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Metals, engineering sectors to ‘walk the tightrope’ to economic recovery

24th June 2020

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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The road to the metals and engineering (M&E) sector’s post-Covid-19 recovery will be long and will require extraordinary and targeted policies to walk the tightrope towards an economic reboot, Steel and Engineering Industries Federation of Southern Africa (Seifsa) chief economist Dr Michael Ade said in a statement on June 24.

With the global Covid-19 outbreak having slashed production and sales forecasts and the overall economic outlook, shutdown measures implemented by government, starting in March, have “hugely impacted” on manufacturing activity in the broader M&E industries, including the steel-consuming industrial sectors.

This is in addition to the challenges experienced by the M&E sector over the past few years owing to subdued domestic demand, increasing levels of de-industrialisation and persistent trade wars between the US and several of its main trading partners.

According to Ade, all of these factors combined have “led to continued further deterioration in business sentiment and restricted investment growth throughout 2019, before the onset of the coronavirus pandemic”.

“All indications are that the road to an economic revival for the M&E sector after the Covid-19 economic crisis will be long, and extraordinary idiosyncratic and targeted policies will be needed to walk the tight rope,” he says.

He adds that other factors may further delay the sector’s ability to emerge from the doldrums. These include low domestic demand, erratic power supply, rising administered prices, exchange rate volatility, generally low productivity levels, capacity underutilisation, declining net operating surpluses and high import penetration.

“Taking the M&E cluster’s production performance in [the first quarter of] 2020 into account, our full-year forecast, released in our ‘State of the Metals and Engineering Sector Report 2020 to 2021” in January, has been significantly revised downward from 0.6% mild growth to -9.1% deceleration [owing] to stagnant local demand, the Covid-19 pandemic, downwardly volatile production numbers and the prevalence of significant sector-specific downside risks,” he elaborates.

Commenting on the global economic outlook, Ade says the pandemic “highlights an urgent need for health and economic policy action, including global cooperation to cushion its consequences, protect vulnerable populations and improve countries’ capacity to prevent and cope with similar events in the future”.

Once the crisis wanes, Ade emphasises that it will be necessary to reaffirm credible commitment to sustainable policies and undertake the necessary reforms to support long-term growth and demand prospects.

He says metals prices were anticipated to decline by 16% this year owing to slacking demand, before showing a modest increase in 2021. The rebound in metals prices is now expected to be driven by a recovery in Chinese demand, which accounts for around 50% of the global consumption of base metals.

Domestically, however, Ade says that although the economy was already performing poorly in recent times (underpinned by two technical recessions in 2018 and 2019), the domestic disruptions at the end of the first quarter of the year and large parts of the second quarter can “mainly be attributed to the Covid-19 pandemic”.

“The uncertainty created by the virus has compounded low levels of domestic demand for intermediate and finished products, dampened selling prices and worsened levels of business, investor and consumer confidence,” he laments, adding that the swift fall in global travel as a result of the pandemic has “had a particularly severe impact on South Africa’s manufacturing sector’s logistics and supply chains capabilities, also affecting tourism spending on locally manufactured or value-added goods”.

He adds that it was owing to these factors that Seifsa has revised its initial expectation of economic output in the M&E macroeconomic framework downwards.

“Seifsa does not expect a robust rebound in output for the broader manufacturing sector, including its diverse M&E cluster of industries, for the rest of this year. Although there will be some level of growth largely underpinned by a weaker rand and rebounding exports, it will be weak [owing] to poor production fundamentals, capacity under-utilisation and high volatility in production from 2014,” according to Ade.

He says that “every bad situation presents a small window of hope” and that an opportunity now exists for local companies to increase exports to the rest of Africa and mitigate losses from the pandemic.

“Although the African market is down, it is still a market. Local companies should mobilise resources to immediately increase exports share regionally and the new export development course offered by Seifsa will provide some leverage to beleaguered businesses during these tough times,” Ade concludes.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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