After starting the year off strong, the outlook for the metals and engineering (M&E) sector is starting to show deterioration, the Steel & Engineering Industries Federation of Southern Africa (Seifsa) reports.
The federation explains that the performance of the M&E sector is indicative of the prevailing economic fundamentals, with it being extremely vulnerable to global and domestic economic events.
Seifsa’s estimates already point to production contracting by between 1.1% and 1.3% in the second quarter of the year, with notable downside risks for the full year.
Seifsa COO Tafadzwa Chibanguza notes that, during the first quarter, inflationary pressures were already building in the global economy.
However, this was initially driven by aggregate demand increasing faster than supply chains could respond. “The invasion of Ukraine by Russia on February 24 set the proverbial cat among the pigeons in economic and inflation terms.”
Chibanguza has identified the themes behind global and domestic economic fundamentals as being aggressive monetary policy tightening in the US – in response to multiyear record inflation; the effect of the Russia/Ukraine conflict on the European Union economy; and China’s aggressive zero-Covid-19 policy, which has impacted the country's economic hubs of Shanghai and Beijing.
“These themes will dominate the global economic narrative and the slowing of global economic growth. Steel production is highly correlated to growth and the early warning signs of a slowing growth rate are evident in the decline in iron-ore prices, a key ingredient in steel production,” he says.
He adds that a rising tide lifts all boats, but highlights that the inverse is also true.
“In a less supportive global economic environment and with headwinds intensifying, domestic economic policy and reform has to do a lot of heavier lifting to support the economy.
“Domestic intervention to counter these headwinds and support the M&E sector is essential,” Chibanguza concludes.