Car makers hit by falling rand, weak demand

Car sales fell for the fourth straight month in July after the rand weakened to historic lows, pushing up the cost of imported parts and potentially fuelling pay demands.

Patchy electricity supply and the lingering threat of strikes are likely to compound the damage caused by a weaker rand, which plunged briefly to 14.00 against the dollar on Aug 24. and is still under pressure.

Africa's most industrialised economy contracted 1.3 percent in the second quarter of 2015, the first quarter-on-quarter decline since the first three months of 2014.

Data on Tuesday showed sales contracted by 8.2 percent, following a 6.1 percent contraction in July.

"Importers will be subjected to the full impact of the exchange rate weakness. It will result in above-inflation new vehicle price increases," director of the National Association of Automobile Manufacturers Nico Vermeulen told Reuters.

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"The pressure is on the automotive franchise value chain - that is dealers and retailers. They are experiencing pressure on margins and very challenging trading conditions all round."

The trade balance swung back into deficit, stoking fears the economy was headed for recession.

The automotive industry's contribution to gross domestic product has slowed to around 7.5 percent in 2014 from around 12 percent a decade ago.

Cities like East London and Port Elizabeth in South Africa's Eastern Cape province depend on it almost entirely, producing half of the country's passenger vehicles and generating more than half of its motor exports.

"The weaker rand makes it more costly to import but we do have the benefit of an export programme, although our export numbers are moderate in comparison to what they potentially could be," said Clynton Yon, senior communications manager at Toyota South Africa.

High debt levels in South African households and the prospect of higher interest rates would also restrain local demand, said Wessel Steffens of Absa's vehicle and asset finance division.

The South African Reserve Bank raised domestic rates to 6 percent in July - the first rise in a year - despite lacklustre growth, citing inflationary pressure partly stemming from a weaker rand.

"The weaker rand pushes up the cost of raw materials and raises the domestic cost base," said Isaac Matshego, an economist at Nedbank, adding that structural weaknesses in the economy were also hurting the sector.

- Reuters