Last year was generally challenging for both the domestic and global economy, as weakening demand, manufacturing as well as trade and investment restrained progress, with extended negative implications for the Metals and Engineering (M&E) sector, which is poised for unremarkable growth in 2020.
This is according to the Steel and Engineering Industries Federation of Southern Africa (SEIFSA), which will release its flagship annual State of the Metals and Engineering Sector Report for 2020-2021 tomorrow (Friday) morning.
Speaking ahead of the launch of the Report, SEIFSA Chief Economist Michael Ade said prevalent challenges underpinning the sector’s poor performance last year, leading to the closure of companies and downsizing of operations, are generally expected to continue in 2020, with the potential to reverse the gains made in the preceding two years.
“The forecast for 2020 is for the entire M&E sector to expand by just 0.6%, with the existence of predominant downside risks, while the various sub-sectors will register varied levels of growth, with some expanding and others contracting,” Dr Ade said.
The prediction aligns with a disconcerting slowdown in growth globally in advanced economies, in Emerging Markets and Developing Economies and in commodity exporters and importers. The deceleration in global growth to 2.4% last year was its slowest pace since the global financial crises, amid a broad-based weakening in trade and investment, production of intermediate and capital goods, contracting manufacturing export orders, decline in commodity and metals prices, and persistent trade tensions between the US and China.
These developments, Dr Ade said, have serious extended implications for the M&E sector’s growth prospects, which is a small open sector and very sensitive to negative external shocks.
Although positive, the demand for finished steel in 2020 is expected to continue slowing, alongside falling steel prices, before a rebound in 2021. Dipping apparent global steel consumption is worrisome, given its implications for the South African economy and its steel and steel-related products industry. Moreover, he said, traditionally slower growth in steel consumption demand has a negative impact on steel prices.
Contrary to earlier expectations, Dr Ade said, 2019 was generally difficult for businesses in the M&E sector, which found themselves in the doldrums as growth rapidly decelerated, underpinned by stagnant domestic demand, production volatility and persistent challenges (including rising intermediate input costs and imports penetration), which are expected to continue into 2020.
“Judging by the performance of the various sub-clusters last year, the existing conditions of the broader M&E industries are disturbingly volatile, with growing doubts on the ability of businesses to remain sustainable in an increasingly challenging economic environment and nondescript domestic growth,” said Dr Ade.
However, he said, the situation is not invariably a zero-sum game for the M&E sub-components. Although downside risks predominate, there is also the possibility that the local economy may be stronger than expected in 2020, if existing headwinds to growth could be dealt with decisively by implementing strategic macro-economic and industrial policies, which would boost production and exports from the M&E sector.
Encouragingly, Dr Ade believes that the Sub-Saharan African region will provide some impetus for M&E sector trade, based on auspicious prognosis of 2.9% growth in 2020 and 3.1% growth in 2021. Investor confidence in some of its large economies is expected to improve, while oil production in some major oil exporters is also expected to pick up,bringing in much-needed foreign currency and boosting the demand for South African steel, construction and engineering inputs.
“The impetus will likely translate into continued M&E exports, as the rest of Africa is still the highest export destination for goods produced in the broader M&E sector. The African Continental Free Trade Area agreement, therefore, presents an enormous opportunity for the M&E cluster of industries to capitalise on broader regional trade opportunities,” Dr Ade said.
He said given the continuous existence of domestic challenges, including energy constraints, the expectation is for benefits from improved trade in advanced economies to trigger to the M&E sector at a sluggish pace in 2020, before gaining momentum in 2021, as ongoing difficulties are addressed and local policy support gains traction.
In conclusion, Dr Ade said while some very moderate growth is expected to return to the M&E sector, the general expectation is for 2020 to continue to be a difficult year for M&E businesses. However, the current downturn of the M&E sector is likely to permanently bottom out if domestic risk factors such as lingering policy uncertainty or indecisiveness, low demand, erratic electricity supply, galloping electricity costs and logistics expenses are urgently addressed.