Sentiment in the manufacturing industry continues to be dampened – settling at similar levels seen during the worst of the Covid-19 pandemic and lower than those seen during the global financial crisis.

Absa’s latest Manufacturing Survey for Q2 showed that load shedding is the major driver for the weak sentiment in the sector.

Historical data shows that confidence has only been at these levels a handful of times.

“The Q2 confidence level was unchanged at 17 since the previous quarter – lower than the trough of 20 reached during the global financial crisis,” said Absa.

“Electricity supply disruptions not only directly weigh on production and capacity and hurt profitability due to the costs associated with load shedding mitigation measures (such as diesel generators), but also negatively impact sentiment,” said Justin Schmidt, the head of the manufacturing sector at Absa Relationship Banking.

“With confidence levels remaining at the same very low levels seen in the first quarter, the effects of load shedding are visible across manufacturing subsectors.”

Absa’s quarterly survey, in collaboration with the Bureau for Economic Research (BER), takes into account the sentiment of 700 businesspeople in the manufacturing sector.

The confidence index ranges between zero and 100, with zero reflecting an extreme lack of confidence and 100 extreme confidence where all participants are satisfied with current business conditions.

The bank said that a tough economic environment continues to constrain household disposable income, leading to manufacturers not only facing a reduction in sales volumes but also a slowing in price inflation regarding selling prices in both local and international markets.

“Compared to the first quarter, domestic sales and the domestic selling price per production unit dropped by 22 and 19 points, respectively, while export sales showed a 15-point decline and export selling price per production unit dropped 14 points. Further evidence of the impact of load shedding is visible in the lower levels of production and the increased level of capacity underutilization.”

“As the intensity of load shedding remains high, the cost of load shedding in the form of both production downtime and diesel purchases for generators are causing margin pressure,” Schmidt said.

Manufacturers at large are pessimistic regarding the future expectations of the business environment. Absa said a record majority of manufacturers expect that business conditions will deteriorate further over the next 12 months.

“In the short term, business conditions are likely to worsen as there is an expectation of increased load shedding during the winter season. However, the silver lining is that as additional generation capacity comes online, business conditions will improve over the longer term,” Schmidt said.

“Manufacturing remains vital to the growth of the South African economy…Given the current energy crisis faced by the country, manufacturers’ investments are focused on remaining in operation while investments into additions or expansions remain on hold,” Schmidt added.

The graph below illustrates the fluctuation in manufacturers’ confidence in the business environment:

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