Download Diapositiva 1 - Manufacturing Circle

Manufacturing Circle Bulletin Quarterly Review
Second Quarter 2012
Presentation for
Manufacturing Circle
16 August 2012
by
Dr Iraj Abedian
PAN-AFRICAN INVESTMENT & RESEARCH SERVICES (PTY) LTD.
Outline
1. Introduction
2. Overall Manufacturing Business Confidence
3. SA Manufacturing Environment in Q2- 2012
4. Survey Results for Q2-2012
5. Rethinking Monetary Policy in the Wake of the Financial Crisis
6. Concluding Remarks
Slide # 2
Introduction
Profile of Respondents
A Total of 67 (previously 49) Participating Firms in Q2 2012
NUMBER OF EMPLOYEES
COMPANY TURNOVER
40
> R10bn
35
R6bn to R10bn
Share of Repsondents (%)
30
R3bn to R6bn
R1bn to R3bn
R301m to R999m
25
20
15
10
5
< R300m
0
10
20
30
40
0
50
0 to 500
Share of Respondents (%)
Slide # 4
500 to 1000
1000 to 2000
2000 to 5000
> 5000
Manufacturing Business Confidence
Second Quarter 2012 Manufacturing Conditions
Mostly Fragile / weak Environment in Q2 2012 Compared to Stable Conditions in Q1 2012
50
45
Share of Respondents (%)
40
35
30
25
20
15
10
5
0
Poor
Fragile/weak
Stable
Q1 2012
Modest to good
Q2 2012
Slide # 6
Strong
South African Manufacturing Environment in
Q2 2012
Kagiso Purchasing Managers Index Quarterly Average
Overall weaker Conditions in Q2 2012
BACKLOG
BUSINESS
NEW
ACTIVITY
SALES
OF ORDER
SALES
INVENTORIES
PURCHASING
SUPPLIERS'
COMMITMENTS
PERFORMANCE
DATE
PMI*
Q1 2012
55.4
58.9
60.6
41.5
53.1
50.3
Q2 2012
51.8
53.6
51.0
40.8
57.8
49.3
EXPECTED
PRICES
EMPLOYMENT
BUSINESS
CONDITIONS
52.0
76.7
47.0
64.6
49.2
69.9
49.5
57.5
Source: Bureau for Economic Research
• Except for “inventories”, drop in all other component indices from Q1 2012 to Q2 2012
• Manufacturing Jobs under strain in Q2 2012
Slide # 8
Manufacturing Production Q2 2012
Weights
2005
Q/Q Seasonally
Adjusted
% Growth
Food & beverages
15.4
1.4
Textiles, clothing, leather & footwear
4.9
-0.2
Wood, paper, publishing & printing products
10.2
-4.8
Petroleum, chemical & rubber products
22.1
1.7
Glass & non-metallic mineral products
4.8
-1.2
Basic iron & steel, non-ferrous metal products & machinery
22.9
-6.2
Electrical machinery
2.5
4.5
Radio, tv communication apparatus & professional equipment
1.1
-0.7
Motor vehicle parts & accessories and other transport equipment
10.9
5.8
Furniture & other manufacturing division
5.2
4.6
100.0
-0.2
Manufacturing Division
Total
Source: Statistics South Africa
Slide # 9
Quarterly Manufacturing Employment
44,000 Manufacturing Jobs Lost in Q2 2012
2.05
2.00
1.95
Millions
1.90
1.85
1.80
1.75
1.70
1.65
Q1
Q2
Q3
Q4
2008
Q1
Q2
Q3
Q4
Q1
Q2
2009
Q3
Q4
Q1
2010
Total Manufacturing Employment
Source: Statistics South Africa
Slide # 10
Q2
Q3
2011
Trend Line
Q4
Q1
Q2
2012
Summary of Q2 -2012 Survey Results
Demand Conditions
Q2 2012Domestic Sales Outperformed Export Sales but losing momentum
RATIO OF DOMESTIC SALES TO TOTAL SALES
Q2 2012
RATIO OF EXPORT SALES TO TOTAL SALES
Q1 2012
Q1 2012
> 60%
> 60%
31% to 60%
31% to 60%
11% to 30%
11% to 30%
0% to 10%
0% to 10%
0
20
40
60
Share of Respondents (%)
Q2 2012
0
80
Slide # 12
10
20
30
40
50
Share of Respondents (%)
60
70
Supply Conditions
Input Costs Remained Elevated in Q2 2012
Q2 2012
TOTAL INPUT COSTS
Q1 2012
> 15%
11% to 15%
6% to 10%
0% to 5%
-5% to -1%
-10% to -6%
-15% to -11%
< -15%
0
5
10
15
20
25
Share of Respondents (%)
Slide # 13
30
35
40
45
Manufacturing Employment Conditions
Positive Growth (at least 1%) in Manufacturing Employment losing Momentum:
25% of Respondents in Q2 2012 (previously 31%)
Q2 2012
CHANGE IN THE NUMBER OF EMPLOYEES
Q1 2012
> 5%
1% to 5%
0
-5% to -1%
< -5%
0
5
10
15
20
Share of Respondents (%)
Slide # 14
25
30
35
Manufacturing Employment Conditions
Factors Explaining the Decline in Manufacturing Employment during Q2 2012
1. Increasing volumes of cheap imports, especially from China.
2. Some manufacturers importing labour intensive intermediate
components from China for local assembly to maintain competitiveness
3. Automation proving to be sustainable and very attractive as a way of
reducing labour costs
4. Mergers leading to staff redundancies
5. Company restructuring leading to the closing of non-competitive
product lines
6. The need to become more efficient in the face of dwindling profit
margins
7. The immediate reduction in the number of contract staff as new orders
from export markets plummet
Slide # 15
Labour Productivity & Regulatory Environment
Mostly unchanged regulatory environment
between Q1 2012 and Q2 2012
Labour productivity either improved or stayed
the same in Q2 2012 compared to Q1 2012
REGULATORY ENVIRONMENT
80
80
70
70
60
60
Share of Respondents (%)
Share of Respondents (%)
LABOUR PRODUCTIVITY
50
40
30
20
10
0
50
40
30
20
10
0
Deteriorated
Q1 2012
Same
Improved
Deteriorated
Q2 2012
Same
Q1 2012
Slide # 16
Q2 2012
Improved
Financial Conditions
1. Sixty five per cent (previously 40 per cent) of surveyed firms reported
positive changes in their operating profit during Q2 -2012
2. Q2- 2012 had a more deleveraged environment compared to Q1- 2012
(58 per cent of respondents (previously 62 per cent) registered a debt to
equity ratio of up to 50 per cent in Q2- 2012
3. Sixty three per cent (previously 80 per cent) of survey participants
accessed credit at lower cost (less than JIBAR +3 per cent) in Q2 -2012
Slide # 17
Manufacturing Outlook
Short to Long-Term Manufacturing Outlook
According to survey respondents, factors that will affect
manufacturing performance in the short to long term include:
1) Elevated input costs (electricity, fuel and labour) and a relatively strong
rand ;
2) The relocation of the manufacturing of retailers’ house brands abroad
(China and India);
3) The slowdown in domestic and international demand conditions as
uncertainty and volatility in the global economic environment prevail;
4) The shift in the patterns of consumer spending in South Africa due to
high costs ;
5) The poor performance of the mining sector.
Slide # 19
Rethinking Monetary Policy in the Wake of the
Financial Crisis
Global Competitiveness Index
BRIC Competitiveness Outperforms South Africa’s Post 2008
Index
1. Declining SA competitiveness due to:
5
4.9
a) The Rand exchange rate
4.8
b) High input costs
2. Strong currencies eroding
competitiveness in many other
countries. For example:
4.7
4.6
4.5
4.4
4.3
a) Closure of steel mills in Australia
due to a strong Australian dollar
4.2
4.1
2005
2006
OECD
2007
2008
South Africa
2009
2010
2011
BRIC
Source: World Economic Forum
Slide # 21
b) Honda and Nissan relocating their
production plants outside Japan
due to an appreciating Yen
Structural Change in the Global Economy
1. More frequent recessions in the future than has been the case in the 25 years leading up
to the financial crisis (World Economic Forum);
2. The global economy to remain on a trajectory of major structural adjustment for a
protracted period;
3. New structural regime characterised by episodes of erratic patterns of capital flows to
Emerging Market Economies (EMEs);
4. EMEs currencies to sustain high volatility for as long as free floating exchange rate
regimes are followed;
5. Highly volatile currencies to impact on the ability of firms to design proper medium term
strategies and budgets
Slide # 22
Volatility of the Rand and Peer Group Currencies
Implied Foreign Exchange Volatility (in per cent), South Africa vs. Peer Countries, 2005 - 2010
Peer Group
Countries:
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Source: Datastream
Slide # 23
Argentina
Turkey
Hungary
Chile
Poland
Malaysia
Philippines
Mexico
Israel
Ukraine
Korea
Indonesia
Russia
Brazil
Peru
Colombia
Thailand
Extra Tool For Monetary Policy
1. The financial crisis has stimulated a new debate on the role of monetary
policy:
a) In advanced economies: Monetary policy should target asset prices
in addition to consumer prices.
b) In emerging and developing economies: Monetary policy should
target the exchange rate in addition to ensuring low inflation.
Slide # 24
Extra Tool For Monetary Policy
2. Emerging market economies have become more vulnerable to currency volatility
because:
a) They are generally not well hedged against a currency risk;
b) A strengthening of the exchange rate may result in the loss of competitiveness of
the traded goods sector and the ensuing effect could become permanent, even if
the exchange rate subsequently returns to its previous level.
3. Foreign exchange market intervention becomes a more relevant monetary policy tool for
inflation-targeting emerging market economies relative to inflation-targeting advanced
economies.
Slide # 25
Inflation and Exchange Rate Targeting
Not Mutually Exclusive
1. Policymakers should use different tools e.g. as macro-prudential
regulation, capital controls, exchange rate bands, etc. to create macrofinancial stability.
2. Following the financial crisis, delivering stable prices is not the only
credible and appropriate target for monetary policy in emerging markets.
3. Given the effects of considerable fluctuations in the exchange rate, there
is a need for two targets:
a) inflation targeting
b) exchange rate targeting
4. The SARB should specifically adopt an explicit “currency band” between
8.20 and 8.60 per US$ as a “working guide” for the conduct of monetary
and exchange rate policies.
Slide # 26
Inflation and Exchange Rate Targeting
South Africa will be required to maintain an adequate stock of safe and liquid assets
GROSS RESERVES VS. MEASURES OF ADEQUACY, SOUTH AFRICA, 2008 - 2016
Source: IMF
Slide # 27
Concluding Remarks
Concluding Remarks
1. Despite a better overall performance in Q1 2012, manufacturing
production and business confidence remained weak during Q2 2012.
2. Following the financial crisis, the global economy is set to remain on a
trajectory of considerable structural adjustment partly characterised by
elevated EMEs currencies’ volatility.
3. Empirical global and national lessons since the financial crisis show that
refraining from using the broader array of available policy tools (including
exchange rate bands) would prove to be detrimental for economic activity,
job creation and growth sustainability.
Slide # 29
Thank you for your attention
Q&A
[email protected]
Tel: 011 883 8036/7
Fax: 011 883 8038
Slide # 30