The metals and engineering sector is set to grow for the third consecutive year in 2019, despite the past year having been generally challenging for both the global and domestic economies.
This is according to the Steel and Engineering Industries Federation of Southern Africa (Seifsa), which released its ‘State of the Metals and Engineering Sector Report for 2019-2020’ on Friday.
In light of the positive performance of the sector in recent years, this edition of the report was published under the theme ‘Sharpening the saw – continuously improving industry activity and competitiveness’.
Presenting the findings was Seifsa chief economist Dr Michael Ade, who indicated that the metals and engineering sector will expand by 1.8% this year.
He noted, however, that the various subsectors would register varied levels of growth, with some expanding and others contracting during the year.
“The prognosis aligns with the outlook for both a moderating global growth and domestic growth in 2018, underpinned by a slowdown in the pace of recovery in commodity exporters, deceleration of growth in commodity importers, a slowdown of growth in global goods and industrial activity during the first half of 2018 and the imposition of broad-based tariffs by the US on steel and aluminium imports.”
The majority of metals prices had weakened in 2018, mainly as a result of concerns about the impact of tariffs on global growth and trade.
Industrial metals were especially susceptible to these concerns, owing to these metals’ many uses in the manufacture of tradable goods.
However, the report predicts a more positive outlook for 2019 and 2020, with metals prices generally expected to stabilise. This will lead to strengthened exports and improved growth prospects for commodity exporters, including the metals and engineering cluster of industries, as well as enhanced capital inflows.
However, the report cautions that there are downside risks, including continuing trade tensions, diminishing industrial activity, the softening of international trade and investment and considerable financial market pressures on some large emerging market and developing economies (EMDEs).
According to Ade, trade tensions between the US and China, including tariffs on an array of products, have had varied effects on metals and agricultural commodities.
Tensions affected about 2.5% of global goods trade, from which South Africa was not immune.
Moreover, these tensions continue to remain elevated.
According to Ade, tighter external financing conditions have the propensity to increase external borrowing costs and the general cost of doing business, which also negatively impacts on production and foreign fixed investment into the sector.
These conditions are highlighted as contributing to considerable capital outflow and considerable currency pressures in more vulnerable EMDEs, including South Africa.
Ade posited that, to confront this increasingly difficult environment, EMDE policy makers must focus on preparing for possible bouts of financial market stress and rebuilding macroeconomic policy buffers as appropriate.
Moreover, he highlighted that policy must also foster stronger potential growth by means of boosting human capital, removing barriers to investments and promoting trade integration within a rules-based multilateral system.
Despite these downside risks, Ade said the metals and engineering sector’s moderate growth prospects for this year are influenced by the positive growth prospects for key industries that are important markets for the sector’s intermediary products and are vital in its value chain.
He indicated that the performance of the domestic economy – which is forecast to grow at 1.3% this year and 1.7% in 2020, supported by continuous improvement of regional markets in Africa, will positively impact on the sector’s growth prospects.
He predicted that sub-Saharan Africa’s growth would improve moderately this year, at 3.4%, and in 2020, at 3.6%.
This is especially important given that Africa is the highest export destination for goods produced by companies in the domestic metals and engineering cluster.
The metals and engineering sector grew by 2% in 2018, despite contending with serious structural headwinds, including a technical recession in the broader economy.
Ade indicated that this momentum is anticipated to continue this year, with all indications that the sector would mark another increase in growth, barring any major disruptions to production.
This growth is despite continuous constraints on the current potential to improve on margins in the sector.
Ade said that, in light of the recent resilience in production in the sector, despite companies facing domestic headwinds, there is a need to ensure that the sector remains attractive by directly reducing increasing intermediate input costs and managing borrowing costs to improve consistently on the bottom line.