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Even essential industries have suffered reduced demand

24th April 2020

By: Marleny Arnoldi

Deputy Editor Online

     

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Leading up to the phased reopening of the economy that South Africa will undertake from May 1, research institute Trade and Industrial Policy Strategies (Tips) says data on the overall economic impacts of the Covid-19 pandemic is not yet available, but the economy will undoubtedly suffer owing to various business closures and reduced trade activity.

Tips says the effects of the five-week full lockdown varied substantially by sector in South Africa. While essential services production and sales, in the food, healthcare, security, utilities, personal and freight transport value chains, continued, others have had to stand still or work at lower capacity.

In a snowball survey that Tips conducted with 190 companies from early to mid-April, nine out of ten respondents said they had reduced production as a result of the lockdown, half had closed down entirely, while another third had reduced output by more than 50%.

The share of companies reporting at least some downsizing ranged from two-fifths in private healthcare to almost all in non-food manufacturing, business services and construction.

While some administrative-type work could be done remotely, for the most part, manual labour was not possible from home, while businesses such as retailers and restaurants rely on direct contact with customers and could not make use of delivery services.

Even essential services providers often downsized during the lockdown, owing to falling demand from households and businesses, or owing to lower available inputs.

Tips explains that some producers were able to shift capacity into essential goods, for example for personal protective equipment (PPE), mattresses and lab coats, as well as packaging for food and healthcare products.

A number of initiatives aimed to produce ventilators.

In the snowball survey, half of large companies with more than 2 000 employees, were able to shift into essential products. In contrast, only one in seven companies with fewer than 50 workers were able to take this route.

Moreover, government procurement procedures remained slow and hard to predict, which meant that producing healthcare products did not guarantee sales.

In clothing, businesses often said that production of PPE alone would not stave off closure in the medium term. Similarly, most plastics producers had to shut down the bulk of their production even if they continued to supply the food and healthcare industries.

THE CASE FOR AUTO

South Africa’s automotive industry, which employs more than 100 000 people, has been affected by lockdowns across the world, including in South Africa. Except for production of inputs for essential services, such as replacement parts, the entire value chain has had to cease operation.

Tips points out that the lockdown has imposed huge financial losses and liquidity pressures on the industry. Smaller second-tier automotive component manufacturers appear most affected, largely because they have lower operating margins and limited access to credit.

To date, no major South African vehicle assemblers or automotive component manufacturers have formally initiated retrenchment programmes, but they agree that some downsizing is inevitable.

Tips says the extent of downsizes will depend on the effectiveness of government support as well as trends in domestic and international demand when the lockdown ends.

Smaller firms fear they may not be able to restart operations if the industry is locked down for much longer. That, in turn, would affect the competitiveness of the larger assembly operations.

STEEL

Tips says the steel industry had already suffered a knock of around R1-billion in just the five weeks of lockdown, owing to fixed and labour costs.

This will be exacerbated by continued lower demand. Downstream steel users and information on global markets suggest that demand for steel in the second quarter of 2020 will be half the level it was before the pandemic and will likely only recover by 20% to 30% during the remainder of the year.

Domestic capacity use could fall to around 50% for long steel.

Tips says that global demand for steel was shrinking even before the national state of disaster was declared in mid-March in South Africa.

Globally, steel mills have not cut production fast enough, which has led to high inventories and downward pressure on prices.

In South Africa, Tips says a core problem for steel manufacturers is that downstream industries, such as construction, manufacturing and mining, are not paying for steel. As a result, steel producers may not recover, ultimately impacting on broader industrialisation and competitiveness of the country.

Tips notes that the main essential products in the industry are steel drums for Sasol to transport alcohol for hand sanitisers.

The producers were able to buy enough steel from ArcelorMittal South Africa to keep production running during the lockdown. The companies also export containers. Some manufacturers are also looking into the potential for supplying hospital beds and ventilators, as well as light building frames for fast-tracking the establishment of hospitals and clinics to help treat patients as Covid-19 spreads.

These projects will only succeed, however, if there is alignment with national plans and fast-tracked procurement.

PLASTIC

The plastics industry employs around 50 000 workers, many of them in small businesses.

From the start, some plastic products were deemed “essential” inputs for healthcare and food, mostly for packaging. Production of face shields and masks as well as other PPE has scaled up, with some lines running at full capacity.

Medical products such as intravenous therapy lines, blood bags and breathalysers have also expanded locally and in Europe, necessitating more plastic production.

Additionally, the plastic industry supplied 41 000 water tanks at the onset of the lockdown in South Africa.

However, Tips says the expansion in essential products did not offset the sharp decline in packaging for takeways, alcohol, personal care, textile, clothing and electronic goods.

On a net basis, production and sales of plastic declined. There are no reports of layoffs as yet, but retrenchments could occur if demand remains depressed after the lockdown ends.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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