Absa PMI declines amid truck burnings, load-shedding
The disruptions seen in July caused by truck burnings on South Africa’s roads and increased load-shedding, partially resulted in a setback for the country’s manufacturing sector.
This is according to the latest Absa Purchasing Managers’ Index (PMI), which revealed that after what looked to have been a decent second quarter – in terms of quarterly growth momentum – the manufacturing sector had a setback at the start of Q3.
Although the headline PMI was only marginally lower in July at 47.3 index points (June: 47.6), this stability masks substantial changes in some major PMI subcomponents.
In a particularly stark move, the business activity index tanked by almost 11 points. Besides a ramp-up of load-shedding in July after the unexpected reprieve in June, it is not immediately clear what drove such a large decline.
However, a substantial rise in the supplier deliveries index to the highest level this year may provide some clues.
The deliveries index is inverted, implying that longer supplier delivery (lead) times boost the headline PMI. This is because pre-Covid, longer delivery times were mostly associated with robust demand conditions.
However, as was the case during the worst of the Covid-19 pandemic, supply chain disruptions can also lengthen delivery times without any rise in demand.
In July, the PMI new sales orders index moved lower. Therefore, there is likely some other explanation for the jump in supplier delivery times, as it was not demand driven.
The longer delivery times in July may well reflect delays associated with criminals torching multiple trucks on the N3 transport corridor during the month.
If this is the case, the headline PMI was kept artificially afloat in July by the meaningful rise in the supplier deliveries index.
In the same breath, to the extent that transport delays contributed to the decline in business activity during July, activity should – at least partially – recover in August.
The sharp moves in the activity and supplier delivery indices may be due to once-off events.
If so, the PMI components highlight the debilitating impact that the kind of disruptions seen in July can have on production processes.
On a more positive note, the PMI price index moved down notably in July, signalling that the meaningful moderation in the annual rate of increase for the producer price index (PPI) in recent months still has some legs.
Business activity
After the business activity index only increased slightly in June despite a reprieve in the intensity of load-shedding, it saw a sharp decline in July, dropping from 48.9 to 38.1.
Besides the return of more intensive power cuts, delays in receiving inputs amid the transport disruptions on the N3 corridor through the month of July may explain the large drop.
The manufacturing hubs around Johannesburg may have been particularly hard hit by the shipment delays.
New sales orders
The new sales orders index lost ground for a second consecutive month, declining to 43.4.
While restrictive monetary policy is now most likely weighing on domestic demand, weak activity in major South African export markets, including the Eurozone and the UK, could also be curtailing foreign demand for locally manufactured goods.
Employment
After making some headway in June, the employment index stabilised in July. Even so, as was the case in the first half of the year, the index remained below the neutral 50-point mark at 47.4.
Inventories
The inventories index remained largely unchanged in July, growing marginally from 48.2 in June to 48.5 in July.
Supplier deliveries
The supplier deliveries index rose to the highest level so far this year, growing from 47.4 in June to 59 in July.
The index is inverted in the headline PMI index calculation, implying that longer supplier delivery (lead) times boost the headline PMI.
With the new sales orders index moving lower in July, there is most likely some other explanation for the jump in supplier delivery times.
It may well reflect delays associated with the torching of multiple trucks on the N3 transport corridor during the month.
Purchasing prices
The purchasing price index declined by 6.5 points to reach the lowest level so far in 2023 at 64.8 (June: 71.3).
This bodes well for a continuation of the annual moderation in the rate of change for the producer price index (PPI).
Stats SA reported that the intermediate PPI increased by only 2.4% year-on-year in June.
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