The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has welcomed the annualised 66.1% rise in real gross domestic production (GDP) in the third quarter of the year, albeit from a low base, given the second quarter’s decline of 51.7%.
Statistics South Africa attributed the rise in real GDP, measured by production, to an uptick in activity across all ten industries of South Africa’s economic classification.
Of these, the largest positive contributors to GDP in the third quarter were manufacturing, mining and quarrying, trade and catering and accommodation.
Seifsa chief economist Chifipa Mhango says signs of recovery have been evident with the easing of declines in production for key sectors such as the manufacturing and mining sectors, as well as in Purchasing Managers’ Index numbers having being on an expansionary trajectory recently, amid the easing of Covid-19 lockdown restrictions.
“From a metals and engineering (M&E) sector perspective, we are encouraged to see the rise in construction activity to 71.1% in the third quarter. The construction industry is one of the key market segments for M&E industry products and accounts for over 60% of the local steel industry’s sales volumes,” Mhango notes.
He adds that it was encouraging to see that gross fixed capital formation (GFCF) had increased at a rate of 26.5% in the third quarter, since this was the key indicator of demand activity for the M&E sector.
The positive movement in the GFCF was mainly attributed to the increase in construction works, residential buildings, non-residential buildings, machinery and other equipment.
In recent months since the Covid-19 lockdown measures were implemented in March, sales of building and construction material picked up from a low base of R1-billion in April to a moving monthly average of R10-billion in September.
A similar pattern was also reflected in production sales improvement from a low base of R18-billion in April, to R46-billion in September. Mhango says this was supportive of the trend in the GFCF numbers released alongside the GDP figures.
He further explains that the M&E sector is heavily reliant on the performance of the mining, construction and other manufacturing sector segments to survive, as these are the key sectoral markets for steel and related metals product.
For example, the period between 2003 and 2010 saw several major infrastructure projects being implemented in the energy sector in preparation for the 2010 Word Cup. The manufacturing sector, and the M&E sector in particular, correspondingly experienced a boom in production, with capacity utilisation of over 85%.
“It would be encouraging to experience similar demand for M&E sector products at this time,” Mhango states.
He cautions, however, that to guarantee stock availability, the industry will need to move back to higher levels of capacity utilisation than the current Covid-19-driven level of 67% that was the result of working restriction guidelines at plant level.
Mhango also highlighted the positive increase of 201.4% in the export of goods and services in the third quarter, which was mainly attributable to an increase in vehicle and other transport equipment, precious metals, machinery and equipment, as well as base metals.
He says that this was encouraging, as the industry’s competitive advantage on the international market was being eroded by the high costs of doing business, mainly driven by rising electricity and logistical costs.
“As local demand remains relatively weak, export markets offer opportunities for the M&E industry.
"However, there has to be policy intervention from the government to address the challenges faced by the M&E sector, as presented in the Steel Master Plan, in order for the sector to be globally competitive.”