High inflation, high interest rates and supply chain disruption will persist throughout this year, as will poor local government service delivery and, of course, the energy crisis, says the Steel and Engineering Industries Federation of Southern Africa (Seifsa).

In launching its ‘State of the Metals Sector Report 2023; on February 16, COO Tafadzwa Chibanguza said domestic rigidities, in particular, have dire consequences on businesses confidence, which serves to compound the headwinds.

He confirmed that this year would undoubtably be another difficult one on the economic front, which means the performance of the metals and engineering (M&E) sector, as one that is highly geared to real economic activity, will be downbeat.

The sector has already been contracting at a 1.2% compound annual growth rate (CAGR) since 2008. Net investment into the sector has remained considerably weak, having resulted in a 0.3% CAGR deterioration of fixed capital stock between 2008 and 2022.

M&E is locked in a deep multi-year structural recession. The bounce back from the Covid-19 pandemic was sharp; however, the production level is still 1.6% below pre-Covid-19 levels and 5.2% below the adaptive moving average.

The sector constitutes 26.15% of the manufacturing sector based on output, representing the metal production, fabrication the heavy engineering value chain and the plastics product subsector.

In 2022, production expanded by 1.6%. The output adjusted capacity utilisation for the sector was recorded at 76.2% in 2022, which is still below the 85% optimal capacity.

Real gross domestic fixed investment declined by 9.2% in 2022. The value of fixed capital stock has also continued to deteriorate, as net investments have not been sufficient, which represents long-term risks to competitiveness.

Input cost inflation for the M&E sector was recorded at 13.1% in 2022, while selling price inflation (factory gate prices) averaged 15% for the year. Chibanguza said it was concerning to see that input costs have been growing faster than selling prices.

Another concerning trend has been the weakening relationship between production and employment. Between December 2019 and December 2022, production declined by 0.9%, while employment declined by 4%, with the sector having shed 15 667 jobs.

In 2022, 1 622 jobs were added in the M&E sector. Chibanguza said production increases were not necessarily a sufficient condition for employment increases and that mechanisation also could have replaced job numbers to a certain extent.

During times of massive structural breaks, as witnessed in the last few years, employment tends to suffer from companies’ cost-cutting initiatives, with the numbers not necessarily recovering alongside production recovery, he added.

Considering what will likely happen this year, Chibanguza said the M&E sector would, at best, contract by 1.5% year-on-year in terms of production, but a base case contraction of 2.2% is more likely.

Downside risks to the base case include further global economic strains, the energy crisis with its binding constraints for the M&E sector and Transnet’s persistent capacity constraints. The fact that a number of African countries are fiscally vulnerable also poses a heightened risk for the local M&E sector, given that it may affect demand for exports.

Chibanguza deems the energy crisis as the most significant immediate and long-term threat to the prospects of the M&E sector and the country.

GLOBAL ENVIRONMENT

Chibanguza said the markedly sharp decline in the European Union’s economic projections has been concerning, given that the region accounts for 21.8% of South Africa’s exports.

China’s gross domestic product growth rate of 3% in 2022 also posed a dampened exports situation, since it was the first time in 40 years that the country’s economic growth rate was below the world average.

Fortunately, the Chinese market is expected to recover in the short term.

The African continent remains the M&E sector’s largest export market, comprising just under 40% of total exports. The region will likely have flatline growth in 2023, with some countries being poised for lower export demand. 

Globally, the overhang from the aggressive monetary policy stances adopted by central banks around the world is starting to be felt in 2023, while inflation remains a significant economic headwind globally.

Although inflation has started showing signs of tapering off early in 2023, the International Monetary Fund estimates that global inflation will average 6.6% this year, from 8.8% in 2022, which is still stubbornly high.

The persistent nature of the inflation, coupled with the strong US jobs market, suggests that, in the interest of maintaining monetary policy credibility, central banks still have room to move upward on interest rates, albeit at a slower pace in the face of slower economic activity.

Emerging markets, particularly those with weak fiscal fundamentals, are particularly vulnerable in this environment.