Despite continuous challenges in recent years, the local metals and engineering sector is expected to show moderate growth of 1.8% this year. The various subsectors will register varied levels of growth, with some expanding and others contracting during the year.
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’ last month.
Challenges facing the sector include high volatility in production, lack of new investment and poor fixed-capital stock, an increasing share of imported intermediate inputs, a high imports-domestic demand ratio and high dependency on exports, as well as high interdependence with the mining, construction and automotive industries, explains Seifsa chief economist Dr Michael Ade.
He tells Engineering News that existing challenges can be mitigated by giving more consideration to latent concepts such as productivity, capacity use and competitiveness. “This will come about as a result of increased local and international demand, which will compel companies to strengthen inventory use, inventory and output.”
Further, he says stakeholders need to manage existing trade-offs between unit labour cost and net operating surplus, investment and net operating surplus, competitiveness and electricity costs, as well as electricity costs and production, given the spill-over benefits on employment or jobs.
Moreover, there needs to be continuous improvement in the key sectors that are important to the survival of the metals and engineering cluster, which include the mining, automotive and construction sectors, and the rest of manufacturing, he adds.
Most metals prices weakened last year, largely owing to concerns about the effects of tariffs on global growth and trade, with industrial metals particularly responsive to these concerns, given their many uses in the manufacture of tradeable goods.
Metals prices generally are expected to stabilise this year and next year, thereby strengthening exports and improving growth prospects for commodity exporters, along with enhanced capital inflows. This view is, however, not without downside risks, which include persistent trade tensions between the US and China and the imposition of tariffs on products, which will have varying effects on metal and agricultural commodities globally.
“These dynamics are expected to add to the volatility in metal prices in the short term, especially since the trade tension affected about 2.5% of the global goods trade in 2018, with additional implications for South Africa’s metals and engineering cluster of industries,” Ade comments.
Further, metals prices rose 6% on average in 2018, less than previously expected. After increasing in the second quarter of last year, prices decreased sharply in the third quarter and especially going into the fourth quarter following the imposition of broad-based tariffs by the US on China’s imports, he explains.
In contrast, steel and aluminium prices rose in the US, following its announcement of specific import tariffs on those metals for a wide range of countries, including South Africa.
However, the temporary pause in tariff hikes agreed upon by the US and China during the G20 meeting in early December is positive, says Ade. “Encouragingly, there are still ongoing talks between the US and China regarding trade squabbles; if the talks are successful, this might lead to reduced trade tensions, with positive implications for metals prices.”
The US and China are the world’s largest economies, with the potential to influence metals prices; the expectation is for metals prices generally to stabilise after existing trade tensions subside, he explains.
Ade points out that, generally, emerging markets are facing headwinds, including increasing protectionism and currency pressures, which add to exchange rate volatility and more difficult external financing conditions.
“In South Africa, with sub-investment grade ratings from ratings agencies, it becomes extremely difficult to obtain funding from external capital markets. Poor investment ratings from the renowned agencies mean increased external borrowing costs and the general cost of doing business, also negatively affecting production in the local industry.”
Local companies need to stay resilient by continuously improving on local demand by applying designation requirements, containing intermediate input costs (including electricity costs) and improving export competitiveness, Ade suggests.
Emerging economies, including the various South African State-owned enterprises (SOEs), should, therefore, be prepared for possible difficulties in obtaining external funding, considering the generally challenging borrowing environment.
Given that tighter borrowing conditions might lead to increased difficulties for emerging markets, depreciating currencies and higher capital outflows, local decision-makers need to be swift and certain with regard to policymaking, as domestic policy uncertainty might add to international financial stress faced by local companies, he explains.
Moreover, continuous support for the local industry through the Steel Downstream Competitiveness Fund of R1.5-billion and the R500-million incentive for the metals and engineering sector, including initiatives aimed at improving efficiencies at SOEs, is key in ensuring the survival of the local industry, Ade stresses.
Following years of negative output growth and a rebound from the recession, 2018 was another better year for the metals and engineering sector, as it consolidated the positive growth performance gained in the preceding year.
“Although indications are that the sector has stabilised, there is a need for the sector to rebound and post better operating profits to attract new investment,” Ade concludes.