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Kagiso PMI falls, manufacturing weak

Johannesburg - The Kagiso Purchasing Managers Index (PMI), a gauge of the manufacturing sector's health, dropped back into negative territory in September.

"The seasonally adjusted Kagiso PMI lost four index points in September and declined back below the key 50 point mark to 46.2," said Andre Coetzee, MD of the Chartered Institute of Purchasing and Supply, on Monday.

The PMI measures business conditions in the manufacturing sector. Below 50 indicates contraction in the manufacturing sector, above 50 shows expansion.

The PMI also fell below 50 in June to 48.2, while the rest of the year it has been above 50.

Coetzee said the PMI reading did not bode well for output in the factory sector in the third quarter of 2012.

Manufacturing production declined by one percent quarter-on-quarter, on an annualised basis, during the second quarter.

"Based on the PMI, the deterioration in the local manufacturing sector has been stark in recent months," said Coetzee.

"Following an average level of 54.7 points during the first five months of 2012, the PMI lost ground and only averaged 48.9 between June and September 2012."

It averaged 51.8 in the second quarter, but dipped below 50, on average, in the third quarter of the year.

The PMI is now in line with the manufacturing trends of South Africa's key trading partners. China's September PMI reading is 49.8 while the European Union's remains below 50.

The PMI is made up of nine indices.

The business activity index fell by a "significant" 7.6 index points to 43.

"One has to go back to July 2011 - a period when the manufacturing sector was hit by widespread industrial action - to find the index at a weaker level," Coetzee said.

The activity sub-index was responsible for almost half of the overall PMI decline.

Business activity measured 48.1 for the third quarter as a whole.

This was down from 53.6 during the second quarter and 58.9 in the first three months of the year.

New sales orders lost 0.7 index points to drop to 46.2.

"Another important feature of the September PMI was that the price index increased further after the 8.2 index point jump recorded in August," said Coetzee.

The price component rose by another 4.9 points to 75.8 - the highest level since January 2012.

Employment also fell in September.

"The August increase to back above 50 for the PMI employment index proved to be short-lived. The index lost 4.5 index points to 46.5," said Coetzee.

However, future business conditions were rated more positive.

The expected business conditions index gained 2.6 points to 55.5 during September.

"The somewhat more upbeat prospects were corroborated by the PMI leading indicator, which rose from 0.90 in August to just below 1 at 0.99.

"The leading indicator measures the ratio between new sales orders and inventories - any number below one indicates that inventories exceed the demand for manufactured goods, which normally does not bode well for factory sector production," Coetzee said.

The PMI is based on a survey conducted monthly by the Bureau for Economic Research at the University of Stellenbosch and the Chartered Institute of Purchasing and Supply.


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