The seasonally adjusted Kagiso Purchasing Managers Index (PMI) remained above the key 50-point mark for the fourth consecutive month in July, when it increased marginally by 0.6 points to 52.2, but challenging market conditions persist.

Kagiso Asset Management head of research Abdul Davids says the local PMI is in line with trends in the eurozone and US, where recent flash PMI data has been improving to above the key 50-point level. However, China’s PMI is in decline and is currently below 50.

He adds that the improvement in the new sales orders index by one point to 55.0 during July suggests that demand for manufactured goods has been slowly improving in recent months and is likely to continue improving owing to the weaker rand, which makes locally produced goods relatively more competitive in the international market.

The employment index gained 2.6 points to reach 47.5. Despite this, the latest Quarterly Labour Force Survey shows that the manufacturing sector shed nearly 18 000 jobs during the second quarter, which Davids attributes to manufacturers’ reluctance to increase production capacity in the absence of a notable, sustained improvement in demand.

He notes that, although the business acti- vity index, which is the second-largest weighted index, is still in positive territory after losing 0.4 points to reach 51.8, it suggests that manufacturing output remains under pressure.

Davids further points out that input costs accelerated in July, with the price index increasing by 5.8 points to 88.0 – a level last reached in March 2011.

“This steep increase is due to a weak rand and relatively higher oil prices during the month and the 6% increase in retail fuel prices. The upward price pressure faced by manufacturers for most of this year was mainly due to higher transport, electricity and labour costs, and manufacturers continue to face significant input cost pressures,” he adds.

The index measuring expected business conditions in six months’ time increased by 0.2 points to 53. This positive sentiment is supported by the PMI leading indicator moving back above 1, suggesting that inventory levels are now low, relative to demand.

While this usually bodes well for future manufacturing production, Davids cautions that the operating environment remains challenging with muted demand and relatively high input prices.

Meanwhile, Manufacturing Circle executive director Coenraad Bezuidenhout says that the latest PMI figures show that the manufacturing industry is consolidating on the back of a more competitive rand, which helps to alleviate margin squeeze, promotes investment in efficiency and maintains employment.

“While it differs from manufacturing categories, there are no warning signs at present that drawbacks of the weaker rand are out- weighing the benefits. Analysis to this effect is at odds with what is at present being relayed by broader manufacturing,” he says.

On the downside, Bezuidenhout highlights administered price increases and security of supply, particularly energy and water, as having impacted negatively on manufacturing price inflation.

“Further downside risks remain in the teetering global recovery, the weakening momentum of domestic spending and the negative impact that protracted and violent strikes in upstream sectors such as agriculture and mining could have. In addition, there are also significant concerns in respect of our trade relationships with established markets such as the European Union and the US, where there is still untapped potential,” he states.