JAMES MAPOSA: Manufacturing revival hindered by load-shedding and cost pressures

Recent statistics released by Stats SA revealed that SA’s manufacturing sector sales increased 9.6% during the first half of 2022 (R1.41-trillion) when compared with the first half of 2021 (R1.28-trillion).

Though the sector recorded near double-digit growth, it is lower than the 28.5% growth recorded in the first half of 2021 (versus the second half of 2020) — a function of opening up the economy due to the easing of Covid-19 lockdown restrictions and the permitting of alcoholic beverage sales. Production and trade restrictions, and the banning of alcohol sales during the hard lockdown era, resulted in 2020s first-half sales falling 17.6% (R1-trillion) compared with the first half of 2019 (R1.21-trillion).

Key takeaways from a sales value viewpoint are that both 2022’s and 2021’s first-half sales are higher than the same period in 2019. This could be a signal that the sector has taken positive strides in recovering from the Covid-19 restriction periods which took place during most of 2020 and some parts of 2021.

However, growth in sales could also be associated with increasing inflation (averaging 4.6% in 2021, rising to just less than 7.5% year on year in June 2022). This has resulted in higher input and production costs and subsequently an increase in produced goods prices over the past two years. As an example, a review of the food and beverages manufacturing sector revealed that despite higher agriculture yields (driven by higher rainfall), field crop prices for oilseeds, summer grains, dry beans, sugar cane and winter grains rose 15.2%, exerting cost pressure on the manufacturing subsector.

The higher production prices were attributed to increasing input costs (machinery, which is mostly imported and costs more to purchase in rand terms, fertilisers and pesticides, fuel, livestock feed, seed and irrigation equipment (also imported). The higher production costs have thus contributed to both wholesale and retail prices for commodities also increasing — food inflation increased 8.6% in June 2022 compared with June 2021. Measures to control production costs will thus need to be prioritised over the next few months to increase sales in a sustainable manner: that is more volume sold as opposed to lower volumes and higher prices.

This is easier said than done as other input costs, such as electricity, are also set to increase during the second half of 2022. It is also envisaged that most manufacturing sector entities will invest (if they are not already invested) in alternative energy sources to sustain production output due to increasing load-shedding as Eskom battles to meet the nation’s growing demand for electricity.

Due to the increase in load-shedding, SA’s production index declined 1.3% during the first half of 2022 (versus 2021) after increasing 16.4% (when compared with 2020). The country’s manufacturing production index for first-half 2022 stood at 89.6 (in 2019 it was 100) and is still sizeably lower than the 2019 index of 96.6. Based on this, returning to 2019’s first-half production levels confirms that securing a steady energy supply will be a priority for most, if not all, manufacturing enterprises.

This is subsequently expected to contribute to higher capital expenditure costs for these firms, with a cost-benefit analysis guiding the investment process (continuing to rely on “erratic” grid-supplied electricity, whose prices continue to rise annually, versus investing in a “more reliable” alternative energy source whose set-up costs will be high but over time will result in lower electricity consumption costs). In addition to energy security, local sourcing of inputs will also be prioritised to reduce the high costs that are now being incurred as a result of a depreciating rand.

In conclusion, the increase in manufacturing sector sales is a positive result for the sector, particularly sales exceeding both 2020 and 2021 in value terms. However, despite these positives, production continues to be affected by electricity supply constraints, which worsened in the first half of 2022 when compared with the same period in 2021 — an area that needs addressing both at a utility and individual company standpoint (taking advantage of liberalisation of energy generation to invest in own-energy generation plant).

In addition, production costs continue to trend upwards, driven by higher input costs (especially imports), an aspect that is forecast to continue to exert pressure on sector margins over the next few years. Over the short term, sales volumes could decline due to the higher pricing of commodities (as enterprises look to offset the higher input and production prices), stabilising during the medium and longer term as manufacturing firms reconfigure around increasing local sourcing of inputs (to a maximum), relying more on their own energy supply and optimising production processes — increased automation (where allowed), enhancing plant infrastructure (making it smarter to improve efficiency) and reducing waste.

• Maposa is founder and MD of market research, strategy, monitoring and evaluation at consultancy Birguid.