South Africa's manufacturing sector slipped into contraction territory in June

Written by Ziad Abdel Fattah:

A survey showed an index Procurement managers A report released Wednesday showed a clear decline in South Africa's manufacturing sentiment during June, following two months of expansion, impacted by a drop in new orders, while a decline in oil prices helped support some indicators of optimism regarding future business conditions.

Although lower oil prices and fuel costs have eased some of the pressure on cost levels, weak demand, declining new orders and deteriorating employment conditions continue to cast a shadow over the sector.

Postpone purchases in anticipation of a decline Prices

The index measuring manufacturers' sentiment in South Africa fell into contraction territory in June, as customers postponed purchases in anticipation of lower prices after the United States and Iran agreed to reopen the Strait of Hormuz.

The Absa Group’s Economic Research Bureau’s index fell to 47.3 points from 50.8 points in May, according to a statement sent by the Johannesburg-based group, where the survey was conducted after the United States and Iran signed an interim agreement to end regional tensions and reopen the Strait of Hormuz, a vital waterway for a fifth of the world’s oil and liquefied natural gas shipments.

Brent crude prices fall

The resumption of traffic through the Strait of Hormuz has caused Brent crude prices to fall below $73 a barrel from a peak of $118, a level close to those seen before the outbreak of war on February 28.

Absa said purchasing managers are delaying restocking, anticipating further declines in input prices following easing tensions in the Middle East and lower Brent crude prices.

The purchase price index fell by 13.5 points to 71.3, reflecting a relaxation of input cost pressures.

Expectations are that pressure on the sector will continue.

However, Absa warned that continued weakness in demand and employment suggests the sector is likely to remain under pressure in the near term.

The data indicated a significant decline in the purchase prices component of the index, suggesting that April and May saw the peak of inflationary pressures, especially after fuel price reductions came into effect on Wednesday.

Absa added that some companies participating in the survey reported that customers are postponing purchases in anticipation of further price drops, which has contributed to a decline in new orders.

Despite this, the sub-index for expectations of business conditions over the next 6 months rose, supported by optimism about the possibility of an end to the war with Iran. However, participants also noted that the anti-immigrant protests that took place in the country on June 30 cast a shadow over the confidence of some workers in the sector, limiting the improvement in factory sentiment in general.