South Africa’s metals and engineering sector is expected to grow for the first time in over three years this year – by 1.4% – amid rising commodity prices and an improved economic outlook both globally and domestically.

Speaking at the launch of the ‘State of the Metals and Engineering Sector Report 2017-18’, on Friday, Steel and Engineering Industries Federation of Southern Africa senior economist Tafadzwa Chibanguza noted, however, that the growth expectations are dependent on there being no production disruptions as a result of the forthcoming wage negotiations in 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. However, he suggested that the uptick is likely a “cyclical bounce” based on analysis of information from this month.

According to Chibanguza, 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,” said Chibanguza.

He said international factors are expected to continue to play 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 add to structural concerns, while the impact of Brexit also poses potential risks to global economic stability.

He explained that these international and local factors are far reaching and will affect the local metals and engineering sector, as they contribute to a pervasive and difficult structural adjustment, which was the highlight of last year, owing to the significant number of job losses.

Notwithstanding the significant job losses recorded in the sector last year, statistics suggest employment numbers are currently higher than the sector’s production levels - a concern for Chibanguza.

He explained that in an environment where the sector is contracting, cost rationalisation and optimisation would most likely result in further attempts to manage labour costs.

“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,” Chibanguza commented.

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

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

Chibanguza pointed out that his prediction for the next two years is based on the assumption that wage negotiations this year are concluded without industrial strike action. A vastly different picture would emerge for that the forecast should such strikes come to pass.

“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.”

Chibanguza said that although the global and local climate outlook may be negative, a general sense of optimism is shared in the sector. He concluded that while the metals and engineering sector will continue to struggle, there remain positives that can be leveraged to contain further damage.