raised at the new tax laws and at the uncertainty they are raising.The surveyed manufacturers also show that consumers’ spending power has been compromised (due to for example, a high unemployment rate and generally weak economic conditions), which has led to low demand for their output. There are, however, manufacturers that have indicated that the demand for their products as well as business in general had been either stable or good.

The major findings of the Q3 2015 Manufacturing Circle Survey are presented in Section 3.

4

SOUTH AFRICA’S WATER RISK

The World Economic Forum’s Global Risk 2015 report has ranked water as the third global risk to take of note of globally. Globally, the demand for water is outstripping the supply of water and the associated risks of an impending water crisis and the potential impact on economic development are being prioritised as matters of key concern within the economic development narrative.

The emerging water crisis in South Africa is characterised by water scarcity in terms of both the quality and quantity of water. According to the National Water Resources Strategy (NWRS-2) there are approximately 4395 registered dams in South Africa, of which 2528 are fresh water supply related. It is estimated that South Africa currently draws 15.6 km3 of water. The agricultural sector is the largest consumer of water accounting for 57% of water use, followed by municipal demand drawing 35%, and the industrial sector draws 8% of water use (Engineering News, Volume 35 no 9, October 2015).

While the current sources of water are approaching the point of full utilisation, demand for water is expected to increase by 2030. The Industrial Policy Action Plan (IPAP) outlines that the demand for water will increase as electricity generating capacity increases and land under irrigation is planned to increase by 33% by 2030. This then means that sectors that are prioritised as the drivers of inclusive industrialisation, such as the manufacturing and agricultural sectors, are exposed to water risk.

Water is a key input into the process of manufacturing and production and affects manufacturing firms’ direct operations and or affects firms through the value chain. For example, the food and beverages sector is highly dependent on water for the production of their products as water is an important input in the manufacturing process as it is used for cooling. As of August 2015, in terms of production and sales, the largest positive contribution to the manufacturing sector was made by the food and beverages division, estimated at 0.7 % in the second quarter of 2014/15. Key water related risks in the food and beverage supply chain also include potential reductions in crop yields and interruptions to the production of certain foods thus impacting food security in the region. Therefore, attention needs to be paid to the risk of water scarcity as the performance of the manufacturing sector could be dampened as particular sub sectors of the manufacturing sector are exposed to water risks through the impact of costs associated with securing quality and reliable water supply.

The water resource challenge is therefore characterised by various dimensions; the current demand for water outstrips the supply, the demand for water is expected to increase and there is uncertainty regarding the impact of climate change and the impact of compliance and regulatory costs. This is exacerbated by the fact that major urban centres are located far from relatively cost effective sources of fresh water. This takes place within a context of a sluggish demand, increasing input costs resulting in tight profit margins which limit the ability for firms to develop innovative mitigating strategies.

Therefore, a strategic plan around measures to manage the current and future demand and supply of water resources that responds to the various ways in which different groups are affected by water scarcity is necessary to mitigate the negative impact of the water demand-supply gap.

There are a number of policies which define the framework for water resource management in South Africa. The Water Act of 1998, the NWRS-2, The National Development Plan (NDP) and The New Growth Path (NGP) through the implementation of the Strategic Integrated Project 18, recognise and respond to the need to address infrastructure needs associated with water scarcity. The commitment to addressing water infrastructure is reflected in The Medium Term expenditure Framework (MTEF) 2013/14-2017/18. Amongst other key infrastructure projects, over R40 billion has been ring fenced for various water infrastructure projects (National Treasury, 2015). While South Africa has made some achievements e.g. the implementation of dry cooling in electricity generation, a key issue is uncertainty, broadly, around the financial model for water management. More specifically, there is uncertainty regarding the regulatory environment, the institutional arrangement and the responsibility of actors involved in the cost delivery model of securing water supply.

This implies that context specific research is needed to understand the complex water resource management matrix in order to inform the strategic approach towards water resource management. This research can also inform and enable businesses to support economic growth by taking up potential business opportunities in solving the water gap challenge. This will ensure that water serves as an enabler for economic and social development and not a barrier.

TRADE & INDUSTRIAL POLICY STRATEGIES

5


SECTION 2: SOUTH AFRICAN MANUFACTURING ENVIRONMENT: Q3 2015

The South African business confidence index continued its downward trend that commenced in the first quarter of 2015. It decreased by 10 index points from the second quarter’s 48 to 38 in the third quarter of 2015, and this makes it its lowest level since Q4 2011 (see Fig. 2.1). The Bureau of Economic Research (BER) indicates that during Q3 2015, more than six out of every 10 respondents were unhappy with prevailing business conditions. The BER further shows that the fall in the business confidence index over the period was due to sharp declines in confidence among wholesalers and retailers with declines of 14 and 18 points, respectively. The manufacturing sub-index picked up marginally to 34 index points from 29, this after falling for three consecutive quarters. Finally, the BER points out that historically, whenever the RMB/BER business confidence index fell below 30 it signalled a looming recession, and therefore there is reason to worry as an index of 38 is not very far from 30.

Fig. 2.1: RMB/BER business confidence index, South Africa, Q1 2011 – Q3 2015

55

48

39 38

52

41

47 46

52

48

42 43

41 41

46

51 49

43

38

30

40

50

60

i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii

2011 2012 2013 2014 2015

INDE

X

Source: BER and PAIRS

The 2015 third quarter average of the Barclays Purchasing Managers’ Index (PMI) of 49.8 index points shows that conditions in the manufacturing sector remain fragile amidst the country’s struggling economy that saw GDP growth contracting by 1.3 per cent during the second quarter of 2015. A PMI that falls below the level of 50 shows a contraction in business activity in the manufacturing sector, and the South African quarterly PMI has been below 50 since the beginning of 2015 (see Table 2.1).

Although still below 50, the third quarter’s PMI of 49.8 represents an increase from the second quarter’s average of

Table 2.1: Barclays Purchasing Managers’ Index (quarterly average), South Africa, Q3 2014 – Q3 2015

PMI Business Activity

New Sales Orders

Backlog of Sales Orders

Inventories Purchasing Commitments

Suppliers Performance Prices Employment Exp. Business

Conditions

Q32014 47.9 45.6 47.5 37.3 49.5 45.3 54.7 77.5 45.4 55.7Q42014 51.2 51.5 52.6 43.0 54.8 57.3 51.0 69.0 46.9 57.9Q12015 49.9 50.6 50.7 35.1 55.1 53.9 50.7 63.4 44.6 64.0Q22015 49.2 47.3 48.7 33.1 55.8 48.6 52.7 73.1 46.4 46.9 Q32015 49.8 49.5 52.1 35.4 53.8 49.6 49.1 76.3 47.2 55.0

Source: Bureau for Economic Research and PAIRSNote: (1) Seasonally Adjusted

49.2. “Business activity” and “new sales orders” – sub-indices that carry the most weight in the calculation of the PMI - both increased from the second quarter to the third quarter of 2015. Other sub-indices that went up include “backlog of sales orders”, “purchasing commitments”, “prices”, “employment” and “expected business conditions” while “inventories” and “supplier performance” are the only sub-indices that went down between the two periods. In addition, 2015 quarter three’s PMI is also higher than 2014’s PMI of the same period that stood at 47.9 index points.

The “price” sub-index of the PMI increased from the second quarter (73.1) to the third quarter (76.3), and this can be partly attributed to the country’s exchange rate that is not only volatile but also weak (see Fig. 3.4), and has therefore put upward pressure on the cost of imported inputs. Despite rising input costs, the producer price index did not increase from the second quarter and remained at 3.4 (see Fig. 3.3) and the global oil prices that remain low (see Fig. 3.2) played a big role in this as they have been applying downward pressure on production costs such as transport. Meanwhile, Fig. 3.5 demonstrates that the second quarter’s export and import volume indices (with 2010 as the base year) did not change much during the period. Finally, Fig 3.6 shows quarter-on-quarter employment in the manufacturing sector went up during the third quarter of 2015.

Fig. 2.2: Brent Crude Oil Price (USD per barrel)

40

50

60

70

80

90

100

110

120

Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15

$/ B

arre

l

Oil prices remained low between the month of July and August .

Source: IHS Econostat and PAIRS

6

Fig. 2.3: Quarterly average producer price index inflation for final manufactured goods, South Africa

0

1

2

3

4

5

6

7

8

9

2013

Jan

Feb

Mar Ap

rM

ay Jun Jul

Aug

Sep

Oct

Nov De

c20

14 Ja

nFe

bM

ar Apr

May Jun Jul

Aug

Sep

Oct

Nov De

c20

15 Ja

nFe

bM

ar Apr

May Jun Jul

Aug

Sep

Per c

ent

Avg. = 5.6

5.4

6.7

7.6 8.5

7.3

3.1

6.7 6.3

3.4 3.4

Source: Stats SA and PAIRS

Fig. 2.4: Rand per US Dollar exchange rate

8.5

9.5

10.5

11.5

12.5

13.5

14.5

Jan-

14

Feb-

14

Mar

-14

Apr-

14

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Source: IHS Econocast and PAIRS

Fig. 2.5: Imports and exports of goods and services, volume indices, South Africa, Q1 2012 – Q22015

Source: SARB and PAIRS

Fig. 2.6: Quarterly manufacturing employment, South Africa, Q1 2008 – Q3 2015

1.65

1.75

1.85

1.95

2.05

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2008 2009 2010 2011 2012 2013 2014 2015

Millio

ns

(a) level

Source: Stats SA and PAIRS

SECTION 3: Q3 2015 SURVEY RESULTS

This section provides an analysis of developments in the domestic manufacturing sector, based on the respondents’ feedback in the Q3 2015 Manufacturing Circle Survey.

A) DEMAND CONDITIONS

The survey results presented in Fig. 3.1 reveal that both the local and foreign markets are important for local manufacturing businesses. The local market, however, remains the main market for manufacturers according to the survey as over half of the respondents indicated that more than 80 per cent of their output was sold locally in Q3 2015, while a further quarter of the manufacturers indicated that between 60 and 80 per cent was sold locally. With respect to the foreign market, 21 per cent of the respondents show that over 40 per cent of their output was exported, while only 14 per cent said that that they did not sell to the foreign market during Q3 2015.

Fig. 3.1: What proportions of your production were sold domestically / exported?

3 1

14

4

25

53

14

55

10 7 8 6

0

15

30

45

60

0% 1-20% 21-40% 41-60% 61-80% 81-100%

Shar

e of

resp

onde

nts (

%)

Sold domestically Exported

Domestic sales for the manufacturing sector were muted during Q3 2015. The survey results show that only 41 per cent of the respondents saw an increase in domestic sales while 46 per cent experienced a decrease in domestic sales during this period. As unimpressive as these results are, they actually present an improvement from the same period in 2014 when there was only a 34 per cent increase in domestic sales but a staggering 50 per cent decrease in sales (see Fig. 3.2). Export sales appear

7


to have fared better than domestic sales as the survey results show that 44 per cent of the manufacturers experienced an increase while only 31 per cent saw a decrease in sales in Q3 2015. These results are similar to those recorded for Q3 2014 – with a 44 per cent increase in export sales and only a 28 per cent decrease (see Fig. 3.3)

Below are some of the factors mentioned that have weighed negatively on sales in the third quarter of 2015:

• Muted domestic demand, • Subdued business from the mining sector due to negative

conditions in that sector,• High freight and general transport costs negatively

impacting exports,• Decreased demand from some other African countries,• Industrial action in the form of strikes and downtime

caused by power cuts have resulted in some clients opting to import rather than to face delays, hence this is taking business away from local producers.

Of those firms that indicated growth in sales, below are some of the reasons given for this increase:

• Growing mining sectors in North America and Canada increasing export demand,

• Increased domestic demand due to muted imports as a result of the weak rand,

• Increased demand form other African countries,• New business from other overseas countries with

assistance from the DTI,• Seasonal demand increase typical at this time of the year.

Africa, Europe and North America came out as the top export destinations of the South African manufacturing sector’s output in Q3 2015. For instance, Fig. 3.4 shows that 3 out of 10 of the manufacturers exported their output to other African countries, and another 3 out of 10 exported over 80 per cent to these African countries. Three out of 10 and more than 2 out of 10 of the manufacturers exported up to 20 per cent of their output to Europe and North America, respectively, with approximately 2 out of 10 exporting between 20 per cent and 100 per cent to each of these regions, respectively. It is interesting also to note that although these regions are important export destinations for the sector, exports to these have decreased in the third quarter of 2015 from the same period in the previous year.

Fig. 3.2: What is the percentage change in the volume of domestic sales?

12

2

13

23

16

12

9

9

4

15

7

10

14

13

19

7

1

14

0 10 20 30 40

< -15%

-15 to -11%

-10 to -6%

-5 to -1%

0

1 to 5%

6 to 10%

11 to 15%

> 15%


Q3 2015 Q3 2014

Fig. 3.3: What is the percentage change in the volume of export sales?

8

4

7

9

28

30

6

2

6

10

3

9

9

26

20

7

1

16

0 5 10 15 20 25 30 35

< -15%

-15 to -11%

-10 to -6%

-5 to -1%

0

1 to 5%

6 to 10%

11 to 15%

> 15%

Q3 2015 Q3 2014

8

Fig. 3.4: What is the distribution of regional export shares?

25 30

4 3 7

30 19

29

4 6 11

31

0

20

40

60

80

100

Shar

e of

resp

onde

nts (

%)

Africa Q3 2015 Q3 2014

52

30

9 4 2 4

26

49

8 5 2 10

0

20

40

60

80

100

Shar

e of

resp

onde

nts (

%)

Europe Q3 2015 Q3 2014

57

24 7 7 2 2

39 42

11 5 0 3 0

20

40

60

80

100

Shar

e of

resp

onde

nts (

%)

North America Q3 2015 Q3 2014

66

32

0 0 0 2

68

26

6 0 0 0 0

20

40

60

80

100

Shar

e of

resp

onde

nts (

%)

South America Q3 2015 Q3 2014

80

17 2 0 0 0

67

30

3 0 0 0 0

20406080

100

Shar

e of

resp

onde

nts (

%)

China Q3 2015 Q3 2014

91

9 0 0 0 0

80

20 0 0 0 0

020406080

100

Shar

e of

resp

onde

nts (

%)

Japan Q3 2015 Q3 2014

84

11 5 0 0 0

84

16 0 0 0 0

0

20

40

60

80

100

Shar

e of

resp

onde

nts (

%)

India Q3 2015 Q3 2014

45 45

8 0 0 2

47 39

8 0 3 3

0

20

40

60

80

100

Shar

e of

resp

onde

nts (

%)

Other Regions Q3 2015 Q3 2014

9


B) SUPPLY CONDITIONS

The third quarter edition of the Manufacturing Circle survey shows that input costs increased for the majority of the manufacturers (Fig. 3.5). Total input costs went up for approximately three quarters of the survey respondents while only just over a tenth indicated that there was a decrease in total costs. In a similar manner, almost 7 out of 10 of the survey respondents said that there was an increase in the cost of imported inputs over Q3 2015. It is not surprising that imported input costs have been rising since the country’s exchange rate remains weak and a good portion of the increase in these costs can be attributed to the weak rand. This places a heavy burden on manufacturers because, as Fig. 3.6 shows, almost 7 out 10 indicated that imported input cost made up to 40 per cent of their total input costs, while approximately 2 out of 10 said that it made up more than 40 per cent of their total costs.

Fig. 3.5: What is the percentage change in imported and total input costs over the quarter?

3

1

1

7

11

29

30

7

10

3

3

2

2

23

22

19

11

16

0 5 10 15 20 25 30 35

< -15%

-15 to -11%

-10 to -6%

-5 to -1%

0%

1 to 5%

6 to 10%

11 to 15%

> 15%

Share of respondents (%)

Imported Input Costs Total Input Costs

Fig. 3.6: What is the ratio of imported input costs to total input costs in over the quarter?

16

43

23

13

4 1

0

10

20

30

40

50

Shar

e of

resp

onde

nts (

%)

Numerous survey respondents said that they did not experience supply constraints in the form of getting the inputs, but the issue was that it came with elevated costs. However, there were some manufacturers who indicated that the current

unfavourable economic conditions are forcing their suppliers to close down, hence negatively affecting input supply. Despite this, there are respondents that indicated that they have not had supply constraints during Q3 2015.

Of those manufacturers that mentioned elevated input costs as an issue with regards to inputs, the following were given as some of the reasons that have caused input costs to rise:

• Weak and volatile exchange rate• High labour costs • Increased transport costs • Increasing electricity costs

Finally, some manufacturers have pointed out that the benefits of lower oil prices have not yet fully reflected throughout the supply chain, possibly the reason why transport costs are still perceived as being high by some.

C) EMPLOYMENT, SKILLS DEVELOPMENT AND LABOUR PRODUCTIVITY CONDITIONS

The next manufacturing input analysed is labour and the survey shows that employment in the sector was muted during Q3 2015. Fig. 3.7 shows that close to 4 out of 10 manufacturers reported that they decreased the number of employees over the quarter while only approximately a quarter indicated that they increased their labour force over the period. The same period of the previous year (Q3 2014), however, appears to have been worse for employment as there was a reported decrease in employment by over 4 out 10 firms and only 2 out 10 firms reported hiring more labour. This is in line with Stats SA’s Quarterly Labour Force Survey’s results that indicate that year-on-year employment in the manufacturing sector went up by 1.9 per cent during the third quarter of 2015.

Fig. 3.7: What is the percentage change in the level of employment?

4

39

37

16

4

10

26

39

17

9

0 10 20 30 40 50

< -5%

-5 to -1%

0

1 to 5%

> 5%


Q3 2015 Q3 2014

In general, skills availability in the manufacturing sector remained unsatisfactory during Q3 2015. The majority of the survey participants indicated that skills availability within the sector were either “poor” or “less than adequate”, with these accounting for almost 8 out of 10 of the respondents. None said they found skills availability to be good, while only approximately 2 out of 10 indicated that there were adequate skills available. What’s more, there was not much change in this view on skills availability from the same period in 2014, except that there is now a smaller proportion of respondents that are satisfied with the availability of skills (i.e. found them adequate) (see Fig 3.8).

10

Fig. 3.8: How do you describe the status of skills availability in your industry?

14

59

27

0

21

57

21

0 0

20

40

60

80

Poor Less than adequate Adequate Good

Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

The results from the Q3 2015 manufacturing sector survey reiterate those of past surveys that showed that there is a lack of technical skills in the sector. Numerous respondents of this latest survey point out that there are not enough artisans nor engineers (or those that are properly trained), while some indicate that the general level and quality of education in the country is not good enough to provide enough properly qualified workers. Many of the manufacturers indicate that most of the skilled workers prefer working in Gauteng than in other Provinces as well as in big cities rather than in rural areas, leading to severe skills shortages in these other less preferred areas of the country. Although this is the case with skills shortages, only just over 2 out 10 of the surveyed firms said they invested over 3 per cent of their turnover in skills development (see Fig. 3.9). The majority of those manufacturing firms that are taking part in skill development are doing so through the SETA-sponsored programmes followed by government-sponsored learner ships and internships. A number of the manufacturers have indicated that they provide in in-house training programmes.

Fig. 3.9: As a percentage of turnover, how much does your company invest in skills development?

3

27

49

13 9

0

10

20

30

40

50

60

Shar

e of

resp

onde

nts (

%)

Fig. 3.10: Which of the following skills development programmes does your company make use of?

Fig. 3.11 shows that labour productivity mostly remained stable for the most part during Q3 2015 with just over half of the manufactures saying that productivity remained the same over the quarter. There was, however, a significant improvement in the “improved productivity” category from the same period in 2014 resulting in an over 100 per cent year-on-year increase in the category.

Fig. 3.11: How do you describe the level of labour productivity over the quarter?

30

63

7

21

53

26

0

20

40

60

80

Deteriorated Same Improved

Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

D) UTILITY SERVICES CONDITIONS

In terms of utility usage by the sector, 3 quarters of the manufacturers said water is important for their operations (see Fig. 3.12); hence demand for water in the manufacturing sector is high.

11


Fig. 3.12: Is water important for your operations?

Yes 75%

No 25%

Clearly water is important for the manufacturing sector and in terms of supply; the majority of the manufacturing survey’s participants indicate that it is fairly reliable. Fig. 3.13 shows that over 6 out 10 of the respondents indicated that water supply is very reliable while another 36 per cent said water supply is intermittently reliable, and a low 2 per cent indicated that water supply is unreliable. It is interesting to note that as the world endeavours to move towards more sustainable ways of doing business that include environmental sustainability, South African manufacturers are also following suit with initiatives to be more efficient with their water use. Fig. 3.14 indicates that three quarters of the respondents show that their firms are involved in an initiative to save and/or use water more efficiently.

Other points raised with regards to water supply and usage are as follows:

• There are concerns about the on-going drought and the negative impact it is having on production as well as its potential impact on future water supply,

• It is the view of some that water provision, although reliable, is costly,

• Some manufacturers have boreholes, water tanks and other measures in place as contingency measures against disruptions in water supply.

Fig. 3.13: How reliable is your water supply?

2

36

63

0 10 20 30 40 50 60 70

Unreliable

Intermittent reliability

Very reliable

Per cent (%)

Fig. 3.14: Do you have any initiatives to save/use water more efficiently?

0

10

20

30

40

50

60

70

80

Yes No

E) COMPANY LEVEL COMPETITIVENESS CONDITIONS According to the Q3 2015 survey, 4 out of 10 of the respondents upgraded their plant’s capacity over the period (see Fig. 4.15). Firms that upgraded their capacity did so for varying reasons, with new product innovation coming out as the top reason for upgrades, followed by upgrading due to mechanisation of functions that were previously done manually and the introduction of advanced manufacturing capacity (see Fig. 3.16).

Fig. 3.15: Have you upgraded any existing capacity at your plants over the last quarter?

Yes 40%

No 60%

12

Fig. 3.16: If the previous answer was yes, what are the main reasons for the upgrades?

50

46

46

29

32

0 10 20 30 40 50 60

New product innovation

Introduction of advanced manufacturing capacity

Mechanisation of functions that were previously donemanually

Greater efficiency (energy and water)

Other

Share of respondents (%)

F) PROFITABILITY AND ACCESS TO CREDIT CONDITIONS

The proportion of manufacturing firms that recorded an increase in operating profits (before cost of funding) increased to approximately 5 out of 10 during Q3 2015 compared to the almost 3 out of 10 firms that recorded an increase during Q3 2014 (see Fig. 3.17). Although the manufacturers indicated that the weak exchange rate is causing the cost of imported inputs to rise, numerous other manufacturers also said that profits went up in the third quarter of 2015 due to the weak rand as it is boosting exports demand. Increasing costs (for example due rising electricity costs), dampened commodity prices (such as that of copper) as well as lower demand due to subdued local and global economies are cited as having a negative effect on profitability.

Fig. 3.17: What is the percentage change in operating profit before cost of funding over the quarter?

19

6

6

17

24

9

7

6

6

15

5

7

13

10

21

10

5

15

0 5 10 15 20 25 30

< -15%

-15 to -11%

-10 to -6%

-5 to -1%

0

1 - 5%

6 to 10%

11 to 15%

> 15%


Q3 2015 Q3 2014

There was a noticeable drop in the proportion of geared manufacturing firms from Q3 2014 to Q3 2015 as depicted in Fig. 3.18. The figure shows that 43 per cent of the firms were not geared during the third quarter of this year compared to the 28 per cent that were not geared during 2014. A sizable proportion of respondents indicated that they are self-funded, while others said that they did not need funding over Q3 2015, reasons that might explain the year-on-year drop in the number of firms that were geared. Furthermore, some said that it was either difficult to access funding in the current economic climate or that it was not profitable to do so due to the resultant low level of business

activity. Other firms indicated that they get funding from the DTI and others from the market although they also indicated that they do so at a high cost.

Fig. 3.18: What is your firm’s debt to equity ratio over the quarter?

28

39

18

6

9

43

25

15

8

10

0 10 20 30 40 50

Ungeared

1 to 25%

26 to 49%

50 to 64%

> 65%

Share of Survey Respondents (%)

Q3 2015 Q3 2014

There was not much of a change in the rates at which firms accessed short-term funding from Q3 2014 to Q3 2015. As can be seen in Fig. 3.19 there was a slightly higher percentage of firms that received short-term funding at a higher rate of more than 6 per cent than in 2014 (with four percentage points increase). Manufacturers were also getting long-term funding at a higher rate during Q3 2015 than during the same period in 2014. For example, respondents that indicated that they were charged a rate of 3 per cent and above on long-term funding went up from 29 per cent (in 2014) to 42 per cent (in 2015) (see Fig. 3.20).

Fig. 3.19: At what rate do you access short-term funding?

63

33

4

60

32

8

0

20

40

60

80

100

< JIBAR + 3% JIBAR + 3 to + 6% > JIBAR + 6%

Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

13


Fig. 3.20: At what rate do you access long-term funding?

G) LOCAL PROCUREMENT CONDITIONS

According to the survey results, the reliance on locally sourced inputs by manufacturing firms has decreased in intensity from Q3 2014 to 2015. Fig. 3.21 shows that the percentage of firms that sourced more than 60 per cent of raw materials locally declined from 71 per cent in 2014 to 55 per cent in 2015. The survey results also show that manufacturers’ reliance on locally sourced inputs varies widely, for example, from local sourcing of only 2 per cent to up to 100 per cent.

Fig. 3.21: What percentage of your total purchase is constituted by locally sourced products?

2

9

17 17

26 29

0

7

13 10

29

42

0

10

20

30

40

50

Shar

e of

resp

onde

nts (

%)

Q3 2015 Q3 2014

In terms of government’s local procurement programme, 39 per cent of the manufacturing survey participants indicated that they considered it to be very important for business in Q3 2015, and this also presented an increase from Q3 2014 in manufacturers with this sentiment. The proportion of manufacturers that did not view government’s local procurement as important however did not change during this period and remained at 15 per cent (see Fig. 3.22). Furthermore, the respondents that indicated that their firms benefited from the government’s local procurement programme during Q3 2015 are far less that those that did not benefit from it as shown in Fig 3.23. There was also a decrease of 5 percentage points in the proportion of beneficiaries of this programme from Q3 2014 to 2015

Fig. 3.22: How important is the government’s local procurement programme to the maintenance of growth in your manufacturing concern?

Fig. 3.23: Did your manufacturing concern benefit from the government’s local procurement programme over the quarter?

23

77

28

72

0

15

30

45

60

75

90

Yes No

Shar

e of

resp

onde

nts (

%)

Q3 2015 Q3 2014

H) MANUFACTURING OUTLOOK

The Barclays PMI remained below the neutral 50 point mark during Q3 2015, continuing a pattern that has persisted since the first quarter of 2015. Additionally, only one month (July) during the third quarter had a PMI that was above 50, while the last two months of the quarter had PMI’s that were below 50. This indicates that manufacturing activity remains subdued in South Africa. Meanwhile, manufacturing activity in the US appears to be declining while China’s actually crossed the neutral mark during the last month of the third quarter to fall below 50 (see Fig. 3.24). Negative spillovers from China’s slowed economy are already being felt in South Africa in the form of dampened demand for SA exports as well as low commodity prices that have brought an end to the commodity price boom.

The sector survey reveals that the manufacturers by and large expect business conditions to mostly remain in the “poor” and/or “fragile/weak” form. These views of the short to medium term horizons are illustrated in Fig. 3.25 to Fig. 3.27. The manufacturers, however, appear to expect the situation in the sector to improve as their outlook becomes more optimistic with time; the outlook of “poor” and “fragile/weak” goes from 77 per cent to 69 per cent then to 52 per cent of the respondents for

14

the 6 months, 12 months and 24 months outlooks, respectively.The level of pessimism has, however, increased from Q3 2014 to Q3 2015 (see Table 3.1) for the short (6 months - with 65 per cent to 77 percent) and medium (12 months – with 66 per cent to 69 per cent), as well as the longer term (24 months – with 47 per cent to 52 per cent).

According to the survey, the fragility that has led to the poor or weak outlook in the short to medium term in the manufacturing sector is due to several factors that include (but not limited to):

• The struggling South African economy that saw a contraction of 1.3 per cent in GDP over the second quarter of 2015,

• The dampened local demand and that of the rest of the world,

• Low commodity prices,• The lack of necessary and adequate skills as well as the

aging skilled workforce that is not replaced by young entrants into the market.

Even though conditions in the sector are expected to stabilise somewhat going from the short to medium term (has a more positive outlook), employment in the sector presents a different story. For example, although the survey indicates that 26 per cent and 28 per cent of firms plan to increase employment during the coming 3 and 12 months, respectively; the survey also shows that 33 per cent and 45 per cent of employers in the sector are also planning to cut their labour force in 3 months’ and 12 months’ time, respectively. It appears that fewer firms are planning on increasing employment over this period while more are planning to cut employment.

Fig. 3.24: Purchasing Managers’ Index, South Africa vs. major trading partners

606060

50ndex 50

inde

x

50

inde

xin

4040J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J

2012 2013 2014 2015

40J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J

2012 2013 2014 20152012 2013 2014 2015

China US Germany South AfricaChina US Germany South AfricaSource: BER, NBS, ISM & Markit and PAIRS

Fig. 3.25: How do you perceive the manufacturing sector’s conditions over the next six months?

8

57

22

13

0

21

56

19

5 0

0

15

30

45

60

75


Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

Fig. 3.26: How do you perceive the manufacturing sector’s conditions over the next twelve months?

8

58

12

22

0

28

41

20

10

1 0

15

30

45

60

75


Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

Fig. 3.27: How do you perceive the manufacturing sector’s conditions over the next two years?

5

42

27

20

6

16

36 33

14

1 0

15

30

45

60

75


Shar

e of

Res

pond

ents

(%)

Q3 2014 Q3 2015

15


WORLD MANUFACTURING FORUMBARCELONA, 3-4 MAY 2016

FROM GLOBAL CHALLENGES TO GRAND MANUFACTURING OPPORTUNITIES: LEADING TOWARDS GROWTH AND SUSTAINABILITY

During the beginning of the 21st century, the importance of manufacturing as a key contributor to economic health and growth has been recognized and elevated as a priority in industrialized nations. Innovation fuelled by ever increasing customer demand drives research and innovation for new technologies and increased productivity, all the while meeting requirements for sustainable use of resources in both developed and developing countries.

In order to increase trade, manufacturing enterprises need to expand beyond their boundaries to generate the more revenue. Globalization was the biggest driver of growth for many corporations over the past decades, but today, that is not enough. Competitive advantage also requires a solid innovation strategy and sustainable use of ever-decreasing resources.

Under this context, the World Manufacturing Forum held in Barcelona, Spain, will assemble global policy experts, industry leaders from large multinationals to small-to-medium sized enterprises, and academic leaders to discuss the policy, economic, social, and technical challenges that impact global manufacturing.

As a point of reference, at our last event in Milan, Italy, more than 400 industrialists and policy makers participated to hear and discuss current manufacturing challenges, with speakers from international enterprises leader on the global manufacturing scene, like ABB, Siemens, Whirlpool, McKinsey.

The Forum will present policy views supporting and defining manufacturing megatrends, challenges for SMEs in the global marketplace, manufacturing intelligence, social innovation as a driver for new products, services, and technologies, financial challenges that affect industrialized and emerging economies, the circular economy and zero waste, and other disruptive technologies.

Save the date now and make plans to attend. Visit www.worldmanufacturingforum.org for information as it becomes available.

Yours SincerelyGarth Williams

[email protected]

Table 3.1: Rise in surveyed firms’ pessimism (“fragile/weak” or “poor” outlook)

Horizon Proportion of pessimistic respondents (in per cent)

Q3 2014 Q3 20156 months 65 7712 months 66 6924 months 47 52

Fig. 3.28: What is the planned percentage change in employment?

END NOTES

i Unless otherwise specified, percentage changes based on consecutive quarters.

ii Shares may not add up to 100 due to rounding.

Programme Committee:Luís Carnero, INESC Porto

Francesca Flamigni, European CommissionJoaquim Minguella, Fundació Privada Centre

CIM, UPC BarcelonaTECHDan Nagy, IMS Inter-Regional Secretariat

David Romero, Tecnológico de MonterreyRoberta Salonna, European Commission

Marco Taisch, Politecnico di Milano, Scientific Chairman of WMF

Garth Williams, Department of Science and Technology (South Africa)

16

SAVE OUR STEEL- AN UPDATE ON TARIFFS AND DOWNSTREAM INDUSTRY RESPONSE

It is no secret that the South African Primary steel industry is under severe pressure at the moment. Downstream manufacturers are also experiencing a substantial reduction in volumes as indicated by the latest PMI figures released this month.

Steel Prices are at an all-time low and demand has slowed dramatically. So we have excess capacity particularly in China prompting a massive increase in their exports. Until recently South Africa was the only primary steel-producing country with no tariffs to protect its market from the flood of heavily subsidised Chinese steel.

So why save the Steel industry. A recent article by Hilary Joffe in the Business Times sums it up as follows – “ One reason to do so is the need to save jobs. But another is simply the cycle: China may be offering cheap steel now, but one day the market will recover and that steel will no longer be so cheap — if it is even available in a world in which huge amounts of capacity have been taken out globally and China has become so dominant a player that it can call all the shots. The concern then is that if SA does not hold on to its steel industry, it may find that it cannot get the steel it needs, at the prices it needs, when the cycle turns.”

From our perspective how we respond is important to the survival of both upstream and downstream steel manufacturers. A recent collaborative approach by Manufacturing Circle, SEIFSA, SAISI and the SAISC on assisting with a co-ordinated response has shown us that there are a number of issues which we can put on the table to assist both parties.

As a collective group we felt it necessary to:• Make manufacturers aware of the products where tariff

amendments are being sought and inform them of the importance of responding to the ITAC publications. If they could raise issues early on we could perhaps get all concerned to agree a way forward.

• Attempt to get feedback to ITAC as soon as possible where there are products not manufactured in South Africa. Clearly input from industry and associations will be important. The way forward might not be clear due to the complexity of the process and it may create more problems for both Mills and downstream players so joint discussions may be needed. For example multiple products fall within a single HS code.

• Ensure that we all look at the big picture to try and get a satisfactory result for the entire supply chain where possible. It could open doors to look at downstream manufactured goods.

Our collective group sent out a survey to try to identify the key issues with questions posed as follows:

• Are there any steel input products that you use which form part of these subheadings that are not manufactured in South Africa?

• What percentage does the steel input material makeup of the end product by value?

• How would the steel tariff affect your competitiveness

17


or end price?• Does your company enjoy any import tariff protection

on finished goods?• Do you feel this is being enforced?• Has your end product been designated for local

manufacture?• Is your product certified by a government body such

as the SABS?• Do you feel this is being enforced?

Responses were varied but they were passionate and engaged which is encouraging from our point of view. Each and every company involved in this industry is deeply concerned about its long term future. Key themes are summarised below:

• The implementation of tariffs is expected to have an impact on downstream manufacturers across the industry sectors

• Possible increases in prices would either be passed on to end consumers, or absorbed internally by increases in input costs impacting on profit margins

• Competitiveness could be compromised in both cases• The importance of designation and lack of

implementation in some cases was noted• Some responses indicated a lack of knowledge of

what has been designated. Further communication will follow to assist in this process

• Some responses indicated a lack of understanding re existing codes and standards that could be used to support the industry

• The ability to side-step tariffs due to a lack of monitoring and enforcement was also mentioned

This survey was the start of an on-going process. We believe that a wider engagement process could include:

• Identifying products that need exemption and encouragement of downstream manufacturers to make applications directly to ITAC in this regard

• Identify downstream opportunities for tariffs as a mechanism to promote balance and keep all parties engaged. This would include interventions across the entire steel manufacturing industry (Yellow Goods, White Goods, Construction, etc.)

• Engaging in the same way with designation and ensure that wherever possible downstream products are designated. SAISC has conducted this exercise with transmission line towers and Fabricated Structural Steel

• Ensure that quality standards are in place and that they can be enforced

• Ensure that we have some form of export promotion which addresses competitive concerns

Longer term projects could include:• Full engagement with SOEs as a collective to deal

with localisation and designation, assisted and co-ordinated by SEIFSA, SAISI, SAISC and associations and the Manufacturing Circle

• Tackling cross cutting issues as a collective (to include the carbon tax, logistics, labour and skills )

What is clear is that we need to continue to engage with stakeholders to address many of the challenges we are facing. We would appreciate your ongoing comments and views.

THE MANUFACTURING CIRCLE APPOINTS NEW EXECUTIVE DIRECTOR




Philippa Rodseth has recently been appointed as Executive Director of the Manufacturing Circle. She brings a business background in projects and finance that can be applied in the effective development and implementation of the organisation’s goals, which are to:

• Achieve a competitive manufacturing environment;• Attain a supportive international trade position; and• Advance the reputation of South African manufactured

products. Ms Rodseth began her career as an Architect working for four years on commercial projects in South Africa and Hong Kong. After obtaining an MBA from WITS Business School, she joined First National Bank’s Commercial Division in 2003 and spent seven years working first in a private equity team funding black youth empowered business, and then as a leveraged finance deal maker. In 2012 she established Spoke Consulting to identify and access funding for projects in Africa; before joining the Manufacturing Circle in October. The Manufacturing Circle has successfully elevated itself as the voice of manufacturing in South Africa over the last five years, promoting the sector’s growth as South Africa’s greatest opportunity for job-rich growth. While the challenges have not diminished, the Manufacturing Circle will rise to meet them under Philippa’s stewardship.

18

Notes:

19


The Manufacturing Bulletin is an initiative of the Manufacturing Circle. It aims to serve as a voice for manufacturing in South Africa with insightful analysis of trends as well as informed comment on what needs to be done to ensure that South Africa’s manufacturing base is nurtured and grown.

The Manufacturing Circle is made up of a number of South Africa’s leading manufacturing companies from a wide range of industries. Some of the members are leading South African exporters of manufactured goods, others are locally focused companies competing with imports from around the world. There is one common denominator among them and that is a passion for manufacturing coupled with a fervent belief that for South Africa to be strong, its manufacturing sector must be strong.

A strong and developing manufacturing sector will drive the creation of skilled and semi-skilled jobs in the South African economy - jobs not just in the large manufacturing companies but critically also in entrepreneurial small companies. New jobs go hand in hand with an increase in fixed investment in plant and buildings – a further multiplier of economic growth. Job creation is a primary objective of the Manufacturing Circle.

Formed in 2008, the Manufacturing Circle has been quietly going about its business of interacting with government and other stakeholders in order to review, debate and help formulate policies which will have a positive impact on South Africa’s manufacturing base.

KEY INITIATIVES TO DATE HAVE BEEN:• The need for a competitive and stable currency• Preferential procurement for locally manufactured goods• The need for a lower cost of capital in South Africa• Inputs into IPAP2 and the New Growth Plan• Effective trade policy which supports South African manufacturing• Input and debate on the issues of electricity costs and carbon taxes• Improving investment and export incentive schemes and processes

Manufacturing holds the key to a growing and employing South African economy and the Manufacturing Circle is playing a key role in finding that future.

Research And Analysis

Pan-African Investment and Research ServicesWeb: www.pan-africanresearch.co.za

Email: [email protected]

Manufacturing Circle

Email: [email protected]: www.manufacturingcircle.co.za

To receive your copy of the Manufacturing Bulletin on a quarterly basis, please email your postal address to: [email protected]




TRADE & INDUSTRIAL POLICY STRATEGIES

QUARTERLY REVIEW€¦ · • Other non-metallic mineral products; • Textiles, clothing and...

Documents

Transcript of QUARTERLY REVIEW€¦ · • Other non-metallic mineral products; • Textiles, clothing and...