Continuous improvement in M&E output bodes well for sector – Seifsa

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has welcomed the second consecutive increase in output of the metals and engineering (M&E) sector in June this year

According to Seifsa economist, Marique Kruger, this second improvement in two months bodes well for local producers, especially amidst the escalating trade war rhetoric between the US and China.

Data released by Statistics South Africa shows a 4.1% increase in production in the M&E cluster in June 2018 compared to June 2017 and a 2.4% increase in comparison to May 2018. This was in line with the 0.7% year-on-year growth experienced in the broader manufacturing sector in June and following a similar upward trend in May 2018.

“The expectation is for the positive output trend to continue in July 2018 in line with an improving domestic manufacturing index, which rose to 51.5 in July from 47.9 in June, signalling an expansion in local production activities,” said Kruger.

She noted that production in the sector had increased in spite of lingering concerns about the possibility of a lower-than-expected contribution of the broader manufacturing sector to the GDP in the second quarter of the year.

“Notwithstanding the general increase in gross output, concerns remain that the contribution of the cluster and the broader manufacturing to GDP is still negligible because of proportionately higher intermediate input prices and production costs, including fuel and energy costs,” added Kruger.

She pointed out that input prices could be highly volatile due to factor affecting supply such as an unpredictable exchange rate.

“[Additionally], demand for intermediate input tends to be more price inelastic, with overall demand remaining about the same whether input prices increase or decrease,” she said.

“This makes it easier for suppliers to pass on frequent price increases to producers or buyers since their demand remained more or less the same, thereby accounting for the volatility in input prices.”

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