South Africa’s manufacturers under pressure

While power shortages remain one of a number of challenges South African manufacturers are facing in 2015, there is a silver lining: solid demand and efforts to trim costs and boost operational efficiencies are expected to shore up earnings in certain segments.

Challenging times

Disruptions to power supplies due to load-shedding have been a drag on economic growth, with manufacturing in particular feeling the weight of scheduled cuts imposed by parastatal utilities firm Eskom.

Lynne Brown, minister of public enterprises, told local press in early August that power cuts could be expected for at least another 18 months, as the company continues to struggle with ageing facilities.

This contributes to what is proving to be a difficult operating environment for South African industry, which accounts for around 15% of GDP, this year, according to media reports.

The falling rand has added to costs for manufacturers that rely on imported inputs, with the currency down by more than 10% year-to-date (YTD) against the US dollar. Additionally, Lesetja Kganyago, governor of the South African Reserve Bank, warned in mid-August that a slowdown in China’s economy and higher US interest rates could bring greater turbulence to the market.

Manufacturers have also had to contend with weaker consumer sentiment in recent months. The First National Bank (FNB) consumer confidence index hit a 14-year low at the end of June, as sentiment levels fell from -4 in the first quarter to -15.

This could begin to impact consumer spending in the coming months, according to Sizwe Nxedlana, chief economist of FNB. “A confluence of adverse economic developments is expected to put renewed downward pressure on the spending power of households from the second half of 2015,” he told media in July.

Staying steady

Despite these setbacks, manufacturing production by volume was down by a marginal 0.4% year-on-year (y-o-y) in June, due mainly to a 4.9% decline in petroleum and petrochemical production and a 3.4% drop in iron and steel, Statistics South Africa (Stats SA) reported. These figures were largely offset by 10.4% and 2.8% respective increases in the output of motor vehicles, parts and other transport equipment, and food and beverages (F&B).

Total manufacturing sales were up slightly, rising 1.2% YTD to R886.4bn ($63.6bn), with motor vehicle and F&B sales up 6.1% and 7.1% each at R112.5bn ($8.1bn) and R194.2bn ($13.9bn), according to Stats SA. Seasonally adjusted F&B sales also posted a 2.6% quarter-on-quarter improvement, double the rate of growth for the broader manufacturing sector.

A separate Statistics SA report released in August showed that utilisation of production capacity by large manufacturers remained virtually unchanged y-o-y, declining from 80.4% in May 2014 to 80.2% this year, which the agency attributed to a shortage of raw materials.

The motor vehicle and F&B segments led the industry, with utilisation rates up by 5.3% and 1.9%, respectively, at 84.2% and 82.7% of total installed capacity.

Greater efficiency

With other areas of the economy also slowing, some manufacturers are taking this opportunity to pursue greater efficiencies. With margins being squeezed through higher costs and slower economic growth, manufacturers must look at reducing expenses to maintain or improve earnings, said André de Ruyter, CEO of packaging producer Nampak.

“For many years, South African industry has externalised a lot of its inefficiencies by relying on cheap labour and cheap energy,” de Ruyter told OBG. “Neither of those is going to be available in the medium to long term, so manufacturers in South Africa need to become more efficient and competitive.”

Among the top priorities for manufacturers is investing in new plant and standby power generation, reducing labour-intensive production and improving energy efficiency, according to de Ruyter, which could help manufacturers offset slower top-line growth and expand market share.

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