The Stellenbosch Bureau for Economic Research’s (BER) latest Manufacturing Survey indicated that manufacturing business confidence remained unchanged at 51 index points.

Demand conditions continued to improve in the second quarter of 2011. The indicators for domestic sales and for order volumes received increased further during the quarter, signalling continued domestic demand strength. Manufacturers expect domestic demand to continue rising in 2011Q3.

On the other hand, exports remained under considerable pressure with the indicators for both sales and order volumes in negative territory.

Production volumes grew at a slower pace during the survey quarter while both the raw material and finished goods stocks rose. Nkanyiso Hlongwa, an economist at the BER at Stellenbosch University said, “The rise in stock levels and subsequent moderation in production volume growth may suggest some easing in the overall growth of manufacturing activity during the second quarter.”

Furthermore, manufacturers reported that business conditions deteriorated during the survey quarter. This could have been driven by the fact that total cost inflation rose, while the rate of increase in domestic and export selling prices moderated during the quarter – thus putting profitability under renewed pressure.

“The acceleration in total cost inflation may be driven by the higher electricity and fuel costs, especially considering that the indicators for raw material inflation and labour costs eased during the survey quarter,” said Hlongwa.

Domestic selling price inflation moderated during the survey quarter. However, despite the moderation, the reading remained fairly high – suggesting that manufacturers are still being forced to upwardly adjusted their selling prices. “This may continue to raise producer prices and keep the PPI relatively elevated over the near term,” said Hlongwa.

Manufacturers reduced their projections for export volumes and raised their forecast for imported volumes in 12 months’ time. “The relatively strong rand exchange rate may have had a significant influence on these expectations, as a strong rand makes imports cheaper and increases the prices of exports to holders of foreign currencies,” said Hlongwa.

Overall the results suggest a slowdown in the growth rate of manufacturing activity, with profit margins shrinking partly due to rising costs.