M ANUFACTURING C IRCLE Q UARTERLY R EVIEW F OURTH Q UARTER 2014 M ANUFACTURING C IRCLE AGM 12 Feb. 2015

1.Introductory remarks 2.SA manufacturing environment in Q Q respondents’ profile 4.Overall manufacturing business conditions 5.Summary of survey results 6.Manufacturing outlook 7.Concluding remarks Outline

I NTRODUCTORY REMARKS

1. Despite mostly soft conditions, sales, confidence and activity improved somewhat in Q relative to Q The status quo about, among others, elevated input costs, input shortages, inadequate skills, failure to benefit from government procurement programme prevailed in Q On the whole, surveyed manufacturers remain unenthusiastic about the sector’s outlook. Introductory remarks

S OUTH A FRICAN MANUFACTURING ENVIRONMENT IN Q4-2014

Some improvement in business confidence Source: BER and PAIRS RMB/BER Business Confidence Index, Q – Q4 2014

Tempo of manufacturing activity up in Q Source: BER and PAIRS Quarterly average Kagiso PMI (index points) Q PMI 51.2 Business activity 51.5 New sales 52.6 Backlog of order sales 43.0 Inventories 54.8 Purchasing commitments 57.3 Suppliers' performance 51.0 Prices 69.0 Employment 46.9 Expected business conditions 57.9

Rebound in manufacturing production Source: StatsSA and PAIRS SA manufacturing production, Q4 2014, Q/Q growth (per cent, seas. adj.) Manufacturing divisionWeights, Q4 Food & beverages Textiles, clothing, leather & footwear Wood, paper, publishing & printing products Petroleum, chemical & rubber products Glass & non-metallic mineral products Basic iron & steel, non-ferrous metal products & machinery Electrical machinery Radio, tv communication apparatus & professional equipment Motor vehicle parts & accessories & other transport equipment Furniture & other manufacturing division Total

Depressed manufacturing employment Source: StatsSA and PAIRS Quarterly manufacturing employment, Q – Q Q/Q: Y/Y:

Weak rand exchange rate Source: I-Net BFA and PAIRS Rand per US dollar exchange rate (daily close), 01Jan14 – 02Feb15

Low international oil price Source: I-Net BFA and PAIRS Brent crude oil price (USD per barrel), 01Jan14 – 31Dec14

Moderating producer price inflation Source: StatsSA and PAIRS PPI inflation for final manufactured goods, South Africa, 2013 Jan – 2014 Dec

2014 Q4 RESPONDENTS ’ PROFILE

Sixty four firms participated in the survey Number of survey respondents, Q4 2014

Mostly small to medium survey participants What was your company’s turnover in Q4 2014? How many employees did your company have in Q4 2014?

O VERALL MANUFACTURING BUSINESS CONDITIONS

Mostly “fragile/weak” business conditions How do you perceive the manufacturing sector’ conditions?

1.Sporadic electricity supply 2.Low global commodity prices 3.Subdued consumer demand 4.Spillover effects from the Q strike 5.Regulatory hurdles 6.Volatile rand exchange rate 7.Weak construction activity Factors that undermined business conditions include:

S UMMARY OF SURVEY RESULTS

Most surveyed firms sold a significant share of their output domestically What is the proportion of your production that is “sold domestically” / “exported”?

Despite muted conditions, most respondents recorded increased sales What is the percentage change in the volume of domestic sales? What is the percentage change in the volume of export sales?

Africa and Europe remained key export markets What is the distribution of export shares to Africa and Europe?

Negative 1. Downbeat consumer spending 2. Sluggish activity in the motor vehicle industry 3. Weak mining sector performance 4. Decreased number of tenders awarded 5. Increased competition from cheap imports and second hand products Positive 1. Increased market coverage 2. Seasonal impulses 3. Extensive promotional campaign Factors that affected domestic sales

Negative 1. Sluggish eurozone economy 2. Elevated corruption in some African countries 3. Subdued mining activity in Africa 4. Weak Russian economy Positive 1. Weak rand 2. Increased focus on the global market Factors that affected export sales

Most respondents experienced elevated input costs What is the percentage change in imported and total input costs?

Above inflation increases in: 1.Electricity tariffs 2.Labour costs 3.Municipal charges Some drivers of elevated input costs

1.Electricity 2.Water 3.Steel products 4.LPG gas 5.Recycled paper 6.Kraft linerboard Shortages of inputs concerned:

Mostly unchanged employment level What was the change in employment level?

1.Reductions in working hours 2.Automation of production processes 3.Rightsizing 4.Early retirements 5.Retrenchments Courses of action taken to deal with high labour costs

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

On the whole, government local procurement important to manufacturing growth but… How important is the government’s local procurement programme to the maintenance of growth in your manufacturing concern?

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

M ANUFACTURING OUTLOOK

SA PMI out of sync with that of key trading partners Purchasing Managers’ Index, SA vs. major trading partners, 2012 Jan – 2015 Jan (50 = no change) Source: BER, Markit, NBS, ISM and PAIRS.

Respondents more pessimistic relative to a year ago Rise in surveyed firms’ pessimism (“fragile/weak” or “poor” outlook) Horizon Proportion of pessimistic respondents (in per cent) Q4 2013Q months months months 2740

Mostly stable employment level over the next quarter but job cuts envisaged over the next 12 months What is the planned percentage change in employment?

1.Regulatory hurdles 2.Electricity shortage 3.Weak mining activity 4.Faltering global economy 5.Uncertainty about SA’s AGOA status 6.Likelihood of strikes 7.No clarity on the government’s beneficiation strategy Some factors informing respondents’ downbeat outlook

C ONCLUDING REMARKS

Concluding remarks 1. The last quarter of 2014 posted some improvement in sales despite conditions being largely soft. 2. As has been the case in previous quarters, Q supply conditions remain affected by a shortage of inputs and structural blockages e.g. lack of skills, high labour costs. 3. Local government procurement did not benefit the majority of respondents. 4. Most surveyed firms expect downbeat conditions for the foreseeable future due to both global and domestic factors.

Thank you for your attention Q&A