The metals and engineering (M&E) sector was without doubt under pressure in 2020 owing to lower steel production and general trading restrictions, Steel and Engineering Industries Federation of Southern Africa (Seifsa) says in its latest 'State of the M&E Sector' report.
Seifsa chief economist and report author Chifipa Mhango explains in the report that steel is one of the key subsectors within the M&E sector and that global commodity prices are influenced by production in this sector.
In 2020, lockdown measures affected commodity prices, which fell to some of their lowest levels in April 2020. As countries started relaxing lockdown measures, commodity prices picked up in the later months of the year, and the return of industrial activity stimulated more demand for metals and commodities.
The revival of industrial activity therefore led to an uptick in the global Purchasing Manager’s Index.
Data showed a rise from the low levels of April 2020, reaching levels of above 50, which is a reflection of expansion of manufacturing sector industrial activity.
Overall, the global economy is estimated to have contracted by 3.5% in 2020, while the South African economy contracted by about 7.5%, according to the International Monetary Fund.
In 2021, the global economy is projected to grow by 5.5%, mostly owing to vaccine-powered strengthening of activity and additional policy support in a few large economies.
It is estimated that 65% of the global working population is employed within the M&E sector directly and indirectly.
However, owing to the challenges the sector has faced in recent years, this percentage has also dropped as companies took strategic operational decisions that led to laying off workers owing to declining demand conditions and rising cost factors, among others.
LOCAL SECTOR'S PERFORMANCE
Meanwhile, in South Africa, gross fixed capital formation (GFCF), which is a measure of infrastructure activity in the country, remains below 30% as a share of total gross domestic product (GDP), despite the measures taken by the government in recent years to stimulate the economy and to boost growth, with massive expenditure towards infrastructure investment.
For the M&E sector, key positives to note in the third and fourth quarters of 2020 were the rise in demand for construction and building material sales from the low level of R1.9-billion in April 2020, owing to lockdown restrictions, to R12-billion in November 2020.
Business confidence also picked up to an index measure of 40 in the third quarter of 2020.
However, the M&E sector was under pressure in 2020. Production remained weak throughout the year, with a total production decline of 15.3% year-on-year.
Sales were also affected by the restrictions, as demand from key market segments declined. Total sales to November 2020 amounted to R668-billion, which was 13.4% lower year-on-year.
Capacity utilisation in 2020 was also at its lowest level in a decade. Since the lockdown measures were implemented by the South Africa government in March 2020, total manufacturing capacity utilisation dipped to 59.8% in the second quarter of 2020 within the M&E sector, and capacity utilisation was at the lowest level of 52.8%.
Manufacturing capacity utilisation in South Africa increased to 72.9% in the third quarter of 2020 from 59.8% in the second quarter, while that of the M&E sector increased from 52.8% to 66%.
Mhango notes that this explains the improvement in production patterns.
Employment in the overall manufacturing sector declined from 1.3-million in the third quarter of 2002 to 1.1-million in the third quarter of 2020. Almost 100 000 manufacturing jobs were lost during the lockdown alone.
Between the first and third quarter of 2020, about 25 857 jobs were lost in the M&E sector.
During the same period, the wage bill increased considerably. The level of increase in the wage bill varies across sub-sectors. Real per capita earnings in the entire manufacturing sector increased by 30%, from R35 072 in the third quarter of 2002 to R50 437 in the third quarter of 2020.
During that time, real per capital income in the entire M&E sector also increased from R36 864 to reach R54 670.61, representing a 33% increase.
The highest increase in the wage bill during the period under review was in the nonferrous metal products subsector, at 47%, followed by the motor vehicle parts and accessories subsector at 43%.
The lowest increases were recorded in the other fabricated metal products subsector at 13%, followed by the bodies for motor vehicles, trailers and semi-trailers subsector at 15%.
Total trade in the M&E sector has favoured imports since 1995. The South African net trade balance in the M&E sector averaged –R102-billion between the third quarter of 1995 and the third quarter of 2020. Imports continued to rise, reaching a peak of R604-billion in 2019, with exports reaching a peak of R418-billion in the same year. Between the first and second quarters of 2020, the values of both imports and exports dropped.
Imports dropped from R134-billion to R105-billion, while exports dropped from R92-billion to R59-billion, indicating a slowdown in trading activities caused by lockdown measures across countries.
South Africa continues to have a favourable net trade balance with the African region unlike with any other region in terms of trading in the M&E sector. In 2020 alone, until the third quarter, South Africa’s net trade balance with the rest of the African region was R64-billion.
This suggests that local South African producers have more opportunities to increase their market footprint on the continent, especially when it comes to taking advantage of the African Continental Free Trade Area agreement which came into effect at the start of this year.
Total GFCF by value for the M&E sector increased between 1994 to 2008, from R1.3-billion to R3.2-billion in value. The massive projects implemented in the run-up to the 2010 Soccer World Cup in South Africa were a huge boost for the sector.
Since then, the levels of GFCF into the sector have remained lower than during the 2008 peak, reaching R2.2-billion in 2020. The GFCF across the entire M&E sector followed similar patterns into the third quarter of 2020, with all subsectors having experienced a massive drop in investment levels in 2009.
Moreover, Seifsa reports a prevailing discouraging trend of generally decreasing price patterns in its intermediate manufactured goods purchasing price index since 2016.
The high electricity prices have compounded the existing gap between the selling prices for M&E intermediate goods and production. The massive surge in prices of mining input products to 32.5% in 2020, which is above price increases of intermediate manufactured goods, is a concern for the survival of the M&E sector.
Further, Seifsa economist and report author Palesa Molise says the National Treasury has allocated R791.2-billion for public infrastructure spending over the Medium-Term Expenditure Framework, which bodes well for the M&E sector.
The plans for the rolling out of Covid-19 vaccines, as well as other investment incentives for the manufacturing sector provide a platform to bring business confidence back to much higher levels to return industrial activity to full production.
Taking that into consideration, Seifsa envisages projected growth of 0.5% for M&E sector production in 2021 and 0.9% for total manufacturing.