February 11, 2004

By Quentin Wray

Johannesburg - The manufacturing sector had a dire 2003, with output falling 2.3 percent in the year despite the overall economy having grown by about 2 percent.

Manufacturing accounts for about one-fifth of gross domestic product (GDP) and is a significant employer.

Data released yesterday by Statistics SA showed that when measured on a seasonally adjusted and annualised basis to strip out cyclical fluctuations, output had been falling steadily all year after being spurred higher by the weaker rand in 2002.

Production is now back at levels last seen towards the end of 2001. The main losers last year were the chemicals, textiles, metal and paper sectors.

Manufacturers' sales during the year came in at R614 billion - the same level as in 2002.

Since the end of 2001 the rand has strengthened 74 percent against the dollar and has eroded South Africa's export competitiveness while making imports relatively cheap.

This has counteracted much of the positive impact on manufacturers that could have been expected from last year's five interest rate cuts.

Treve Hendry, the chief executive of Argent, a Johannesburg-based engineering and steel trading firm, said yesterday that although his firm's output was up last year, this was entirely on the back of buoyant domestic demand.

He said clients in the US and Europe were operating in a non-inflation environment and would not accept increased prices just because the rand had firmed. 

Foreign customers, once lost, were very difficult to get back, he said. His firm had kept on supplying them at rand prices that were 18 percent to 40 percent lower than when contracts were signed, even though this meant margins got squeezed.

Tales of woe brought about by the strong rand abound in South Africa's industrial centres.

Bloomberg reported yesterday that Highveld Steel & Vanadium, South Africa's second-biggest steel maker, blamed last year's profit plunge of nearly three-quarters on the stronger rand, which had cut exports and lowered local demand.

Adenaan Hardien, chief economist for African Harvest Fund Managers, said that while the data showed there was a small pick-up in December, this was too small to stop the manufacturing sector from being a drag on overall growth in the fourth quarter of last year.

Previously released GDP growth data shows that the manufacturing sector had been in contraction since the fourth quarter of 2002. Stats SA will release growth statistics on February 24.

George Glynos, an analyst at Econometrix Treasury Management, said that while December's manufacturing performance was slightly better than expected, it was "still weak and did not bode well for fourth-quarter GDP".