Load-shedding hurt South African manufacturing

The Q2 Absa Manufacturing Survey showed that confidence levels in the manufacturing sector remain near the low points reached during previous business cycles, as load-shedding weighs on sentiment.

The Q2 confidence level was unchanged at 17 since the previous quarter – lower than the trough of 20 reached during the global financial crisis.

However, although sentiment has improved significantly since the record low recorded during the pandemic, historical data show that confidence has only been at these levels a handful of times.

“Electricity supply disruptions not only directly weigh on production and capacity and hurt profitability due to the costs associated with load-shedding mitigation measures but also negatively impact sentiment,” said the head of the manufacturing sector at Absa relationship banking, Justin Schmidt. 

“With confidence levels remaining at the same very low levels seen in the first quarter, the effects of load-shedding are visible across manufacturing subsectors.”

Absa’s quarterly survey, which covers approximately 700 businesspeople in the manufacturing sector, was conducted by the Bureau for Economic Research at Stellenbosch University between 10 and 30 May 2023. 

The confidence index ranges between 0 and 100, with 0 reflecting an extreme lack of confidence and 100 extreme confidence where all participants are satisfied with current business conditions.

The tough economic environment continues to constrain household disposable income. In addition, manufacturers are faced with a reduction in sales volumes but also a slowing of price inflation with regard to selling prices in both the local and international markets. 

Compared to the first quarter, domestic sales and the domestic selling price per production unit dropped by 22 and 19 points, respectively, while export sales showed a 15-point decline and export selling price per production unit dropped 14 points. 

Further evidence of the impact of load-shedding can be seen in the lower production levels and the increased capacity underutilisation.

“As the intensity of load-shedding remains high, the cost of load-shedding in the form of both production downtime and diesel purchases for generators are causing margin pressure,” said Schmidt.

Forward-looking expectations also highlight significant pessimism – a record majority of manufacturers expect that business conditions will deteriorate further over the next 12 months.

“In the short term, business conditions are likely to worsen as there is an expectation of increased load-shedding during the winter season,” Schmidt said.

“However, the silver lining is that, as additional generation capacity comes online, business conditions will improve over the longer term.”

“Manufacturing remains vital to the growth of the South African economy as evidenced by the growth recorded in the Q1 2023 GDP figures released by Stats SA. Given the current energy crisis faced by the country, manufacturers’ investments are focused on remaining in operation while investments into additions or expansions remain on hold.”