While the improvement in international demand for metals and metal-containing products could lead to export growth, cost increases in the metals and engineering sector are a concern, Steel and Industries Federation of South Africa (Seifsa) chief economist Henk Langenhoven said on Monday.

Seifsa welcomed that the improvement in international demand for metal and metal-containing products and said this reflected the potential for export growth for South African manufacturers of these products, while Langenhoven expressed the hope that producers were preparing themselves for the growing demand. 

He added that the weakening exchange rate would provide windfall benefits over the short term.

“On the downside, however, there is great concern about cost increases in the metals and engineering sector. The price index of the latest Kagiso Purchasing Managers’ Index (PMI) has gone up as well, indicating that this concern is widespread.

“Comparisons between the PMI cost index and the headline or final products producer price index do not show the very close relationship evident between the former and both steel producers and merchant prices. If these patterns persist, they will quickly erode the potential benefits to be derived from exploiting the international demand,” Langenhoven said.

He further pointed out that in the PMI several of the subindices showed a divergence between the domestic outlook and international prospects.

“The business activity index, which is of importance for the metals and engineering sector, has declined by nearly 3%, while the overall PMI held steady,” Langenhoven highlighted.

He added that, even more significant was the deviation from “normal” fluctuations, with the business conditions index improving strongly by 3.5 points to 61.4, the employment index also improving slightly to 50.7 and an increase in the stock index.

Langenhoven explained that under normal conditions the employment index and the stock index would edge in different directions. “This shows clearly the volatility in the market,” he said.

“In the final analysis, the metal and engineering sector will have to be competitive to reap any benefits from the recovery in international demand and it is hoped that this will indeed be the case,” Langenhoven concluded.