As South Africa ends its first week under Alert Level 2 of the national lockdown, industry organisation the Steel and Engineering Industries Federation of Southern Africa (Seifsa) is hopeful that the increased economic activity from the reopening of key sectors will boost the recovery of metals and engineering businesses that have been "brought to their knees" by the pandemic, says Seifsa chief economist Dr Michael Ade.
The demand for metals and engineering products is derived from the demand for finished or final products manufactured by other industries, Ade says.
He expresses the hope that increased business activity from other industries and the consequential demand for consumer goods owing to people being able to earn some level of income will, in turn, result in higher demand for intermediary goods.
As an example, he notes that increased demand for vehicles is likely to have positive implications for the metals and engineering (M&E) sector since, on average, 900 kg of steel is used per vehicle manufactured, with components spanning the body structure, panels, doors, trunk, engine block cast iron and fuel tank.
“Manufacturing activity may need to be ramped up as demand consistently increases, but this could be a difficult challenge, especially for small and medium-sized enterprises (SMEs) in the M&E and the broader manufacturing sector, as cash flow has been drastically reduced as a result of little or no business activity during the lockdown period,” he says.
The Covid-19 pandemic has added to the plethora of challenges already faced by SMEs in the M&E sector, such as high operational costs and reduced demand for their goods, thus impacting negatively on production, margins and profits, Seifsa points out.
SMEs represent 66% of the member companies that the organisation represents as a national federation of employer associations.
Ade says, generally, SMEs make up the majority of employers in South Africa. He cites research by McKinsey, which shows that SMEs make up more than 98% of businesses in South Africa and employ up to 60% of the country’s workforce across all sectors.
As a result, he says, it is important for policy-makers to provide relevant support to SMEs, which will enable them to navigate this critical time and sustain production as economic activity gained momentum.
“SMEs are in deep crisis and desperately need financial assistance to stabilise operations and improve margins. Cash flows are extremely tight and some businesses have closed down. Any further delays may complicate matters, leading to significant job losses and even more company closures,” Ade says.
He indicates that the organisation believes liquidity or cash flow is the most significant area where the government can intervene urgently to support the industry. He proposes that the government, through one of its funding institutions, create a temporary lending or bridging facility for SMEs to allow them to continue operating.
Ade says that while various Covid-19 relief funds were made available for SMEs during the pandemic, many companies were unable to take advantage of these funds for a number of reasons, including credit-qualifying criteria.
He emphasises that it is important that the government creates a fund that will enable those businesses that have fallen through the cracks to secure funding.
Ade says there is also a need to promote access to competitively priced inputs for the mid- and downstream sectors.
“Locally-produced steel is considerably more expensive than imported steel (especially prior to the import tariff increases), putting local producers on the back foot when trying to compete with the cheaper imports. The loss in competitiveness is driving most sub-industries to import components, leading to high import penetration of components and standard parts.”
Ade also calls for an immediate review of the quantity of imported products that can be manufactured locally to prevent a flood of products into the market from countries that had opened up earlier after their respective Covid-19 lockdowns and had surplus inventory which could then be dumped into the South African market.