Dark clouds gather over important South African industry

South Africa’s manufacturing industry is under increasing pressure from water shortages, a looming gas shutoff, and low business confidence. 

Often overlooked, manufacturing is one of the main drivers of economic growth in South Africa and a key source of employment for millions. 

The sector is particularly important because it can absorb low-skilled labour and add value to commodities produced in South Africa. 

However, the industry’s economic output has steadily declined since the mid-2000s, with its deterioration accelerating in recent years. 

The blame is often attributed to load-shedding, which has hobbled economic activity since it began in earnest in the mid-2010s. 

In its 30-year macroeconomic review of South Africa, the Bureau of Economic Research (BER) flagged another more fundamental reason. 

It argued that declining business confidence in the country since 2006 has resulted in poor economic growth and companies’ unwillingness to invest in manufacturing capacity. 

The decline has been sharp. Eighty percent of respondents to the RMB/BER Business Confidence Index (BCI) survey reported being satisfied with prevailing business conditions during 2006, compared to only 32 percent last year. 

Reserve Bank data also indicates that this decline is not close to ending soon, with the sector’s output contracting again in the first quarter of 2024. 

In the bank’s quarterly review for the first quarter, it revealed that only 77% of the country’s manufacturing capacity is utilised. 

This is reflective of a lack of demand for products in South Africa’s weak economy and low business confidence. 

The decline is also widespread, with five of ten manufacturing subsectors posting lower output. 

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

The pressure on the sector is set to continue despite load-shedding relief over the past 150 days as new challenges emerge. 

Of particular concern are repeated and prolonged water shortages in the country’s economic hub of Gauteng. 

“In the case of Gauteng, it is a very specific issue because what you have there are three major metros that contain a significant portion of our national manufacturing capacity and are all at risk from water supply disruption,” water scientist Dr Anthony Turton said. 

“The immediate short-term risk now is the potential failure of certain municipalities. When I say failure, I mean the relative chance that those municipalities are unable to self-correct and deliver services.”

This spells major trouble for local manufacturers as water is a vital input in the production of many goods and is key for employee hygiene. 

Climate specialist Professor David Walwyn said this can be directly attributed to deteriorating infrastructure at a municipal level. 

“We are already seeing consequences of the collapse of capability at the local authority level. I think that is common across all public goods from roads to electricity to safety and security,” Walwyn said. 

“We have seen vivid examples over the past few years relating to the dissolution of local capability.” 

This has pushed businesses to reduce their reliance on centralised water supply, with companies spending billions on water reticulation systems. 

Asset manager Coronation has even begun engaging with businesses it invests in regarding their reliance on centralised water supply as part of their investment process. 

However, Walwyn warned that despite these mitigation efforts, prolonged water shortages make large-scale industry unviable in certain areas as it is too expensive to go completely off-grid. 

“It is simply not possible to go off centralised water distribution for large industrial companies as can be done with electricity.”

Another significant threat to manufacturing in South Africa is the looming cut-off of natural gas supply to factories in parts of the country. 

Last year, Sasol announced it would stop natural gas production in June 2026, arguing the regulated price of the commodity was insufficient for it to maintain the pipeline from Mozambique. 

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

“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’.”

Human estimates the end of natural gas supply from Sasol will result in over 60,000 direct jobs being lost and thousands more of indirect jobs.