Business trends in the metals and engineering (M&E) sector have been highly volatile for the last three years and are likely to remain so for the foreseeable future, national employer federation representing the M&E industry Steel and Engineering Industries Federation of South Africa (Seifsa) says.

“This volatility reflects the uncertainty created by a variety of factors affecting the M&E sector, such as energy constraints, factory failures and labour unrest, as well as the sluggish demand for materials, owing to a slowdown in foreign sales figures. Additionally, factors such as sudden and often prolonged demand disruptions in the automotive and mining sectors and slow infrastructure spend by government have negatively impacted on the M&E sector,” says Seifsa chief economist Henk Langenhoven.

He adds that the current instability in the sector is contributing to its inability to break out of the low growth cycle since the trough of 2009.

However, Langenhoven notes that the M&E sector recorded encouraging production and capacity use trends for the first quarter of this year.

“Production grew by 2.5% from 2013 and capacity use was up by 1.7%, and is touching the 80% use level. On a yearly basis, production improved by 3.5% and capacity use by 1.3%, compared with 12 months earlier. This is in line with the 12-month movements in the Purchasing Managers Index (PMI) business activity sub-index, which improved by 4%.”

Langenhoven states there are doubts about the continuity of these positive trends into the near future, as several issues need to be considered.

“The turning points in the PMI business activity subindex leads M&E production turning points by 12 to 18 months. Considering this lag, one would not have expected production to increase in the first quarter of 2014.

“Production levels in several subindustries, such as the automotive sector, have recovered, following unexpected losses that took place last year, which could explain this situation. Exports could also have accelerated in the first quarter of this year, and there could have been some stock built up in anticipation of labour disruptions in the foreseeable future in the sector itself,” he surmises.

Further, Langenhoven notes that several short-term indicators are weakening, signalling the likelihood of this production improvement slowing down, or even reversing in the short term.

“All three short-term PMI business activity subindex comparisons declined during the first four months of 2014, showing that confidence weakened by about 5%.”
Additionally, he highlights that the Bureau for Economic Research’s (BER’s) Manufacturing Survey, covering the first half of 2014, reflects similar downward trends for current business conditions, albeit for total manufacturing.

Langenhoven also notes that, according to the PMI, the indicators of the levels of new orders are also down, which is a further indication of the weak operating environment.

“Price escalation in the M&E sector is slowing down significantly, as measured by actual price movements and perception data from the PMI and BER, which are also indicating softer demand conditions,” he states, adding that the perceptions about future employment creation are negative, as indicated by a PMI business activity subindex and in the BER manufacturing indices.

Langenhoven explains that the local outlook for M&E is heavily influenced by the prospects for the mining, automotive and construction sectors.

“The mining sector has been under siege from industrial action, the automotive sector has revised its production forecasts downward and construction shows very little signs of recovering from its three-year slump. The latest quarterly data releases show some glimmer of hope, but it could take some time to impact on actual production. These weigh heavily on the medium- term outlook, since the dynamics of the four sectors feed off one another, and the stakeholders in each sector are similar,” he stresses.

Further, Langenhoven tells Engineering News that the contraction in the gross domestic production figures, which were released in May, together with the volatility of the sector, pose significant challenges to the M&E industry.

“The yearly data indicates how serious the downturn would be if the first-quarter data of declines of –0.6% for the overall economy, –4.4% for manufacturing and –10.6% for M&E were to continue for the whole year. These indicate the change in fortunes from the fourth quarter of 2013, which was unexpectedly positive, to the negative figures of the first quarter of 2014.”

However, Langenhoven says longer-term movements in the data are more encouraging.

“Seifsa previously stated that this would, in fact, be the case when the March M&E data was released. For the sector, the actual quarterly (non-yearly) performance was down by only 2.8%. When the first quarter is compared with the same quarter in 2013, the sector actually grew by 2.5%,” he points out.

Langenhoven notes that these figures indicate “how much worse the first part of 2013 was”. He adds that instability in these trends is “very real, as the figures show”.

“When a full year [2013 to 2014] – based on four quarters – is compared with a similar period a year ago [2012 to 2013], the sector grew by 4.3%. Although the short term represents a setback, the sector is slowly recovering from being in the doldrums since the 2008 slump.”

However, he says that, with regard to the price escalation, “the strengthening and weakening of the rand has a direct and almost immediate impact on M&E price escalation. When the rand strengthens, it pulls back the escalation of production prices”.

Nonetheless, Langenhoven says, despite some strengthening, the rand is still fairly weak at current levels, auguring well for the international competitiveness of locally produced products.

“Easing production prices also have the direct causal effect of slowing the pace of consumer inflation, which, in turn, reduces the risk of aggressive interest rate hikes and, therefore, bodes well for company financing costs,” he states.

However, Langenhoven cautions that the long-running trend of double-digit, year-on-year increases is still evident.

“Therefore, it should be stressed that, while there is some relief in the short term, South Africa’s production prices are still structurally high,” he states.

Skills Development Focus

Seifsa skills development and human capital executive Mustak Ally tells Engineering News that the federation aligns itself with the mission of the National Skills Development Strategy to increase access to high-quality and relevant education, as well as training and skills development opportunities, including workplace learning and experience, to enable South Africans to participate meaningfully in the economy.

“In pursuing this goal, we offer training and development through our state-of-the-art Seifsa Training Centre, in Benoni, on the East Rand, which offers several artisan-focused programmes that are inclusive of learnerships, apprenticeships and trade testing,” he highlights.

Ally adds that Seifsa also offers bursaries to engineering students and apprentices for the M&E sector.