Henk Langenhoven
Photo by: Duane Daws
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) warned on Friday that the metals and engineering sector could contract by between 2% and 3% in 2014, owing primarily to the fallout from a month-long strike in July.
The sector, which made up about 30% of the broader manufacturing industry, grew by 2% in 2013.
Chief economist Henk Langenhoven said that, despite the Purchasing Managers' Index (PMI) rising above the critical 50-point level in September, which was indicative of expansion, the recovery was unlikely to be strong enough to ensure growth for the full year.
In a half-year review, Langenhoven noted that production levels had been highly volatile as a result of production and demand disruptions, while capacity utilisation remained below 85%.
Confidence had been severely compromised, while profit margins were under pressure. These factors, together with low capacity-utilisation rates, meant that investment was weak.
There had not been a material shift towards capital intensity, however. But Langenhoven said such a shift was possible in the medium term, particularly as firms sought to mitigate the impact of labour disruptions on output.
There had also been a “structural shift” in the value-added distribution in the sector, with profits shrinking as cost pressures associated with wages and intermediate goods rose. The sector was replacing domestic intermediary inputs with cheaper imported components to sustain competitiveness.
Langenhoven said production levels should rise from the second half of 2015, assuming a lag of 12 to 18 months between the rise in the PMI to expansionary levels and growth in actual output.