South African non-bisor manufacturing grows by 3.4%

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By Cees Bruggemans, Chief Economist of FNB.

South African manufacturing has deeply disappointed of late in supposedly not recovering more strongly from the 2009 recession, especially in 2011, to the point of even promoting the impression of a new economic slowing or at least cyclical underperformance to be underway.

As with Mark Twain remarking about his reported death, things may have become somewhat exaggerated.

The culprits? There may be many, but two subsectors stand out, their experiences in 2010-2011 of such a nature that it may distort perceptions of the cyclical post-2009 behaviour of manufacturing and the economy generally.

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Oil refining capacity in this country is mainly in private hands and outside of Sasol is mostly 40-50 years old. The nature and capital-intensity of oil refining is such that companies can only expand (and modernise) capacity in big lumps. Given the small local market and mature growth, large production shortfalls and import dependencies tend to build up before big investment decisions are made, bearing in mind the returns on capital that can be earned.

Global refining capacity surpluses, large new capacities coming on stream overseas, our own refining margins very slim and any refinery addition from necessity having to be very large, the appetite hasn’t been there for such greenfield investment locally, allowing the bulk of our oil refining capacity to age to a point where plant breakdowns happen more frequently and maintenance shutdowns last longer, affecting oil refining production and manufacturing output generally.

Given the growth in demand over time, any new capacity investment would naturally have given rise to growth in refining activity, lifting overall manufacturing activity as well. Instead, such incremental growth is being met from imports of refined product and isn’t supporting the growth of overall manufacturing activity.

This is not a cyclical but a structural issue. With a weight of 8.5% in overall manufacturing, oil refining underperformance can distort our impressions of manufacturing’s cyclical condition, and even that of the economy generally (escalating the bias).

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Similar problems, however, can be observed in parts of the basic iron and steel subsector, with a weight of 7.7% in total manufacturing.

Here, too, we have especially in recent times encountered plant breakdowns, maintenance shutdowns and/or reduced local output and reliance on increased imports.

Especially the steel plant in Newcastle appears to have given problems. South African steel output this past year has been well down on the previous year, November’s crude steel output being down 13.7% on a year ago.

This may again mostly reflect structural rather than cyclical issues.

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To gain a better feel of how manufacturing ‘generally’ is performing of late, especially in recovering from severe labour-related interruptions in mid-2011, it may be advisable to check how ‘Non-Bisor’ Manufacturing has been doing (that is, without the structural distortions of basic iron and steel and oil refining).

Instead of trying at subsector level to remove distorting influences (which statistically is rather challenging), it is easier to simply drop the two subsectors and run a Non-Bisor Manufacturing Index parallel to the normal Total Manufacturing Index, using Statssa data.

In the graphs below it will be noted that although in years gone by there have from time to time been short periods of deviation between the two data sets (mostly reflecting plant maintenance shutdowns in oil refining and steelmaking), this has generally not been a major or enduring condition influencing our perception of overall manufacturing performance.

Things changed for the worse, though, in 2010 and even more so in 2H2011. The oil and steel sector-related plant interruptions appear to have become more prolonged and severe, judging the manner in which Non-Bisor deviated from Total Manufacturing output.

This was mainly assumed to be a supply-side rather than a demand phenomenon as economic recovery started in mid-2009 and has ever since continued steadily (even as globally there was a pronounced demand slowdown in 2H2011 not visibly related to local tendencies).

Despite substantial volatility observable in Non-Bisor Manufacturing output, especially in late 2011 (mostly traceable to that other major subsector, motor vehicle production), the cyclical trend recovery in Non-Bisor Manufacturing output from its 2009 recession low has been much more persistently positive than in overall manufacturing.

It is this perception that may need addressing.

Manufacturing has been recovering since 2009 and has done so more persistently than overall data distorted by subsector-specific problems would have suggested.

Even though Non-Bisor Manufacturing output hasn’t quite recovered its 2007 cyclical peak, it has regained (much) more of the lost ground than perhaps imagined so far, with less reason to fear imminent falloffs due to supposed self-evident slowing in the recent data, taken to mean perhaps that demand has been severely faltering (or trade competitiveness lost).

Relax, the manufacturing recovery is well on track, better than expected, even if it could be stronger, when going by the Non-Bisor data.

Graph 1   Manufacturing production indexes (2005=100)

Graph 2   Change in manufacturing output (year/year %)

Source: Cees Bruggemans, FNB, January 13, 2012.

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