Manufacturers worried about PMI decline

Manufacturers worried about PMI decline

FMCG SUPPLIER NEWS

Business Live - May 3rd 2012, 08:52

The Manufacturing Circle, the group representing SA's major manufacturers, says the Purchasing Managers' Index decline for a second consecutive month in April reflects "still quite challenging" conditions for local manufacturing. 

The Purchasing Managers' Index (PMI), conducted on a monthly basis by the Bureau for Economic Research (BER) and the Chartered Institute of Purchasing and Supply, is a key leading indicator for activity in the manufacturing sector.

The Kagiso PMI, released on Wednesday, fell 1.4 index points to 53.7 in April from 55.1 in March. Despite the recorded marginal decline, it was positive that the index remained above 50.

An index level of below 50 represents contraction in the manufacturing sector, while a reading of more than 50 signifies expansion.

Speaking to BusinessLIVE, Coenraad Bezuidenhout, Manufacturing Circle executive director, said that while it was true that a lack of demand in SA's major export market, Europe, might be responsible for the drop in the PMI, it was also that the ability of South African manufacturers to compete in overseas markets was "under severe pressure due to a domestic policy environment that undermines the competitiveness of local manufacturers".

The Manufacturing Circle continued to advocate for currency movement intervention by monetary authorities.

"We need to build on positive developments such as the reduction in the electricity price increase and the subsidies on port charges, by reviewing our monetary policy in favour of a more competitive exchange rate," he said.

The PMI employment index rose 1.7 index points to 48.8, its highest level since February 2011.

Despite the improvement, the employment index still remained under the key 50 index point level. The April figure, Kagiso said, indicated there was still a contraction in employment levels in the manufacturing sector.

Roughly a third of Manufacturing Circle members had shed jobs during the first quarter of 2012, Bezuidenhout said. A slight improvement seemed likely over the next quarter, he added. He noted, however, that the overall expectation of a slight contraction over the next year remained.

The new sales orders index of the PMI, the largest weighted PMI sub-component, declined to 55.4 in April from 59.7 in March.

The PMI leading indicator, which is new sales orders as a ratio of inventories, fell to below one (0.96) for the first time since December 2011.

Abdul Davids, head of research at Kagiso Asset Management, explained that a reading below one indicated that inventories were too high relative to the demand for manufactured goods.

The index measuring expected business conditions over the next six months experienced the largest decline after losing 6.2 points to reach 56.2, while the business activity index stabilised at a fairly robust level of 57.7 during April.

The good news on the pricing front, according to Kagiso, was that the price index declined to 71.1, its lowest level since January 2011.

Davids, however, pointed out that the spiraling oil price posed the largest upside risk to input costs going forward.

Jeff Schultz, economist with Absa Capital, said while the PMI figure suggested that the local manufacturing activity was relatively stable for now, there were risks to the sector's outlook, including the "health" of the global economic system.

Tebogo Mosepele, economist at Standard Bank Research, said the downside risks to the sector, coupled with weak domestic demand, could weigh on SA's gross domestic product (GDP) growth prospects. Manufacturing is the second largest contributor to GDP growth.