PMI continues to reflect cautious optimism

The good momentum, with manufacturers seeing their output increase, bodes well for the rest of the year: Absa head of manufacturing Justin Schmidt.

SIMON BROWN: I’m chatting now with Justin Schmidt – he is Absa’s head of manufacturing. We had the PMI data out. That would have been on Tuesday, February 1, that it came through.

Justin, I appreciate the early morning, as always. The PMI – we haven’t chatted in a couple of months. There was sort of cautious optimism when we chatted last, and it does seem to be following through – or are there perhaps some nuances that I’m just missing?

JUSTIN SCHMIDT: Hi, Simon. I think that’s exactly it, that the cautious optimism is paying off and we are seeing this rebound continue. So I’d still remain cautiously optimistic, but what we’ve seen is an activity rebound in January and the biggest driver of this was output. So the sub-index, business activity, rose after kind of a slump in December, which was probably driven by Omicron and work absenteeism, but we’re really seeing that rebound again. I think there is good momentum, where manufacturers are seeing their output increase. That just bodes well for the rest of the year.

I think the one important thing here is that we do know December is the Christmas festive season, the factories lock down. The season sees the adjusted numbers. This takes that effect out of this, so it is a positive start to the year.

SIMON BROWN: It tells us that demand – and that would be local, I imagine some export as well – is starting to pick up. I take your point on Omicron, which arrived early in December, and absenteeism and the like, but it does say to us that in January there’s normality returning and we are seeing that demand: local and export.

JUSTIN SCHMIDT: Yeah. In that other kind of index we spoke about previously, we were already seeing that expectation of higher export prices, higher demand.

Read/Listen: Absa’s Q2 2021 Manufacturing Survey shows rising manufacturer confidence

What we are seeing here now in January is that in December it was about 50, the new sales orders, but it ticked up to 55. That is another positive sign that there is that demand. I think when we look into the inventories number, we’ve been seeing in the survey the confidence numbers saying the net majority of manufacturers are looking to invest in their inventories.

And here’s another kind of reading, the PMI saying inventories have ticked up again and that’s always a good sign for the future; you have to have the inventories to make those sales. So those two numbers really bode well for the coming months.

SIMON BROWN: I was chatting about some supply chains during January. They certainly seem to be stuck to a degree. Are manufacturers just maybe learning to live with it, because every time I speak to someone they say ‘it’ll improve in six months’. It hasn’t. They’ve been saying that for a year-and-a-half. Is this for now the new normal and you kind of learn to manage it?

JUSTIN SCHMIDT: Simon, they’ll improve in six months’ time [Simon chuckles] as the starting point [both laughing]. We saw an improvement in the number this month in terms of the supply-chain seizure that we’ve been seeing over the 18 months, like you say. If you look at the graph, with 2020 at the bottom, you’ve got this steady increase. It slowly improves.

But the number – the important thing is the print we have now – is the best in eight months. The past eight months is way higher than historical levels. If you look at the graph it’s massively above, so even a small down-tick, to your point, manufacturers are learning how to live with it. It’s far from optimal, but I think that with the price of shipping decreasing in December and January, those are positive signs. But we need to watch it over six months; I don’t think this is going away quickly.

SIMON BROWN: Obviously agriculture’s had a huge space, food services to a degree, and mining has obviously been doing incredibly well. Would it be fair to say that there are some sectors that are probably doing markedly better and agri and mining are going to be two of them?

JUSTIN SCHMIDT: Simon, in the PMI we don’t break it down to the lower levels. But what we did see in the sales number in November, there was this headline of a decrease. But when you dove into it, you saw chemicals were not doing well. It was strange that furniture really had a big dip, and we couldn’t figure what that was [about]. The rest of the sectors really had year-on-year increases. So you’ve almost got to strip some of the sub-sectors’ outlook – look at if a refinery was closed or Sasol was having issues, or whatever it was – and then look through the rest of the industry.

Food and beverage – we are really looking to the sales number for December to see what happened in that sub-sector in December. We know local tourism really rebounded. We are hoping that people were spending, and we do see some improvement in the hospitality space.

So yeah, I think all of that will tick the demand up for these goods. It is kind of a mixed bag at times. There’s a lot of noise, the other thing. I don’t think that noise is going away for … the next six months still, the first half of this year. But there are a lot of improving sub-sectors.

SIMON BROWN: I take the point. I did my bit in December to help hospitality. I think we’ll leave that there….I think it remains cautiously optimistic, which is frankly a good thing, rather than going the other way.

Justin Schmidt, Absa’s head of manufacturing, I appreciate the early morning time.

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