Coupled with ESKOM’s acknowledgement that it cannot guarantee electricity over the next five years, the medium and long term impact on investment in the economy is potentially crippling. Given the fact that ‘potential economic growth’ is calculated by taking into account the growth in capital investment, human capital and productivity, the much quoted 3,5% number must be in serious doubt. On the other hand, Transnet’s resolve, and actions, to continue investing in infrastructure ‘for the next 15 to 25 years’ is what is needed. If the controversy around SANRAL’s funding could be resolved once and for all, the equation for investment’s contribution to growth could decidedly turn positive.
Initiatives to raise SEIFSA members’ profile in debates/support for the sector’s development
The SEIFSA Economics and Commercial division constantly goes out to seek initiatives and create relationships that will benefit SEIFSA members and the metals and engineering sector in South Africa.
On 14 October we attended the biannual meeting of the Customs Operations ‘key stakeholders’ forum’ in Pretoria. Again, much effort is going into plugging the holes in our borders in terms of smuggling and dumping, with greatest successes in clothing and textiles. The latter has set up a ‘Textile Compliance Centre’ which coordinates all sub groups/industries in their sector with Customs, ITAC, the national compulsory registration council, and procurement institutions and any other government institutions. We thought this to be a good model to perhaps emulate within our sector. We have asked Nick Steen, head of this unit, to meet with us. (More info: henk@seifsa.co.za)
On the outcome of the outgoing Governor of the SA Reserve Bank invitation, we (SEIFSA CEO and chief economist) met on the 3rd of November at the Bank. The full management team of the Bank attended the meeting; Ms. Gill Marcus, the Governor Designate, Mr. Lesetsa Kyanyago, three of her special advisors, the head of research, the head of the economics department and three other researchers. The Bank was interested in the economic dynamics underlying the trends, as well as developments in the industrial relations field. Our ‘Half Year Review 2014’, and questions and discussions centered around the international trade and competition situation, employment trends, investment trends, the distribution of value added in the sector amongst remuneration, profits and investment, and the impediments of transport and logistics. The Bank wished to make these meetings a regular occurrence in future. It was a unique opportunity to raise understanding of our sector at such an influential institution in the country. More info; henk@seifsa.co.za)
The Minister of Finance delivered his Medium Term Budget Policy Statement (MTBPS) on 22 October. The MTBPS has been eagerly awaited to ascertain government’s perceptions of the long and short term challenges facing the economy, and the remedies needed. The minister’s analysis of these were realistic and without mincing of words. The clear distinction between short, medium and long term (structural) challenges and solutions is welcomed. It is clear that the Medium Strategic Framework (published by the Presidency earlier this year) has been instrumental in shaping these statements. Government wants/must get its household in order to avoid dragging the country into a debt trap, and possible confidence vacuum, that could effectively paralyse any hope of a better life for all. Short term fiscal measures have been announced. The two biggest risks are success with the savings measures and the governments wage bill containment. Medium term measures have started and possibly need refinement but will start to bear fruit. The longer term projects are getting deserved and increasing attention, which is refreshing. Unfortunately the short term impact of the associated problems are very debilitating; stabilising the supply of electricity, fixing the quality of the health and education system, building capacity and strengthening accountability in local authorities, emphasis on supporting urban renewal and fixing increasing dilapidated infrastructure, and the same applies to transport and logistics improvements. These are all needed to achieve the structural adjustment in the economy, and to break out of the declining growth performance. (SEIFSA’s full report on the MTBPS will appear in the SEIFSA News and is available on request (henk@seifsa.co,za).
The possibility of designating transformers has been mooted a while back, but was turned down by the Dti, mainly on objections from ESKOM. Large importation of transformers by local authorities since, has focussed the minds and the designation idea has been revisited and more or less accepted. SEIFSA helped the Dti to coordinate and collate the latest updated data for this process. A session took place at the Dti on 23 October to hand over all the data and discuss the way forward. Robust discussions were had, and we offered to convene a meeting with the industry once decisions have been firmed up. (More info: taffie@seifsa.co.za or henk@seifsa.co.za).
HPL has made several presentations to individual companies, associations and to the Western Cape provincial government demonstrating SEIFSA’s ability to tailor-make research for planning and policy purposes, or to provide a strong basis for such research. The latest one was at the Aluminium Federation of SA on the 22nd of October. We showed what data is available and what type of in depth analysis could be done. In most such cases, customisation is often needed in close cooperation with the entity. In the aluminium case, the dominance of the primary producers in the data makes its usefulness for the secondary producers less attractive, but could be fine-tuned with industry knowledge and developed into a powerful tool for company and policy advocacy applications. (More info: henk@seifsa.co.za)
The latest amendments to the Codes of Good Practice on B-BBEE (published by the Dti) are open for public commentary from 10 October until 14 November 2014. BUSA organised a workshop on 3 November with the objective to increase understanding of the changes and agree on issues that will be included in the BUSA submission to the Dti. The workshop was presented by Murray Chabant from Signa. The workshop covered the following: Qualifying Small Enterprise statements (Code 600), Guidelines for developing Sector Charters (Code 000: Statement 003), Specialised Enterprises (Code 000: Statement 004), Sale of Assets (Code 100: Statement 102), and Equity Equivalents for Multinationals (Code 100: Statement 103). SEIFSA will be part of the BUSA delegation to attend a Dti workshop on 12/11/2014 that will be held at the Department of Tourism offices in Pretoria. SEIFSA had a Dti official lined up for an information session and workshop on the subject to precede the comment closing date, but could not raise enough interest for the event. For further information or any comments, please contact Thakhani Khalushi (thakhani@seifsa.co.za). SEIFSA has planned workshops as follows; 20 November 2014 in Johannesburg, and 14 November 2014 in Durban.
SEIFSA’s commercial manager (Mashirane Matheba) has been actively pursuing the National Empowerment Fund with the intention of establishing a dedicated empowerment fund facility for SEIFSA members. In broad terms it would entail a facility for members to deposit their corporate social investment and/or enterprise development funds in terms of their B-BB EE scorecard commitments, which will attract a R1,50 contribution from the NEF for every R1 committed. These funds will be ring-fenced for application in the metals and engineering sector. This is potentially a powerful, focussed conduit for fostering human resource and small company development. For more information, please contact Mashirane (mashirane@seifsa.co.za).
Transnet Freight Rail (TFR) held an inaugural Steel Industry Forum on the 21st October 2014. The workshop was attended by TFR’s customers, suppliers, TFR staff and industry bodies, including SEIFSA. Transnet wants to move transportation of steel from road to rail. The purpose of the forum was to seek strategic alignment on Transnet’s Market Demand Strategy (MDS) and the Steel Industry’s supply chain optimization, and also to harness customer insights for collaboration in pursuit of improved service delivery. The MDS aims to expand and modernize the country’s ports, rail and pipelines infrastructure over a period of seven years in order to promote economic growth in South Africa. The MDS has an investment program of R300 billion to achieve; efficient supply chains, global competitiveness, growth within SADC countries, reduced costs of doing business, and improved customer satisfaction. Transnet is asking the Steel Industry to; commit to volumes to support the capacity investments, to invest in siding capacity (rehabilitation and expansion), to identify consolidation opportunities and to foster closer relationships downstream in a mutual spirit of partnership. These meetings will take place once per quarter. SEIFSA members are encouraged to contact Mashirane Matheba, Commercial Manager at SEIFSA if there is any possible collaboration or assistance required regarding Transnet Freight Rail.
An Anglo American sponsored Enterprise Development Conference was held at Gallagher Convention Centre on 27th and 28th October 2014. The conference was sponsored by Anglo American in association with Property Point and Transnet. The conference showcased different inspirational keynote speakers and panel discussions featuring some of the country’s experts in the Enterprise and Supplier Development space. Taffie Chibanguza is also working with Anglo American on their enterprise development program, training their suppliers in the use of the price escalation indices and processes. Any member who has suppliers that they would like to development (and could enhance their BEE scorecards) should contact Taffie (taffie@seifsa.co.za) Mashirane (mashirane@seifsa.co.za) or Thakhani (thakhani@seifsa.co.za) for more information and support.
And then, the last worth mentioning is the momentum building up within the Industry Policy Forum process, both in the main agreement and trade and policy challenges workgroups. We hope to have a draft report on the latter to be discussed shortly and then taken further with the unions and other partners. In the light of the dire economic trends, we better make headway in trying to formulate our suggestions for solutions. (More info: henk@seifsa.co.za or lucio@seifsa.co.za)
Understanding the Economic environment:
Three datasets of specific importance for the metals and engineering sector were released recently.
• The Medium Term Budget Policy Statement contained important data on government’s expectations about the economy. The minister has to achieve four different policy objectives simultaneously, but the remedy for each jeopardizes the accomplishment of the others. He lowered government’s economic growth forecast for the next number of years to 1,4% (2014), 2,5% (2015), 2,8% (2016) and 3% (2017). This seems to be more realistic than before; the economy is growing far below its potential. The widening balance of payments deficit and increased dependence on foreign financing pose risks which are clearly understood. He announced measures to curtail government spending and lower the borrowing requirement to address this problem. SA’s infrastructure program requires large imports, which cannot easily be curtailed. His projections for the balance of payments deficits (relative to GDP) reflected this; 5,6% (2014), 5,4% (2015), 5,2% (2016) and 5% (2017). Government spending levels have been maintained to underpin growth despite declining tax income. The brakes were applied heavily; his estimates for the borrowing requirement of government as a percentage of GDP are 4,1% (2014/15), 3,6% (2015/16), 2,6% (2016/17) and 2,3% (2017/18). If this is achieved, government debt to GDP will only rise from 42,8% to 44,6%, to 45,4% and 45,9% in the respective years. These announcements were probably the most eagerly watched by rating agencies internationally. The curtailing of the government wage bill is crucial for success. The minister’s inflation targets are realistic and to the upper end of the SARB target range; 6,2% (2014), 5,9% (2015), 5,6% (2016) and 5,1% (2017). So many factors can influence these numbers, the downside mainly linked to oil prices and the upside due to exchange rate depreciation.
• Metals and engineering production data for August were released on the 9th of October (with the next release on the 11th of November). Production grew by 16% in August after the month-long strike and losses of 17% in July. All sub industries recovered some ground in August with ‘electrical machinery and equipment’ faring the best, resurging by 30% with the least recovery in ‘special machinery’ production (7%). The magnitude of the challenges facing the sector is borne out by the following facts;
o Despite the significant recovery of production in August (on July), compared to August 2013, the sector still contracted by nearly 4%.
o Production for the eight months of 2014 was 3,5% lower than the same period last year.
o The recovery was also not enough to change the course of the year, yet. Production for the 12 months ending in August compared to the same 12 months ending in August 2013, contracted by nearly 2%.
The result has been further underutilisation of production capacity and more strain on profit margins, company closures and job losses. There are more serious longer term consequences though. The fragility of the inter-relationship between metals and engineering and the auto sector, and the real possibility of losing out on supply chains is significantly illustrated by the August growth numbers. Whereas ‘motor vehicle’ production recovered by 32% in August, the production of ‘vehicle bodies and trailers’ recovered by only 5%. Even more concerning is the fact that the production of ‘parts and accessories’ did not recover at all (the latter is part of, or a significant market for metal products). It is quite clear that auto components can, and will be imported if need be. The consequences will be dire.
• The Kagiso/Bureau for Economic Research’s Purchasing Managers’’ Index is an important leading confidence indicator. The overall PMI for October reached 51.8 index points indicating very slow improvement in manufacturing confidence (above 50). The performance of the ‘business activity’ sub index, however, is the important one for metals and engineering. This index leads production trends by 12 to 18 months. Not only did;
o The index decline during October on September by half a percent, but
o The year to date (10 months) was nearly 9% lower than the same period during 2013.
o On a 12 month basis, the index was more than 6% lower than the same 12 months during 2013.
o The month of October was more than 7% lower than October 2013.
Trend analysis of these numbers leads us to the (sobering) conclusion that that the contraction has probably been arrested (we are not falling as fast any more ..!) These are the first signs of a possible bottoming of the trough (recovery) but difficulties to gain momentum are very evident; the October data illustrates this for the manufacturing sector generally, and metals and engineering specifically. Hopefully coming months will see actual recovery.
Our offer stands if you need us to share the important trends in the sector, or your specific sub-industry individualised , in support of your planning/budgeting process, please contact us. Research is ongoing and available.
Have a great week ahead. The Economics Team