Manufacturing increases could aid South Africa

South Africa proved its pliability and manufacturing potential by competing on this global platform. This continued persistence in global manufacturing indicates that a worldwide downturn in industrial production will hold its position dependent on the outcome of the Euro-zone crisis.

A major crisis undermines local exports as Europe purchases approximately a third of our manufacturing exports. Added to this, the uncertain global environment will possibly put some strain on local company earnings and job security.

Manufacturing accounts for a small proportion of GDP in most Sub-Saharan African countries. Produced goods currently constitute only 14% of Africa's exports. Even in South Africa, the continent's industrial powerhouse, manufacturing has declined significantly since its peak in 1981. However, it remains the second largest sector, contributing over 15% of total output and consists of 13% non-farming jobs.

Nevertheless we are encouraged by the global industrial production data out early in 2012 and generally more constructive data out of the US and China. This suggests that by the middle of 2012 South Africa's manufacturing sector will be better positioned to assist the other lagging local economic sectors to pull themselves out of recession and marginalise the divergence in performance. For example, cement production is up 14.4% while vehicle production was down 12.6% year-on-year.

The recent increased maintenance in the petroleum industry, which has distorted data, has exaggerated weaknesses in the manufacturing sector. It is better to look at the trend cycle index for manufacturing, which shows that although manufacturing has recovered from the 2008/2009 severe recession, it has being stagnating for the past year and remains under some pressure.

Some of the challenges facing manufacturing in Africa include skills shortages, rigid labour laws, political instability and inadequate power supply. The local energy supplier Eskom has warned mining and manufacturers alike that it is functioning at an extremely low reserve margin and power cuts are imminent. Also putting a damper on growth in this sector is below standard mining performance as well as agricultural performance and low construction activity.

South Africa has traditionally been known to export unrefined commodities; however, the minister of trade and industry recently stated that a possible solution to increase production figures would be beneficiation. For example, instead of exporting mineral sands such as titanium sand, sold for $440 a ton at the end of 2011, increase processing into titanium sponge, which would fetch $4 000 a ton and further refining it to an alloy, used in the aircraft industry gaining up to $100 000 a ton. This seemingly small addition to the refining process will have immense benefits if extended into other commodities as well.

Although progressing at a tender pace, manufacturing can be seen as a stable industry in an otherwise uncertain economy.

Index of the physical volume of manufacturing production: 2005 - 2011 STATS SA. Base: 2005=100