South African manufacturer confidence continues downward spiral

Absa’s latest manufacturing survey showed that confidence levels in the manufacturing sector dropped 9 points in the first quarter of 2023, largely due to the continuing effect of load-shedding.

“Manufacturers are feeling pessimistic as load-shedding, especially at higher levels such as stage 6, continues to have a significant impact on their businesses,” said Justin Schmidt, head of the manufacturing sector at Absa Relationship Banking. 

“Current confidence levels are similar to those seen during the global financial crisis and are the lowest since the Covid-19 hard lockdown.”

This quarterly survey covered approximately 700 businesspeople in the manufacturing sector and was conducted by the Bureau for Economic Research (BER) between 8 and 27 February 2023. 

The confidence index ranges between 0 and 100, with zero reflecting an extreme lack of confidence and 100 extreme confidence.

Manufacturing confidence in Q1 2023 stands at 17 points. In Q4 2022, confidence remained unchanged following two consecutive quarterly declines.

“Although many manufacturers have implemented measures to become resilient to load-shedding, once stage 4 is exceeded, heavy manufacturers may be asked to curtail their production to stabilise the national grid,” Schmidt said. 

Load-shedding was also responsible for a 15-point drop in production which, in turn, led to raw material shortages and insufficient demand.

Capacity underutilisation increased by six points to where it now stands at 74 – the highest level since the hard lockdown.

Costs in the country remain high, as the total cost per production unit indicator stands at 85 points – well above the long-term average of 60. 

“Survey respondents noted the cost of load-shedding in the form of production downtime and diesel purchases for generators as key costs this quarter.”

However, concerns remain as manufacturers are limited in their ability to pass rising costs onto their customers, leading to margin pressure.

Despite the already difficult operating environment, pessimism continues to surround forward-looking expectations as most manufacturers expect business conditions to deteriorate even further over the next 12 months.

“We’re seeing that manufacturers’ investments are currently focused on surviving load-shedding in the form of transitioning to renewable energy, while investments into additions or expansions have been put on hold until manufacturers see a shift in the operating conditions.”