Manufacturing Circle Bulletin Quarterly ReviewManufacturing Circle Bulletin Quarterly ReviewFirst Quarter 2012First Quarter 2012

Presentation for

Manufacturing Circle

18 May 2012

by

Dr Iraj Abedian

PAN-AFRICAN INVESTMENT & RESEARCH SERVICES (PTY) LTD.

                                  

                                            

Slide # 2

OutlineOutline

1. Introduction

2. Overall Manufacturing Business Confidence

3. SA Manufacturing Environment in Q1 2012

4. Survey Results

5. Concluding Remarks

                                  

                                            

IntroductionIntroduction

                                  

                                            

Slide # 4

Profile of RespondentsProfile of RespondentsA Total of 49 (previously 48) Participating Firms in Q1 2012

                                  

                                            

Manufacturing Business ConfidenceManufacturing Business Confidence

                                  

                                            

Slide # 6

First Quarter 2012First Quarter 2012Mostly Stable Business Conditions in Q1 2012 Relative to Q4 2011

                                  

                                            

Slide # 7

Short to Long-TermShort to Long-TermRisks to Outlook on Business Confidence (Short to Long Term)

•Upside risk:

1.Planned infrastructure investment spending programme by the government

•Downside risks:

1.Shortage of water and electricity supply

2.Scarcity of raw materials (e.g. good grade coal and steel)

3.Higher transport and energy costs

4.Uncompetitive labour rates

5.A strong rand

6.Uncertainty and slowdown in global economic activity

7.Poor service delivery from the municipalities

8.Original equipment manufacturers (OEMs) relocating outside South Africa due to uncertainties over the automotive production and development programme (APDP)

                                  

                                            

South African Manufacturing Environment in South African Manufacturing Environment in Q1 2012Q1 2012

                                  

                                            

Slide # 9

Kagiso Purchasing Managers Index Kagiso Purchasing Managers Index Quarterly Average

Source: Bureau for Economic Research

•Most component indices of the PMI in expansion terrain in Q1 2012…•But developments in the global economy to dampen the local manufacturing sector •Proof: disappointing manufacturing outcome in March 2012

Date PMI* Business activity

New sales

Backlog of order

salesInventories Purchasing

commitmentsSuppliers'

performance Prices EmploymentExpected business conditions

Q1 2011 55.5 54.1 60.2 40.6 57.5 48.8 56.1 80.3 48.8 62.2

Q2 2011 55.1 56.8 60.0 41.1 58.3 54.4 49.7 79.6 48.5 63.0

Q3 2011 48.3 44.6 47.9 42.3 51.4 48.4 53.1 74.7 42.0 58.0

Q4 2011 50.5 51.0 50.4 45.2 52.1 51.4 55.4 82.8 45.7 59.6

Q1 2012 55.4 58.9 60.6 41.5 53.1 50.3 52.0 76.7 47.0 64.6

                                  

                                            

Slide # 10

Manufacturing Production Q1 2012Manufacturing Production Q1 2012

Source: Statistics South Africa

Manufacturing DivisionWeights

2005

Q/Q Seasonally Adjusted % Growth

Food & beverages 15.4 -0.5

Textiles, clothing, leather & footwear 4.9 2.5

Wood, paper, publishing & printing products 10.2 -1.5

Petroleum, chemical & rubber products 22.1 3.8

Glass & non-metallic mineral products 4.8 0.6

Basic iron & steel, non-ferrous metal products & machinery 22.9 1.6

Electrical machinery 2.5 -3.7

Radio, tv communication apparatus & professional equipment 1.1 1.9

Motor vehicle parts & accessories and other transport equipment 10.9 6.2

Furniture & other manufacturing division 5.2 6.1

Total 100.0 1.9

                                  

                                            

Slide # 11

Quarterly Manufacturing EmploymentQuarterly Manufacturing Employment67,000 Manufacturing Jobs Lost in Q1 2012

Source: Statistics South Africa

                                  

                                            

Summary of Q1 2012 Survey ResultsSummary of Q1 2012 Survey Results

                                  

                                            

Slide # 13

Demand ConditionsDemand Conditions

•Disappointing domestic demand sales•Some improvement s in export sales ... But not enough to offset the slowdown in domestic sales (ratio of domestic sales to total sales still outweighs that of exports) Could lead to high inventories

                                  

                                            

Slide # 14

Supply ConditionsSupply Conditions

Lower input costs in Q1 2012 relative to Q4 2011, in line with a slowdown in producer price increases and a moderation in the price index of the PMI

                                  

                                            

Slide # 15

Manufacturing Employment ConditionsManufacturing Employment Conditions

Only 31% of Respondents reported a growth of at least 1 % in Manufacturing Employment compared with 43% during the previous quarter

                                  

                                            

Slide # 16

Manufacturing Employment Conditions Manufacturing Employment Conditions Factors Explaining the Fall in Manufacturing Employment during Q1 2012

1. Increased tendency by municipalities to procure lower-cost imported goods

2. Seasonal effects, i.e. certain jobs are not required out of a particular season during a year

3. High fixed costs

4. Unfair trade practices. For example, exports to Brazil facing between 8 to 14 per cent taxes

5. Sluggish vehicle sales in Europe

6. Increased investment in less labour intensive assets as a result of uncompetitive costs of labour

and lower production

                                  

                                            

Slide # 17

Labour Productivity & Regulatory EnvironmentLabour Productivity & Regulatory Environment

Same levels of labour productivity in Q4 2011 & Q1 2012, generally

Mostly, unfavourable regulatory environment in Q1 2012 relative to Q4 2011

                                  

                                            

Slide # 18

Financial ConditionsFinancial Conditions

1. Rise in the share of respondents reporting operating losses before cost of funding (from about 30

per cent in Q4 2011 to about 60 per cent in Q1 2012 )

2. Increase in the share of respondents (from about 12 per cent in Q4 2011 to 16 per cent in Q1

2012) registering a debt to equity ratio of at least 65 per cent.

3. In line with the increase in credit lending during Q1 2012, higher number of respondents accessing

credit at JIBAR +3 - +6 per cent in Q1 2012, relative to Q4 2011.

                                  

                                            

OutlookOutlook

                                  

                                            

Slide # 20

Manufacturing OutlookManufacturing Outlook

1.Economic activity in South Africa to moderate to 2.5 per cent in 2012, due to(a) A mild recession in the eurozone on the back of the protracted sovereign debt crisis and(b) a slowdown in China.

2.Trade linkages between South Africa and (1) the eurozone and (2) China, will represent the major channel through which the effects of the eurozone recession and the hard landing in China will be felt in the South African economy.

3.Inflation-adjusted manufacturing value added is expected to shrink by 0.7 per cent during 2012.

4.Recovery in the global economy from 2013 going forward coupled with the implementation of the government’s infrastructure investment drive to boost the manufacturing sector from 2013, going forward.

5.The rand exchange rate (as determined by capital flows) to present downside risks to the manufacturing sector’s outlook.

                                  

                                            

Concluding RemarksConcluding Remarks

                                  

                                            

Slide # 22

Concluding RemarksConcluding Remarks

1. Despite a better overall performance in Q1 2012 relative to Q4 2011, manufacturing

production is prone to both a weaker global and domestic demand, going forward

2. Manufacturing jobs and profitability will remain under pressure during 2012.

3. The government infrastructure investment drive needs to be fast-tracked in order to

cushion the effect of a slowdown in global economic activity on the domestic economy

                                  

                                            

Slide # 23

Thank you for your attentionThank you for your attention

abedian@pan-african.co.za Tel: 011 883 8036/7Fax: 011 883 8038

Q & AQ & A