High cost of imported raw materials and cut-price world market kills
the advantage
ASSUMING HAPPY export times are due because the rand has slumped is a possibly erroneous assumption.
The immediate - and somewhat simplistic - reaction to currency depreciation is that exports will become cheaper when converted into foreign currencies, and that margins will become better as export income increases in rand terms.
Theoretically, that's correct. But it doesn't take into account a number of other factors - all of which can adversely impact on this assumed gain.
According to Colin Schultz, distribution manager, and John Nagle, trade manager for exports at SANS Fibre - the AECI subsidiary producing continuous filament synthetic yarns - making that happy assumption could leave you far from the truth of the whole matter.
Take SANS, a long-standing exporter, with some 50% of its product going overseas.
As Schultz points out, the raw material is all imported; priced in US dollars; and therefore increasingly expensive as the rand declines. The slim margin is made from the value added to these raw materials. Add to that the fact that international freight costs - both inward and outward bound - are also priced in US dollars.
But then look at what the market is doing.
The supply chain is filling up dramatically, said Schultz, with our warehouses sitting 95% full. Things are not moving as we would like in a global market that is currently very slow.
We've actually pulled a number of machines down in the past month.
In analysing the whys of this, according to Nagle, you have to take into account the tremendous impact of the Asian flu - an oriental economic crisis which has hit SANS eastern competitors hard.
This was exacerbated by major expansion of the fibre producing industry in recent years in Korea, Indonesia and Taiwan - three countries which have a very large share of the international market.
The new plant capacity they developed was big enough on its own to supply the whole world off-take, said Nagle.
So, as times got tough, a sudden over-supply of capacity was exposed - with a declining demand in a jittery world market only adding to this problem of excess output.
The result, according to Nagle, has been price-cutting on the grandest of scales. Sufficiently large cuts to make buyers forgetful of the lack of promise of back-up service and support, he added.
It has been big enough to dent the US producer market, never mind that of SA, Nagle told FTW. All the US textile manufacturers (the majority based in North Carolina) have had a poor last quarter due to cut-price imports from the Far East, he said. We're not alone.
There's also a decline in the world's commodity prices - in which SANS' non-
specialised/ niche market product fits. That's fixing a lot of income at below hoped-for levels.
You can add to that the fact that - in a declining world market - the apparel industry (The last thing people buy is clothes, said Schultz, so it's the first area hit in a recession.) is battling.
In sheer volume terms, said Nagle, we're finding it tough. We are keeping our head above water, but we are getting no benefit from the dropping rand.
By Alan Peat
