Analysing the latest PMI – can it rebound back to healthy levels?

South Africa's Purchasing Managers Index has been under strain of late, with recent numbers coming out below 50, an indication that South Africa's manufacturing sector is experiencing economic strain. The unhealthy numbers of late have not been received with surprise given the slurry of recent labour unrest. August's PMI has come in at 49, still indicating a struggling sector, that is on the cusp of breaching back into healthy territory. Alec Hogg was joined by Abdul Davids, Head of Research at Kagiso Asset Management to have an in-depth look at the numbers, their antagonisers, and what we can expect from the next batch given today's economy. – LF

ALEC HOGG: Thanks for being with us today. The Purchasing Managers Index for August rose, signalling a return to near-normal manufacturing output level. The headline PMI though, remained below the 50-point mark. We'll find out why that's important. It's the fifth month in a row. Abdul Davids, who is Head of Research at Kagiso Asset Management, is in our Cape Town studio. That 50 level, Abdul: that's really the number, isn't it?

ABDUL DAVIDS: That's right. While we have seen the rebound coming through, I think the reading at 49 is a bit disappointing and hopefully, we'll see a recovery above 50 in the coming months.

ALEC HOGG: I'm having a look at the index that you published today. During the last few months, we've been below 50 but if you consider where we were in 2009, then actually, we haven't done quite as badly as you might have anticipated, given the strikes, the problems in the platinum sector, and the manufacturing sector, so there's some resilience in this economy.

ABDUL DAVIDS: That's right, and I do think that some of the macro factors that have contributed to that has been on the favourable side. What I refer to is probably the currency, so the currency is still significantly weaker than, say, two years ago and we know that many of our manufacturers are geared for export and export markets. What we have seen in the international context is that whilst European and Chinese PMI are softening a bit, they're still above the 50 level, so it does point slightly to a slowly growing world economy as well.

ALEC HOGG: Unfortunately, in the South African context, while they're slightly growing we seem to be sliding – not desperately, not back to the 2009 disaster levels, but we still seem to be going in the wrong direction when you take it as a trend. However, in the short term, might we break back above 50?

ABDUL DAVIDS: That's the unique thing about South Africa in that context, because we've had such a protected strike in the platinum strike. We've had the metal industry strike as well. These are all the unique factors that have driven our PMI to low levels – around the 44/45 in June/July – and so we are due for a rebound and potentially, with these factors rebounding we're likely to see further improvement in the PMI in the coming months.

ALEC HOGG: Abdul, what's the likely impact if Business Day's story this morning about Eskom running out of power, is actually accurate and that we're going to have load shedding, despite the fact that Medupi is coming on stream next year?

ABDUL DAVIDS: Unfortunately, it's similar to a recession for the manufacturers, bearing in mind that 50 to 60 percent of their costs or exposure, leads to energy, so it does have quite a significant and severe impact on the manufacturing sector. What we have seen (especially with the large manufacturers) is that they've obviously been almost compelled to become more efficient. We've therefore had this ten percent reduction in energy use for a number of months (if not years) already, in the base, but it will definitely have a significantly negative impact if we had to go back to the 2007 scenario of load shedding.

ALEC HOGG: So what do you do if you're running a business with that kind of threat hanging over your head? Do you go off and buy yourself a big generator?

ABDUL DAVIDS: Unfortunately, many businesses have already done that. What we have seen is that some manufacturers have become quite innovative in the sense that they're actually looking to add ways of generating their own electricity as well. A lot of innovation and a lot of proactive work has been done by the sector, but at the lower scale, labour-intensive manufacturers. Unfortunately, there's very little they can do in terms of mitigating this threat.

ALEC HOGG: Abdul, more of a philosophical question now, something that was raised a year or so ago by Russell Loubser, the former JSE Chief Executive when he says that we just drift along… It seems as though we're doing that. It seems as though we aren't doing anything radical. There wasn't some electrical expert from some part of the world, brought in to run Eskom to try to turn it around. We appointed another cadre there and it seems that everywhere we look, we get this (almost) acceptance of mediocrity. Do you think, philosophically, that I'm on the right page when I suggest that we are continuing to drift?

ABDUL DAVIDS: I think there are elements of truth to that statement, but I do also think that it shows a severe lack of forward planning. What we have seen over the last 10/15 years is that we have broadened and expanded the economy in terms of the participants in the economy. That economic growth, albeit not massively exciting, has been much higher than the electricity supply could generate and sustain. As a result (because of the lack of investment and planning in terms of new power stations coming on stream), we are sitting with this predicament that we're in now.

ALEC HOGG: Of course, there's a knock-on effect on pricing as well. How did that reflect itself in the PMI?

ABDUL DAVIDS: Well, the pricing one is quite unique because in August, we saw petrol prices going up and as I said, we know that energy is quite a big component of overall pricing and exposures of cost structures etcetera. Obviously, the prospect of the 67 cents reduction in petrol prices and diesel prices, albeit not coming down by the same extent, will have a favourable impact on the pricing index bearing in mind that the pricing index has been hovering around above 85 and around 90 for some months now. The current reading at mid-seventies is probably a positive, but there's probably more downside to come in terms of that pricing index.

ALEC HOGG: Abdul Davids is the Head of Research at Kagiso Asset Management.

There may be slight errors in this transcript