Following its announcement in Janurary of a growth projection of 1.4% for 2017 in the metals and engineering sector, the Steel and Engineering Industries Federation of South Africa (Seifsa) believes that the local steel industry will probably use this bottoming of the trend as an opportunity to hopefully repair balance sheets and enjoy some relief from the persistent contraction of the industry over the past few years.
“Companies would probably need to be convinced that this is a structural shift in the trend [and not a cyclical bounce] so that they can start investing in serious innovation,” says Seifsa senior economist Tafadzwa Chibanguza.
He notes that this development is considered to be significant because the metals and engineering sector has been contracting every year since 2013, with 2016 having contracted by 2%.
“The cumulative contraction from 2013 to 2016 has been 6%, therefore, a predicted change in fortunes is a definite plus.”
Though this is positive news for the sector, Chibanguza notes that this does not mean that all the subindustries are “out of the woods”, as some of them are forecast to continue contracting in 2017.
Chibanguza says one of the factors contributing to the projected sector-supporting increase in commodity prices is the anticipated US fiscal policy under the new administration, especially the promise of $1-trillion of additional infrastructure expenditure by the US government.
However, he adds that protectionist measures by the same administration might also negatively affect the demand for metals from South Africa and, therefore, adversely affect prices. “Closing the US off will limit global trade and, consequently, create a negative scenario for the South African economy and the metals and engineering sector.”
Moreover, Chibanguza notes that increasing commodity prices bode well for the domestic economy and, from a revenue perspective, for countries such as the South African Development Community countries to which South Africa exports products.
“An increase in the price of the commodity equals increased revenue and, therefore, the ability to fund projects and buy imports.”
Seifsa noted an increase in commodity prices last year; this could be attributed to increased demand from China for commodities and supply cuts in some of those commodities, which are rebalancing the supply and demand equation in the nonferrous metals space, besides others.
“However, there are still questions about the cyclical or structural properties of the current commodity price surge. “Analysed thoroughly, the current surge seems to have the properties of a cyclical bounce, so industries and economies relying on commodity prices need to make the most of this current spike while it lasts,” Chibanguza concludes.