Global restrictions implemented to curb the spread of COVID-19 have had a direct impact on manufacturing supply chains with constraints still evident across many manufacturing subsectors a year after the country first went into hard lockdown, according to the Q1 Absa Manufacturing Survey.
“South African manufacturers are reporting issues in the supply chain that are resulting in raw material shortage constraints negatively affecting their production processes,” says Justin Schmidt, head of manufacturing sector at Absa Retail and Business Bank. “Currently, a major problem globally appears to be the supply of shipping containers and vessels across routes, including to and from South Africa. Whilst manufacturers remain hopeful that this will be resolved within the quarter, the risk of successive Covid-19 waves around the globe and further lockdown restrictions is a major concern.”
Raw material shortages
For the second quarter in a row, manufacturers highlighted raw material shortages as a serious impediment to activities. With the index currently at 57 points, this is the second highest number recorded since 1974. The index ranges between zero and 100, with zero reflecting no constraint and 100 a serious constraint.
The quarterly survey, which covers approximately 700 businesspeople in the manufacturing sector, was conducted by the Bureau for Economic Research (BER) at Stellenbosch University between 18 January and 1 March 2021. The majority of survey responses were received during the last two weeks of February, when the peak of the second wave of COVID-19 infections in South Africa had passed and it was evident that some of the restrictions on economic activity would soon be lifted. In spite of this, the higher intensity of loadshedding in the quarter when compared to Q4 of 2020 as well as raw material shortages, helps explain why overall confidence fell from 31 to 25 index points in Q1 2021.
Positively, insufficient demand as a constraint on current activities remained at 65 index points, only 9 points lower than in Q1 of 2020 and 20 points below a peak of 85 reached in Q2 of last year. Whilst this indicates that insufficient demand does remain a constraint for manufacturers, the situation seems to be improving.
Despite previous promising signals that the manufacturing sector’s output recovery could receive a boost in 2021 if the higher demand levels were sustained and manufacturers could restock inventory to meet forward looking demand, the Q1 survey results indicated that output continued to lag behind demand – stock levels of finished goods relative to expected demand remained the lowest on record.
“Many manufacturers close during December and January, and as such, there is often a dip in production volumes over this period. This year however, loadshedding as well as the introduction of adjusted level 3 lockdown restrictions, notably the alcohol ban, have been a major drag on production,” Schmidt notes.
The February production data will provide a good indication of the sector’s production recovery. The sector seems to have gained some lost ground as indicated by the Absa Purchasing Managers’ Index (PMI) which increased for a second consecutive month in February 2021 to 53.0, signaling an improvement in business conditions, he added.
“External shocks such as the reintroduction of lockdown restrictions to mitigate the impact of a third wave of COVID-19 cases and the resurgence of load shedding, which will likely remain a factor throughout 2021, pose a risk to the recovery,” Schmidt says.