Stagnant demand and high production costs are likely to result in declining employment in the metals and engineering sector.

In a statement issued at the weekend, Steel and Engineering Industries Federation of Southern Africa chief economist Henk Langenhoven said it was not surprising that the May 2015 manufacturing production data for the metals and engineering sector had confirmed further contraction in the sector

“On a yearly basis, production declined by 3.6% when the 12 months ending in May are compared with the same period in 2014. Monthly production in May contracted faster than in April, from -0.9% to a further -2.7%. It also slowed by 4.3% compared with a year ago,” he pointed out.

In May 2014, the severity of the prolonged mining strike, which was in its fourth month, had significantly impacted on steel demand.

He added that the base effect of the higher production in the metals and engineering sector during June 2014 to build inventories in the event of its own strike in July 2014, was likely to indicate comparative worsening conditions this year.

The response of the metals and engineering sector to the mining strike resulted in artificially high production in May 2014 and artificially low production in June 2014.

Langenhoven said the current numbers were lower than those of May 2014, as a result of the lack of demand from the mining sector, owing to the strikes.

He expected the figures for June and July this year to be even lower than production in June and July 2014.

“Although the first five months of 2015 seemed to indicate a slowdown in the contraction, this was almost entirely owing to the recovery of basic ferrous production, as a result of maintenance delays, which had since lost momentum. However, production for auto sector exports shows continuous improvement,” Langenhoven said.

Meanwhile, only production for special machinery, electrical machinery and equipment; and structural metal grew in May, compared with April, and this accounted for 25% of the sector.

Special machinery grew 4%, electrical machinery and equipment grew 4.4% and structural metal grew 4.7%.

Over a 12-month seasonally adjusted period general purpose machinery was at -8.8%, structural steel was -8.6%, nonferrous was -8.2%, rubber products dropped -6.2%, household appliances fell -5.7%, plastics was -3.5%, electrical machinery and equipment dropped -2.2%; other fabricated metal products declined -1.1% and basic iron and steel fell -1%.

Langenhoven said the volatility in forward-looking confidence indicators was reflected in the mostly negative production data recorded. The volatility observed in the business activity subindex of the purchasing managers’ index (improvements of 25% followed by retreats of -24%) over the last 12 months was evidence of the prevailing uncertainty about the future.

Increasing inventory levels and retreating prices, together with these production figures, were expected to result in further decreases in employment levels.

“The question is how much longer this will continue. The metals and engineering sector depends on exports, mining, the auto sector and construction as its biggest markets. Its fortunes will only change with improvement in the majority of these market segments,” Langenhoven stated.