South Africa’s metals and engineering sector is poised for a second consecutive year of modest growth, with the Steel and Engineering Federation of Southern Africa (Seifsa) forecasting a 1.1% expansion for 2018. The sector grew by 2.7% in 2017, breaking a streak of three consecutive years of contraction.
However, the recovery was unlikely to signal an end to output volatility, which had become a hallmark of the industry since the global economic crisis of 2008. In addition, Seifsa chief economist Dr Michael Ade warned that industry was still in the throes of fundamental structural change, characterised by declining investment, output and employment, as well as low capacity utilisation levels.
Between 2007 and 2017, production in the domestic metals and engineering sector declined materially, with output falling by 15% between 2007 and 2009 when compared with pre-crisis levels. Between 2010 and April 2013 it fell by 16% against pre-crisis levels and by 18% between 2013 and 2016.
Capacity utilisation rose to nearly 80% in 2017, but remains below the ‘full capacity’ benchmark of 85%. Over the past 11 years, the industry had achieved the benchmark only in one year, that year being 2007.
Employment trends were also “uninspiring”, despite a 510-jobs uptick in 2017. Between the second quarter of 2015 and the third quarter of 2017, the sector shed more than 6 500 jobs.
However, Ade said the positive 2018 prognosis, which is outlined in detail in Seifsa’s ‘State of the Metals and Engineering Sector Report 2018 to 2019’, was supported by rising global economic growth, improving domestic confidence and an expectation that the South African economy would grow by between 1.1% and 1.2%.
The dependence of metals and engineering companies on the mining, automotive and construction sectors was also analysed, with the report indicating that the automotive and construction sectors were likely to offer demand support during the year.
The report was less optimistic about demand conditions in the mining sector, but Ade said he would be monitoring developments in the first quarter, with signs that recent political developments could be positive for the mining industry in 2018.
On the trade front, Africa was expected to remain the most important market for South African metals and engineering exports. In 2017, Africa accounted for 37.2% of the export basket and also reflected a positive R80-billion trade balance. Overall, the metals and engineering trade deficit came in at R121-billion last year, with the sector exporting R237-billion-worth of output against imports of R358-billion.
The composition of the export basket to Africa was also heavily weighed towards machinery, vehicles, plastics and rubbers, whereas exports to Asia, Europe and the America’s were underpinned by base metals.
Ade said the analysis implied that greater priority should be given to opportunities in sub-Saharan Africa, including those inside and beyond the Southern African Development Community market, which accounted for the 43.6% of exports to the region.
“Despite the current potential to improve on margins in the M&E sector being fragile due to domestic headwinds, all indications are that the sector will record another increase in growth during 2018, barring any major disruptions to production,” Ade concluded.