Manufacturing outlook worsens

The decline in PMI in July follows a lower rise in the index in June, and breaks a three-month upward trend in the index, which may cast doubt on the beginning of a recovery for the manufacturing sector in third quarter.

Business activity declined by a shocking -4.1 points to 33.8 points in July, also breaking a three-month upward trend, while new sales orders recorded a milder -2.4 point decline to 35.8 points, halting a four-month rise.

This is an indication that manufacturing production is likely to have fallen further in July and may continue to decline for the remainder of third quarter.

It was surprising to see a rise in the price component of PMI in June, despite the significant -3% decline in producer prices in the previous month.

This was corrected in June, with the price component declining to 48.7 points in July from 51.7 point in June.

Slight recovery in commodity prices

However, a slight recovery in commodity prices as well a stronger rand is conveyed by the lower -3 point decline in July versus the 6.1 point rise in June. Inventories improved from 39.1 points to 33.5 points during the month.

However, suppliers' performance declined for the fifth consecutive month to 43.6 points in July, an indication that producer demand remains significantly depressed.

Despite the overall decline in PMI, the backlog in sales orders improved markedly from 23.9 points in June to 29.7 points in July, while the purchasing commitments component increased from 31.1 points in to 36.7.

The rise in the backlog in sales orders and purchasing commitments provides some level of certainty to producers for the medium term. Another positive aspect of July's PMI is the increase in the employment component, rising from 36.9 points in June to 40.8 points in July.

Expected business conditions rose to 55.1 points, marking the fifth consecutive rise.

However, the rand continues to trade very strongly below the R8.00/US$ mark, which is likely to dampen international demand, while the electricity tariff increase creates cost side pressures keeping a grey cloud over the manufacturing outlook.

Kagiso PMI

Jul 2008 43.0
Aug 2008 46.8
Sep 2008 47.0
Oct 2008 46.2
Nov 2008 39.5
Dec 2008 40.1
Jan 2009 40.7
Feb 2009 39.2
Mar 2009 36.0
Apr 2009 35.6
May 2009 37.3
Jun 2009 37.9
Jul 2009 37.3

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