The metals and engineering sector has experienced slow and unstable growth since the financial crisis in 2007. In addition, the recent demand and production disruptions through various strikes have exacerbated the already alarming trends. It is against this backdrop that the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) has formulated the view that the sector may contract during 2014.

Business confidence has been compromised in the sector since the financial crisis and seems to have taken a second turn for the worst since 2011. Capacity utilization has also been below the full benchmark of 85% for many years. In addition, various data indicate that, as a result, profit margins are under severe pressure. Furthermore, on average production levels have been 30% lower than the peak of 2007 and growth patterns vary, due to production and demand disruptions.

However, SEIFSA Chief Executive Officer Kaizer Nyatsumba is of the view that in spite of the challenges currently facing the sector, there seems to be small signs of recovery of confidence. This was evident in the latest purchasing manager’s index figures released in September as well as the Bureau for Economic Research’s Manufacturing Survey for the third quarter.

“Assuming the lag of 12 to 18 months, growth in production will only be under way by the second half of 2015,” Mr Nyatsumba said.

To remedy the challenges currently facing the metals and engineering sector, Mr Nyatsumba says that manufacturing should play a much more critical role. This would help the economy to grow at higher rates than it has done over the past few years.

Mr Nyatsumba said that it was also vital that the Government and the private sector work collectively to achieve international competitiveness and find lasting solutions for economic growth in general and in the metals and engineering sector in particular.

“Approaching sector dynamics holistically has a better chance of success than an approach based on stages of production,” Mr Nyatsumba said.

Mr Nyatsumba said that in the medium term, it was possible that capital intensification would commence. This would be a reversal of prevalent trends.

“The increase in unit labour costs recorded over the past years, along with labour instabilities, may be substantial enough to make mechanisation a serious option.”

Commenting on investment opportunities within the sector, Mr Nyatsumba said there was a serious possibility that deteriorating investment patterns recorded over the past years would continue. The combination of rising domestic costs, production disruptions and competition from cheap imported components has had two results:

• Gross fixed investment and the value of production capacity has declined.
• The sector itself is replacing domestically-produced intermediary inputs with cheaper, imported components for assembly in South Africa in order to save costs and stay competitive.

“Low capacity utilisation, very low profit margins and competition from imports may result in no or very little investment in the sector. In addition, international doubts regarding South African producers’ ability to honour their supply commitments as exporters may have dire consequences in future.”

The Industrial Policy Response

Mr Nyatsumba is of the view that any industrial policy response should recognise the complexity of the sector and the fact that it is highly exposed to international markets and import competition.

The sector has the same domestic constraints as all other sectors, but it seems to be losing its competitiveness. The support for higher value-added products internationally seems to be overwhelming South African producers. The strategy to “tax” upstream â€" commodity and basic metal producers â€" to compensate for international subsidies of imported products was not viable.

“There has to be a holistic policy response and the Industrial Policy Action Plan is a fine attempt,” said Mr Nyatsumba, who reiterated the need for Government and the private sector jointly to find sustainable solutions to address South Africa’s current economic woes.