AbdulDavids.jpgActivity in the manufacturing sector contracted in February for the first time in four months as business activity plummeted, signalling a sector "taking strain", said Abdul Davids, head of research at Kagiso Asset Management.

 
The Kagiso purchasing managers index (PMI), which gauges activity in manufacturing, fell by a steeper than expected 6.6 index points to 47.6 in February. A below-50 reading suggests contraction in activity.

A 16.2-point decline in the Business Activity Index (to 45.5) was the main driver of the fall in the headline index. January’s figure was artificially high owed to seasonal factors and a decline was expected in February, albeit not of the magnitude that was recorded, noted Davids.

He said the Business Activity Index has been very volatile since October 2014 – swinging by an average of 10.8 points from month-to-month – which reflects the uncertainty and volatility of the underlying environment as the timing and frequency of load-shedding is unstable.

Load-shedding would remain "a key constraint" in the manufacturing sector as interruptions in electricity supply affected manufacturing’s ability to produce and directly dampened domestic demand, said Davids.

Eskom implemented load-shedding on some days in February as electricity demand surpassed supply. The problem was made worse by technical glitches at some of the utility’s power stations.

The New Sales Orders Index also fell by 4.4 points to 49.3. The decline was likely driven by domestic
factors as the global manufacturing picture improved during February, said Davids.

The Employment Index slumped even further and is now at 43 index points.

The Inventories Index declined from its “exceptionally high level” in January, but at 53.3 it remains in positive territory.

The Price Index continued to signal a slowdown in the rate of increases in input costs. The index measured 60.4 points, which is more than 30 points below the level recorded a year ago. Davids cautions that the Price Index (and actual producer price inflation) could bounce back in coming months.

The fuel price increase in March will be matched by a further increase in April on the back of the strength of the US Dollar, higher SA fuel levy and the increase in the contribution to the Road Accident Fund. Electricity prices will rise in the coming months, which suggests that input cost pressures could intensify for manufacturers going forward.

Despite the decline, purchasing managers remain optimistic about the future as the index measuring expected business conditions in 6 months’ time fell only 2.5 index points to 64.4.

The PMI leading indicator remained below 1, which suggests that a quick output recovery is unlikely.

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