The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has reiterated the devastating impact of the national lockdown on the country's manufacturing output.
Seifsa chief economist Dr Michael Ade says the Statistics South Africa data published on August 11, which reflects a deceleration by 16.3% year-on-year in June, is worrisome for local companies in both the metals and engineering cluster of industries, as well as the broader manufacturing sector, especially given the need for key labour-intensive subindustries to remain resilient in sustaining and creating jobs.
“The ongoing economic crisis and added pressure on the government to address the widening current account and budget deficits mean that there will be a significant delay in the urgency with which businesses are assisted during these difficult times,” he says.
However, Ade points out that seasonally-adjusted manufacturing production increased by 16.8% in June compared with 30.4% in May, highlighting continuing volatility.
Disconcertingly, Seifsa reports the largest negative contribution of -36.6% was made by the subcomponents of the metals and engineering sector, comprising the basic iron and steel, nonferrous metal products and metal products and machinery.
He explains that the poor performance, which reflects the extensive negative impact of the Covid- 19 pandemic on the manufacturing sector over the months of April, May and June, is cause for concern.
However, Ade also says the slightly-improving trend over the same months, albeit still negative, provides a degree of comfort as it means that local businesses are slowly gaining control over the challenges faced, including a disruption of supply-chain activity since the advent of the Covid-19 pandemic.
“These are unusual times for businesses and the current economic environment, underpinned by increasing operational costs and a volatile exchange rate, has compelled businesses to be selfish in exploring ways of ensuring their survival before considering the interest of the broader industry,” he says.
However, going forward, Ade says that, despite the challenging economic atmosphere, he strongly recommends local businesses think long term by continuously supporting other businesses where possible because the ongoing crisis means that much-needed assistance to improve cash flow from development finance institutions or the government will be slow in coming.
“If local businesses cannot be assisted financially or funded, the best companies can do in the interim is to buy or source inputs locally and promote private-private partnerships.”
Specifically, in times of crisis, big local or multinational businesses with the capacity and cash reserves to absorb negative shocks should assist the industry and complement ongoing long-term efforts, such as planned infrastructure spending, by the government aimed at boosting demand and, by extension, production, he adds.
Ade posits that is important to sort out demand and boost sales. “Increased sales of intermediate and final manufactured products will invariably compel companies to take up more capacity as they strive to meet demand, with positive implications for manufacturing output and jobs.”
Importantly, he says increased sales will have a direct positive effect on struggling companies’ profits and margins as they strive to navigate murky waters and remain sustainable.