Manufacturing collapse in South Africa

South Africa’s manufacturing sector has declined for years, with the first quarter of 2024 seeing a noticeable contraction, spelling bad news for economic growth.

The South African Reserve Bank (SARB) has released its Quarterly Bulletin for the first quarter of this year, which revealed a marked decline in the country’s manufacturing sector.

The real output of the manufacturing sector contracted by 1.4% in the first quarter of 2024 and subtracted 0.2 percentage points from overall growth in real GDP.

Production volumes decreased in five of the ten manufacturing subsectors, particularly in those producing motor vehicles, parts and accessories, and other transport equipment.

It also declined for basic iron and steel, nonferrous metal products, metal products and machinery; furniture and other manufacturing; and textiles, clothing, leather, and footwear.

In the first quarter of 2024, the production of food and beverages, petroleum, chemical products, rubber, and plastic products increased.

“Consistent with the weak business confidence among manufacturers, the decline in manufacturing activity in the first quarter of 2024 reflected insufficient demand for manufactured goods as well as high operating costs associated with electricity-supply constraints and supply-chain disruptions,” the SARB explained.

Nevertheless, the seasonally adjusted production capacity utilisation increased slightly from 76.6% in November 2023 to 77.0% in February 2024.

Following two consecutive quarters of expansion, the real economic activity in the sector supplying electricity, gas and water contracted by 0.4% in the first quarter of 2024.

The volume of both electricity produced and consumed as well as water consumption decreased over this period. 

The decline in electricity generated reflected weak demand from the electricity-intensive sectors and continued electricity load-shedding. 

However, this sector’s real output in the first quarter of 2024 was still 1.6% higher than in the corresponding period of 2023.

The construction sector’s real output decreased further by 3.1% in the first quarter of 2024, marking the fourth successive quarterly contraction, as residential building and civil construction activity decreased. 

This resulted in the sector’s real output level being 8.7% lower in the first quarter of 2024 than in the corresponding period of 2023. 

The tertiary sector’s real GVA remained unchanged in the first quarter of 2024, following an expansion of 0.3% in the fourth quarter of 2023. 

Real economic activity growth slowed in the personal services, finance, insurance, real estate, and business services sectors, while the real GVA of the commerce sector increased marginally. 

By contrast, the real output of the transport, storage, communication services, and general government services sectors contracted during the quarter.

Below are graphs from the SARB’s latest Quarterly Bulletin that show the decline of South Africa’s manufacturing industry.

Existential threat

South Africa’s manufacturing sector is in trouble. It faces several external threats, such as logistics and energy constraints.

In addition, the sector faces a significant existential threat in the next two years after Sasol announced it would stop natural gas production in June 2026, forcing the industry to scramble for alternatives. 

Earlier this year, Jaco Human, executive director at the Industrial Gas Users Association of South Africa (IGUA-SA), told Classic Business that Sasol is pushing the industry over this cliff. 

From June 2026, Sasol will stop supplying gas from Mozambique, halting supply to downstream consumers in KwaZulu-Natal, Gauteng and Mpumalanga. 

Human said this is a unique and dangerous situation, not even comparable to power cuts from Eskom. 

“The reality is that this is a cliff. It is a hard stop, and right now, we do not have the infrastructure for any alternative and no way to reduce our reliance on this single source,” he said. 

“The consequences are real, and it essentially means production stoppages.”

“Sasol will push industry over this gas cliff. Interestingly, we have never seen any solutions coming from Sasol, saying, ‘We can provide you with more gas, and this is how much we have to spend’.”

Sasol has argued that the regulated price of natural gas was insufficient for it to maintain the pipeline from Mozambique or invest in alternatives.

According to Human, Sasol’s plan to stop production will devastate the economy and could threaten upwards of 60,000 jobs.

Some hope

However, there is some hope for the sector, as load-shedding is set to improve markedly in 2024 and going forward.

Transnet is also developing a turnaround plan that could improve South Africa’s logistic challenges and bottlenecks within the next few years and as early as this year.

Pushing for the import of Liquified Natural Gas (LNG) through South African ports can also address the industry’s looming gas shortage. 

This would require massive infrastructure development to enable South African ports to receive LNG imports and connect them to the current pipeline network. This infrastructure is currently non-existent. 

Human explained that the project to enable LNG imports must break ground by July 2024 to be ready to replace the existing supply from Sasol. 

Industry alone cannot undertake this project, as it needs government support to build the infrastructure and ensure sufficient demand to make it financially viable. 

Human said the project is shovel-ready and just needs to reach financial close, which depends on sufficient levels of volume throughput to make it feasible. 

Industry alone can contribute around half of the required demand, but the government must step up to cover the other half. 

There is hope that the newly elected Government of National Unity (GNU) will address these challenges and, in the process, save South Africa’s manufacturing industry.