South Africa’s metals and engineering sector is expected to grow for the first time in more than three years this year – with growth estimated at 1.4% – amid rising commodity prices and an improved economic outlook globally and domestically.

Speaking at the launch of the ‘State of the Metals and Engineering Sector Report 2017-18’ last month, Steel and Engineering Industries Federation of Southern Africa senior economist Tafadzwa Chibanguza noted, however, that the growth expectations depended on there being no production disruptions, owing to the forthcoming wage negotiations for the sector.

“Commodity prices were significantly low at the start of 2016, but the majority of them recovered, pointing to possible further momentum in 2017,” he said.

Chibanguza noted that the current commodity price surge would contribute favourably to the metal and engineering sector’s growth, despite uncertainty as to whether the trend is cyclical or structural in nature. He suggested that the uptick was likely a “cyclical bounce”, based on an analysis of information this month.

He added that the sector was fighting to recover from 2016’s multifaceted crisis, which resulted in renewed downward trajectories for production, employment, investment and profit, underpinned by struggling capacity use. He predicted that some of these challenges would persist throughout this year.

The positive growth prognosis for the metals and engineering sector is further bolstered by an estimated domestic economic growth of 1.7% this year and 1.8% in 2018.

“Sentiment towards emerging markets looks promising, given [uncertainty about] advanced economies, which would improve the climate if it should translate into some continued rand strength,” stated Chibanguza.

He said international factors were expected to continue playing a significant role in the local economy, regardless of a global sense of optimism in the global economy for this year.

“Going forward, the concern is that a high degree of uncertainty surrounding the economic policies of the new administration in the US is expected to persist, creating a challenging and volatile environment for emerging markets, including South Africa.”

Chibanguza added that the prospect of rising protectionism and its implications for world trade added to structural concerns, while the impact of Brexit also posed potential risks to global economic stability.

He explained that these international developments would have far-reaching effects on “the local metals and engineering sector, as they contributed to a “pervasive and difficult structural adjustment”, which was a salient theme last year, reflected in the significant number of job losses.

Notwithstanding the significant job losses recorded in the sector last year, statistics suggest employment numbers are higher than the sector’s production levels, which concerned Chibanguza.

In an environment where the sector was contracting, the cost of rationalisation and optimisation would most likely result in further attempts to manage labour costs, he explained.

“Given the historical characteristics of the labour market in the sector for clearing excess capacity, we forecast a risk of further job losses. The strong correlation between production and employment affirms this synopsis.”

In addition, he said the sector had not cleared the hurdle of downward pressure in the production index, which could be attributed to the production disruption during the 2014 labour-sector wage strikes.

“The significance of these disruptions is that they appear to have adversely affected the long-run trends that continue . . . in 2017 and are forecast for 2018 as well.

“We highlight this as a definite risk because in the event of a production disruption, a new [and] deeper downward spiral could be initiated and lead to further deepening of the crisis.”

Although the global and local climate outlook might be negative, a general sense of optimism was nonetheless apparent in the sector, Chibanguza noted, with the metals and engineering sector continuing to struggle, while leveraging positives to contain further damage.