Manufacturing Under Considerable Pressure During Lockdown

26 June 2020 – The results from JSE-listed Absa’s Manufacturing Survey for the second quarter show that even some essential service manufacturers were severely impacted on by the Covid-19-related lockdown, while even a resilient sector like food and beverage manufacturing saw a significant deterioration in business conditions.

The quarterly survey, which covered about 700 business people in the manufacturing sector, was conducted by the Bureau for Economic Research (BER) at Stellenbosch University between May 13 and June 1.

Overall manufacturing business confidence and consumer demand have been eroded to levels worse than those seen during the global financial crisis of 2008/9. Manufacturing confidence fell from 17 index points in the first quarter to a record-low of six index points in the second quarter.

While confidence among food and beverage producers increased from 11 to a still poor 17 index points in the second quarter, these manufacturers indicated that the current business conditions were some of the worst on record. Domestic and export sales plunged to a record low.

Moreover, a net 15% of these respondents experienced a decline in production in the second quarter of 2020 compared with the second quarter of 2019.

Social distancing and the shutdown of the leisure and hospitality sector (restaurants, bars, the wine industry, wedding and catering services) have had a direct impact on the demand for food and beverage manufacturers’ goods.

“Despite widespread relief measures to address the impact of the lockdown on households and businesses and interest rates at historic lows, the knock-on effects of the lockdown are still being felt.”

Insufficient demand was rated as a very serious constraint on business conditions in the food and beverages sector, with the indicator rising to the highest level in 19 years,” said Absa retail and business bank manufacturing sector head Justin Schmidt.

Manufacturers have noted production inefficiencies owing to the limitations placed on production. This likely contributed to an increase in the total cost per production unit accelerating at a time when sales prices are under pressure in both the domestic and export market.

The fact that food and beverage manufacturers are expecting business conditions to worsen over the next 12 months is of great concern, said Absa.

As the bulk of South Africa’s food exports are to its neighbouring countries, how the rest of Africa recovers from this crisis will be important for the recovery and growth of South African food and beverage manufacturers.

“The speed of recovery as well as the long-term success of the industry will depend on unlocking some of the constraints that the sector is facing, such as insufficient power supply, the need for regulatory reform in the form of master plans, as well as unlocking demand through infrastructure investment. Furthermore, this success will also be dependent on support for the localisation of production and buying local,” Schmidt said.