Weak rand fails to ease South African manufacturers' woes

At the Multotec factory in the heart of a Johannesburg industrial area, workers carefully mould "screen panels" that help global miners, from Canada to Mongolia, separate waste from mineral riches.

There are polyurethane panels packed for delivery to Brazilian company Vale's coal operations in Mozambique; rubber panels destined for the Pilbara, the iron ore-rich region of Australia; and there are giant cork spiral separators that are used in the chrome and coal industries in the US.

The mining services company has been making such products for more than 40 years, leveraging off the country's history as one of the world's leading mining destinations to build a global footprint.

It is an example of the manufacturing heritage South Africa boasts. But it is also illustrative of the challenges the country's manufacturers - and miners - face as they grapple with rising costs, subdued global demand, infrastructure bottlenecks and labour unrest.

Manufacturers and government officials had hoped the weakness of the volatile rand - one of the world's most traded emerging market currencies - would boost exporters. Yet while the currency hit 13-year lows against the US dollar last month, offering some respite for exporters, it has failed to ease manufacturers' pain. Any positive impact has been outweighed by industrial unrest and power constraints.

"If the rand gets weaker our raw materials get more expensive so we don't necessarily see the benefit," said Thomas Holtz, chief executive at Multotec, a private company with German and South African shareholders. After an "extremely bad" year last year, he hopes that " in the next 12 to 18 months there'll be a recovery".

Manufacturing is key to South Africa, which is by far Africa's most developed economy. It contributes about 12 per cent of South Africa's gross domestic product and is touted by the government as a critical tool in its armoury to tackle rampant unemployment.

But the sector contracted throughout much of 2014, before rebounding in the last quarter. It began this year by shrinking by 1.5 per cent on a seasonally adjusted month-on-month basis in January.

Manufacturers have struggled to recover since a 2009 recession, during which the number of people employed in manufacturing fell from 2m to 1.7m. The sector has since shed another 50,000 jobs, says Coenraad Bezuidenhout, executive director of the Manufacturing Circle, an industry body.

Its poor performance reveals South African industries' vulnerability to the vagaries of global demand, linkages to the struggling mining sector, and the stymieing effect of domestic constraints. "There's a whole package of things that are negatively impacting the manufacturing ecosystem," says Mr Bezuidenhout.

Last year, there was a five-month strike in the platinum sector and a weeks-long strike by 220,000 metalworkers. This year, a power crisis has deepened, with Eskom, the state utility, frequently enforcing scheduled power outages. "A cheap rand doesn't solve our infrastructure bottlenecks overnight. It doesn't solve labour instability; in fact it could be fuelled in some circumstances (because of inflation)," Mr Bezuidenhout says. "And a cheaper rand doesn't solve the energy shortages."

The treasury has slashed its growth forecast for 2015 to 2 per cent from 2.5 per cent, while warning that deterioration in electricity availability could reduce growth to 1 per cent.

Against this bleak backdrop, companies' face escalating costs driven by increases in electricity tariffs and wages. "Labour and electricity are two very big negatives and we are not seeing productivity gains to match the labour costs," Dennis Dykes, chief economist at Nedbank. "And because manufacturers are under pressure, they are not putting in huge amounts of investments so that also restricts any sort productivity gains you might expect."

Multotec, which has a revenue of almost R2bn and employs 1,700, is lucky to be located in an industrial zone that has so far avoided the power outages. But Mr Holtz says the availability of additional power is a concern. "We're constrained by exactly the same limitations that the mining sector's constrained by; if you don't give us power we can't manufacture," he says.

He says the rand's depreciation has not had a major impact, adding that Multotec's treasury seeks to manage the firm's currency volatility. And while rand weakness can be beneficial in some markets, it can also add to the input costs of imported goods.

Mr Holtz remains upbeat about South Africa as a manufacturing base, if the power crisis is resolved, saying South African manufacturers' are well placed to take advantage of Africa's development. "We've got the (manufacturing) DNA," Mr Holtz says. "Just give us the right environment to compete in."

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