Companies in the metals and engineering sector will simply be unable to meet the proposed draft employment equity sectoral targets in the short to medium term because the sector has been in a structural recession since 2008, with production on average 15% below the 2008/9 peak and recording a compound annual contraction rate of 1.3% a year since then.

The metals and engineering sector is in structural decline, both in terms of economic performance and employment. This presents a structurally constrained environment, one where opportunities for new employment creation are limited, industry body Steel and Engineering Industries Federation of Southern Africa (Seifsa) CEO Lucio Trentini argues.

The metals and engineering sector is an integral part of the global and domestic economy. It constitutes 26% of manufacturing in South Africa and contributes 2.6% directly to the country’s gross domestic product. The sector is a crucial supplier of inputs into major sectors, such as agriculture, mining, the automotive sector, construction and other manufacturing sub-industries.

The sector is also a strategic avenue through which the country converts its mineral endowment to final engineered products domestically.

"Production trends have been on a structural downward trajectory since the 2008/9 global financial crisis, from which the sector has never fully recovered," Trentini says in response to the proposed sectoral targets.

The net effects of the current draft employment equity targets is that companies will simply be unable to meet the proposed targets, human capital and skills development will be hampered, as will valuable and positive investments that companies make in community work or supplier development initiatives, among others, and some companies will simply opt to close shop, he says.

Production levels remain 5% below pre-Covid-19 levels, he points out.

"On the employment front, the sector has lost 205 926 jobs from the 2008 peak of 577 502 to the current employment count of 374 496. As the global economic environment deteriorates, more intense headwinds are anticipated for the sector.

"There seems little prospect for improvement in the near future, especially with loadshedding continuing to wreak havoc on our sector and the broader economy as a whole. The electricity crisis, resulting in up to 16 hours of electricity cuts for some industrial areas, eats into everything that powers an economy that has hardly grown for more than a decade."

Seifsa estimates production in the sector may contract by a further 5.3% this year, if the impact of loadshedding is factored in.

Further, production of the metals and engineering sectors is a function of economic activity and infrastructure spend, which have disappointed over the past 10 to 15 years.

Meanwhile, there is a decoupling between production and employment trends, which has continued to widen over the past 15 years.

The current estimates indicate that it takes a 5% increase in production to induce a 1% increase in employment. Therefore, the context of declining production does not bode well for employment prospects, he says.

"Seifsa’s submission is that, in such an environment of structural decline and a limited market that is also shrinking, the sector is unlikely to attract new entrants and the transformation consideration has to be considered through this lens.

"The economy is expected to flatline barely above recessionary territory on a medium-term basis, which will undoubtedly lead to the upending of large, medium and small businesses and the prospects of employment opportunities. The combination of high inflation in a weak demand environment, which has a negative carry on profit margins, and high interest rates, which are inversely related to new investment, means the outlook for the sector is bleak," emphasises Trentini.

STALLED CONSULTATIONS
Further, the proposed sectoral targets have come as a surprise as the Employment Equity Amendment Act, although assented to earlier this year, is not yet in effect. The regulations are, therefore, premature and, if challenged, may be considered ultra vires [beyond its powers].

"We are firmly of the view that the Department [of Employment and Labour] (DEL) erred in halting the consultation processes it was following with the different subsectors and sectors, as provided for in the Act, and publishing only sector targets for the main sectors in an attempt to hopefully achieve implementation on September 1.

"By doing so, it has opened itself up to legal challenges, which will inevitably lead to the implementation date not being achieved and the process that the DEL had embarked upon being further halted until the exhaustion of the ensuing legal proceedings."

This will likely result in the implementation of sector targets being delayed for far longer than it would have been, had the DEL continued with its consultation processes and not tried to fast-track the implementation of sector targets.

"The department is, therefore, urged to reconsider this course of action and to firstly conclude the engagements and processes that started with the different employer organisations in the different sectors and subsectors before re-issuing sector targets," says Trentini.