Manufacturing getting to grips with load-shedding

Production volumes have held up since the recovery from the Covid-19 impact started

Given the increased intensity of load-shedding in 2022 and especially the first half of this year, one would have expected overall manufacturing production volumes to have contracted a lot given that the manufacturing sector is a heavy user of electricity.

However, this is not the case as production volumes have held up since the recovery from the Covid-19 impact started. We ask three questions about the manufacturing sector that are of interest for investors and provide our thoughts. 

Some brief contexts of how critical the sector is in the economy. Manufacturing is a R513bn sector in real gross value-added terms and constitutes 11.2% of the economy in the first quarter of 2023, down from 15% in 1995. It is the fourth biggest sector in the economy, employing nearly 1.2-million people according to the first quarter of 2023 quarterly employment statistics, the latter of which is a survey of formal business establishments.

Employment levels are 44,450 jobs lower compared to the peak reached in March 2019. According to the quarterly labour force survey — a survey of households — manufacturing employment sit at just over 1.4-million people, the difference with the quarterly employment statistics being accounted for by the informal sector. In terms of gross earnings, the manufacturing sector is an R85bn sector, the fourth after community services (R273bn), business services (R235bn), and trade (R113bn). The manufacturing sector is therefore a critical sector of the economy, which has been shrinking over time with negative employment and income consequences.

How far is the manufacturing sector recovery from the Covid-19 impact? 

The manufacturing production volumes are yet to fully recover, at 6% below 2019 levels. However, not all subsectors of the manufacturing sector have not recovered. Food and beverages is 4% above the 2019 levels, Within this subsectors only other food products remain below pre-Covid levels, 4% lower to be specific. 

Textiles, clothing, leather and footwear is about 10% below 2019 levels. Within this, only footwear has fully recovered while other subsectors have not. Wood and wood products, paper, publishing and printing also remain 10% below 2019 levels, with one subsector — products of wood having fully recovered to 4.0% above the 2019 level. 

Petroleum products, chemicals products, rubber, and plastics products remain 17% below 2019 levels with three of the five subsectors — basic chemicals, rubber products, and plastics having fully recovered while coke, petroleum products and nuclear fuel, and other chemical products continue to struggle. 

Glass and non-metallic mineral products, basic iron and steel, nonferrous products, metal products and machinery are nearly recovered but not there yet. Furniture and other manufacturing divisions remain 7% below 2019 levels. Electrical machinery, motor vehicles, parts and accessories, and other transport equipment as well as radio, TV and communication apparatus, and professional equipment have fully recovered. 

While the overall sector remains below pre-Covid levels, it is clear there are divergences within the sector which might have to do with a combination of demand dynamics and the impact of load-shedding, the latter of which should have had far more of an impact if historical trends held. But the manufacturing sector has remained resilient. 

Why isn’t manufacturing nosediving even though load-shedding has intensified? 

From what we can see from capacity utilisation data, the sectors that increased capacity utilisation throughout 2022 compared with 2019 levels are some of the heavy users of electricity. We believe the reason for this is adaptation and building of resilience through investment in own electricity generation that the corporate sector has been embarking on, which suggests that the impact of load-shedding will incrementally become less damaging over time. 

Which sub-sectors have built resilience and which ones continue to struggle?

While the overall manufacturing sector continues to build resilience, there are winners and losers. Capacity utilisation data shows that capacity increased to above pre-Covid levels in textiles, printing and publishing, electrical machinery, and glass and ceramics. Jointly, these account for 40% of the manufacturing sector. Sectors that are close to trend, accounting for 25%, include food and beverages, plastics, autos, parts and accessories and basic chemicals. The remaining sectors account for 35% and are still struggling include petroleum, rubber, basic iron and steel, furniture and radio, TV and professional equipment. 

All said, the manufacturing sector remains below 2019 production volumes overall. But there has been building resilience such that future load-shedding is likely to have less of an impact and thus benefiting output and profits. It is not all doom and gloom. In the load-shedding adversity the corporate sector has been adapting and and finding solutions.