Capacity utilisation in the South African manufacturing sector improving but remains relatively low, with its potential growth being constrained by a challenging operating environment, says Mr Chifi Mhango, the Chief Economist of Don Consultancy Group (DCG) 

Statistics South Africa (StatsSA) data released today shows that total manufacturing capacity utilisation by large manufacturers was 77.8% in February 2022 compared with 75.7% in February 2021, an increase of 2.1%, with a marginal increase of 0.7% from January 2022. The highest capacity utilisation was registered within the Electrical machinery at 83.4% and the lowest within the Textiles, clothing, leather and footwear division at 70.3%. The highest improvements year on year was within the Glass and non-metallic mineral products division, with an increase of 7.7% to reach 79.1%. 

“The relatively low levels of capacity utilisation in the manufacturing sector in South Africa are attributed to insufficient demand coupled with supply chain constraints (raw material shortage) in some sub-sectors due to disruptions caused by the war in Ukraine.” Mr Mhango indicated 

The DCG Chief Economist also asserted that: “The heavy reliance on road transport as a key mode of transportation for raw material supply in South Africa especially from mines, is also hindering progress towards full industrialisation of the economy due to the high costs associated with road transport in South Africa, as investment into the railway system and its rehabilitation has been limited for decades; coupled with electricity supply constraints and it’s rising costs.” 

“During the massive infrastructure investment into the South African economy related to the Soccer 2010 World Cup projects, as well as energy and road infrastructure expansion projects in the 5 years to 2010, the level of manufacturing capacity utilisation for the South African economy trended above an average of over 82.7%; with annual manufacturing production growth rates as high as 4.9% and annual manufacturing sales growth of 18% year on year being reached. During the same period, the sector’s annual GDP growth rates were also relatively high, with 6.4% being registered.” added Mr Mhango 

Mr Mhango, therefore, shared his concern: “That the South African economy has not reached levels of capacity utilisation of above 82% in the manufacturing sector since the period 2016 to 2010. 

“Associated data of production patterns in the manufacturing sector reveal cyclical growth patterns, with recent data showing a year-on-year marginal production growth rate of 0.2% in February 2022. Manufacturing has remained under pressure for some time in recent years, with data depicting an average annual production decline of 1.3% and average annual sales growth rate of 4.4% in the last five years to 2021. During the same period, an annual average sector GDP decline of 1% and total capacity utilisation average of 78.42% were also registered in the manufacturing sector.” said the DCG Chief Economist. 

Mr Mhango continued: “To reiterate the view that the recovery of the manufacturing production should be driven by the Government’s efforts to revive the economy by addressing all the identified challenges that exists within the industrial landscape for confidence to return at production level, with capacity utilisation that are above the 80% levels sustainably. It, therefore, remains imperative that the South African Government speeds up the implementation of its various Industry Master Plans, and we are hopeful that this will be achieved.” 

Mr Mhango also pointed specifically to: “The heavy reliance on Government infrastructure projects by some key sub-sectors of the Manufacturing sector such as the metals industry in stimulating demand, hence boosting production, thus speedy rolling out of these projects remains key.” 

Analysing the data from other advanced economies National Statistics Offices, Mr Mhango observed: “That capacity utilisation for manufacturing increased by 0.6% to 78.7% in March 2022 from the previous months in the USA, the highest level since August 2018; while in China, manufacturing capacity utilisation rate was at 75.9% in the first quarter of 2022, as zero-infection Covid-19 policy restrictions being applied amid rising infection rate limit industrial operational activity.” 

Mr Mhango concluded that: “A rising manufacturing capacity utilisation is a sign that sector demand is improving, preventing manufacturers from cutting production. However, the current global picture shows average levels of below 80% in manufacturing capacity utilisation, which is concerning for the global economic recovery, considering the disruptions caused by the Covid-19 massive restrictive lockdown regulations on industrial operational activities in 2020.”