1. M ANUFACTURING S ECTOR Q UARTERLY S URVEY F IRST Q UARTER 2015 M ANUFACTURING C IRCLE OF S OUTH A FRICA M EETING 14 May 2015 Dr Iraj Abedian P AN -A FRICAN I NVESTMENT & R ESEARCH S ERVICES

2. M ANUFACTURING E NVIRONMENT IN Q1 2015

3. Q1 2015 business confidence was lacklustre… Source: BER and PAIRS RMB/BER Business Confidence Index, Q1 2011 – Q1 2015

4. …so was the tempo of manufacturing activity over the quarter Source: BER and PAIRS Quarterly average Kagiso PMI (index points) Q1 2015 PMI 49.9 Business activity 50.6 New sales 50.7 Backlog of order sales 35.1 Inventories 55.1 Purchasing commitments 53.9 Suppliers' performance 50.7 Prices 63.4 Employment 44.6 Expected business conditions 64

5. Q1 2015 manufacturing production contracted Source: StatsSA and PAIRS SA manufacturing production, Q1 2015, Q/Q growth (per cent, seas. adj.) Manufacturing divisionWeights, 20122015 Q1 Food & beverages 24.440.6 Textiles, clothing, leather & footwear 3.17-1.1 Wood, paper, publishing & printing products 12.65-2.8 Petroleum, chemical & rubber products 22.13-2.6 Glass & non-metallic mineral products 3.911.1 Basic iron & steel, non-ferrous metal products & machinery 19.592.0 Electrical machinery 1.7-1.2 Radio, tv communication apparatus & professional equipment 1.41-22.0 Motor vehicle parts & accessories & other transport equipment 7.394.3 Furniture & other manufacturing division 3.61-3.0 Total 100-0.6

6. The international price of oil remained depressed on balance in Q1 2015… Source: IHS Econocast and PAIRS Brent crude oil price (USD per barrel), Apr’14 – Apr’15

7. …contributing to a modest producer price inflation outcome for the quarter Source: StatsSA and PAIRS PPI inflation for final manufactured goods, South Africa, 2013 Jan – 2015 Mar

8. At the same time, the rand remained weak and volatile Source: IIHS Econocast and PAIRS Rand per US dollar exchange rate, 01Jan14 – 04May15

9. S UMMARY OF SURVEY RESULTS

10. 2015 Q1 RESPONDENTS ’ PROFILE

11. A record number of (77) firms participated in the Q1 2015 survey Number of survey respondents, Q1 2011 - Q1 2015 Manufacturing Circle Survey

12. Mostly small to medium survey participants What was your company’s turnover in Q1 2015? How many employees did your company have in Q1 2015?

13. O VERALL MANUFACTURING BUSINESS CONDITIONS

14. Q1 2015 manufacturing conditions were generally downbeat How do you perceive the manufacturing sector’ conditions?

15. 1.Electricity supply disruptions 2.Crime (e.g. bouts of business robberies) 3.Slow government spending for infrastructure programme 4.Restricted access into the US market (AGOA-related) 5.Chronic factors ( rand volatility, inputs shortages and elevated competition from imports) Factors that undermined business conditions include:

16. D EMAND CONDITIONS

17. Domestic sales outperformed exports What is the proportion of your production that is “sold domestically” / “exported”?

18. Less than half of respondents reported a positive performance of both domestic and export sales What is the percentage change in the volume of domestic sales? What is the percentage change in the volume of export sales?

19. Domestic sales were downbeat due to: 1.High consumer debt (partly owing to seasonality) 2.Weak performance in the motorcar and mining industries 3.High competition from sub-standard imported goods

20. Despite a generally soft outcome, the following factors supported export performance for some firms: 1.A competitive rand exchange rate 2.Increased reorientation towards international markets given the weak domestic demand 3.Buoyant demand from Africa

21. S UPPLY CONDITIONS

22. The majority of respondents reported elevated input costs What is the percentage change in imported and total input costs?

23. 1.Overpriced imported inputs due to a weak rand exchange rate 2.Exorbitant labour costs 3.High electricity tariffs. Some drivers of elevated input costs

24. 1.Electricity 2.Water 3.Steel 4.Copper 5.Sugar Reported shortages of inputs concerned:

25. U TILITIES SERVICES CONDITIONS

26. While municipalities supplied electricity for majority of respondents… Do you buy your electricity for your plant/s from Eskom or from local/municipal

27. …Direct clients of Eskom bore the brunt in terms of production days lost due to electricity supply disruptions Please provide an estimation of how many production days lost at your plant/s due to

28. Respondents widely rescheduled production or relied on own-generation capacity as a strategies to cope with electricity disruption What alternatives have you employed to mitigate against electricity shortages/inconsistencies at your plant/s?

29. C OMPANY LEVEL COMPETITIVENESS CONDITIONS

30. Most surveyed firms did not upgrade plant capacity over the quarter… Have you upgraded any existing capacity at your plants over the last quarter?

31. …those that upgraded capacity, did so for varied reasons, e.g. to cater for new product innovation or to increase efficiency If the previous answer was yes, what are the main reasons for the upgrades?

32. E MPLOYMENT, SKILLS DEVELOPMENT & LABOUR PRODUCTIVITY CONDITIONS

33. Employment conditions were muted over the quarter, partly due to high labor costs What was the change in employment level?

34. Meanwhile, the skills stock within manufacturing industries remains inadequate on balance How do you describe the status of skills availability in your industry?

35. Despite the skills shortage, the majority of surveyed did not meaningfully invested in skills development in Q1 2015 As a percentage of turnover, how much does your company invest in skills development?

36. SETA-sponsored as well as government-sponsored programmes account for the bulk of skills development initiatives Which of the following skills development programmes does your company make use of?

37. The level of labour productivity remained static on the whole How do you describe the level of labour productivity over the quarter?

38. P ROFITABILITY AND ACCESS TO CREDIT CONDITIONS

39. About one half of surveyed firms reported a rise in profits (due in part to expenditure and debt control), albeit of a lower magnitude relative to a year ago, in general What is the percentage change in operating profit before cost of funding over the quarter?

40. About 77% of firms in Q1 2015 (previously 68%) were geared What is your firm’s debt to equity ratio over the quarter?

41. The increase in the proportion of firms that accessed funding at rates equal to or above JIBA +3% suggests tighter credit conditions in Q1 2015 relative to Q1 2014 Short-term funding rate Long-term funding rate

42. L OCAL PROCUREMENT

43. Most firms sourced a considerable share of their inputs domestically What percentage of your total purchase is locally sourced products?

44. On balance, most firms considered government local procurement as being at least important to growth but… How important is the government’s local procurement programme to the maintenance of growth in your manufacturing concern?

45. …most respondents said they did not benefit from such programme Does your manufacturing concern currently benefit from the government’s local procurement programme?

46. M ANUFACTURING OUTLOOK

47. The tempo of manufacturing activity in SA has retreated further recently Purchasing Managers’ Index, SA vs. major trading partners, 2012 Jan – 2015 Jan (50 = no change) Source: BER, Markit, NBS, ISM and PAIRS.

48. About one half of surveyed firms expect stagnant labour market over the next quarter and falling employment levels over the 12-month horizon What is the planned percentage change in employment?

49. In all, respondents remain pessimistic about expected manufacturing conditions going forward Rise in surveyed firms’ pessimism (“fragile/weak” or “poor” outlook) Horizon Proportion of pessimistic respondents (in per cent) Q1 2014Q1 2015 6 months6766 12 months4864 24 months3245

50. 1.Challenges in the domestic power sector 2.The likelihood of strikes in 2016 3.The uncertainty surrounding the course of commodity prices Some factors informing respondents’ downbeat outlook

51. C ONCLUDING REMARKS

52. 1. Overall business confidence and the tempo of manufacturing activity remained flat in Q1 2015. 2. On balance, demand conditions were largely muted both at the domestic and international levels. 3. High input costs, skills shortages and credit access tightening exerted additional strain on the performance of the SA manufacturing sector in Q1 2015. 4. Challenges in SA’s power sector pose a substantial and urgent risk to the country’s re-industrialisation drive and by extension, to the short and long term overall economic performance. It is vital that appropriate policies be implemented to address this critical blockage. Concluding remarks

53. Thank you for your attention abedian@pan-african.co.za Tel: 011 883 8036/7 Fax: 011 883 8038 Q&A