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After a sluggish start to the year, the outlook for South Africa’s manufacturing sector has turned more uncertain as producers contend not just with a rise in input costs originating largely from fuel, but also depressed demand as households grapple with higher living costs.Manufacturers had been hoping for a turnaround this year after subdued demand last year, particularly for exports, partly due to US President Donald Trump’s punitive tariffs.But producers are also now feeling the effect of higher fuel costs due to global oil supply disruptions linked to the Middle East war, said Sachin Chanderdhev, a sector specialist for manufacturing at Absa Business Banking.“Before we had the Middle East conflict our macroeconomics in the country were looking quite positive. We were in a state of low inflation, a strong rand, fuel prices were lower than they are now,” he told Business Day.“We’ve now got a case where these costs are going up and we have had significant tariff increases in that market. As your input costs go up, the competitiveness of your final product comes under pressure.”South Africa’s lack of functional railway infrastructure means that more than 80% of all freight is forced onto the country’s roads using diesel transport, said Ben Bosch, chief product officer at Skynamo, a unified sales operations platform designed for manufacturers, wholesalers and distributors. “Even with the recent temporary relief, fuel price volatility triggers a vicious compounding cycle, driving up costs across every link of the supply chain ― from crude processing to product packaging,” Bosch said in a commentary, referring to the government’s temporary reduction of South Africa’s general fuel level to soften the blow of fuel price increases.The government will phase out the relief by the end of this month.In heavily commoditised sectors such as building materials and hardware, automotive and the food and beverage sectors, operating margins are incredibly thin, Bosch said.The Middle East conflict has created costing problems for manufacturers not just in the bottom line in rands and cents but also in terms of time, Chanderdhev said.“Managing a working capital cycle, managing the cash conversion cycle becomes such a tricky thing when there are constant curveballs being thrown into the mix,” he said.“The second thing that comes up is demand. Last year, even though we had strong macroeconomic indicators within our country, the demand was under pressure, specifically on the export side.”The reduction in demand is a worry for producers, leading to the pre-emptive drop in manufacturing production in April, banking group Investec said in a note.The latest data from Stats SA shows that industrial production — which measures output from a wide range of sectors including manufacturing, mining and quarrying as well as utilities such as electricity, gas and water supply — fell 1.2% month on month in April as the effect of the US-Iran war became more apparent.Manufacturing alone contracted 2.7% compared with the previous month while electricity output fell 1.3%.Some industries held back on production in March at the start of the war, preferring inventory run downs — using stock they have rather than producing more — on demand concerns for later in the year due to the oil price and sentiment shock, Investec said.“For the pace of recovery in economic activity generally, much will depend on whether the Middle East peace deal and lower oil prices hold, with the underlying causes of conflict not seen to be resolved and the deal consequently not secure,” it added.Efforts are under way to get last week’s tentative agreement to end hostilities in the Middle East onto a firmer footing, but negotiations between the US and Iran remained fractious on Monday.The upshot is that crude oil tumbled to $80 for the first time since March on Friday, Old Mutual Wealth investment strategist Izak Odendaal noted, cautioning, however, that the move might be a bit overdone given the uncertainties.“Few will complain since the price is now well below the late April peak. However, it is still higher than at the start of the year, squeezing household purchasing power and company margins,” Odendaal said.“The relief won’t necessarily be felt immediately, just as the impact of higher prices wasn’t, as businesses don’t change orders, hiring or pricing plans overnight. In South Africa specifically, we’ll have to wait until next month for retail fuel prices to decline.”
