Economics and Commercial

Metals and Engineering sector production continues to fall more than employment

JOHANNESBURG, 19 OCTOBER 2016 - Figures released by Statistics South Africa (StatsSA) today show production in the sector declined by 3,9% up to August this year, while employment numbers dropped by 3,1% over the same period. Over a 12-month period, production contracted by 4,9%, while employment has fallen by 2,2%.

Commenting on the data, SEIFSA Chief Economist Henk Langenhoven said that the latest production (August 2016) and employment data (second quarter 2016) show no relief in the economic contraction experienced by the metals and engineering sector.

“The great concern is that production is still falling faster than the employment shed over the first half of 2016. These numbers are in contrast to overall manufacturing, which recorded some improvement in production over the year to August 2016,” he said.

Mr Langenhoven said that it is obvious that the production performance of sub-industries in the metals and engineering sector paints a dire picture. Sub-industry figures show that:

• On a 12-month basis, only electrical machinery and equipment manufacturing registered growth of 3%, which is lower than the +5,5% recorded by the end of July this year.
• Over the eight months of 2016, electrical machinery and equipment grew by +0,3% (against 3% previously) and other fabricated metal production grew by +1,2% (against 0,5% in the previous period).
• Basic ferrous production was slightly up by 0,4%. All the other groupings contracted, resulting in the 3,9% decline.
• Of growing concern is that month-on-month performances have deteriorated for some time now. This year, August production was 2,5% lower than July production, which was 2,1% lower than June’s. Only other fabricated metals (+3,7%), general machinery (+1,6%) and household appliances production (+1,3%) increased.

Mr Langenhoven said that the employment survey was done in the middle of the second quarter of 2016. That quarter showed a slight 0,3% (equivalent to 1 044 people) improvement in employment numbers on the first quarter.

“This was in line with a slight improvement in activity during March and April this year, which unfortunately subsided again. Over the first six months period, employment declined by 3,1% on the last half of 2015, and by 2,2% over 12 months,” he added.

Regarding the drop in employment, Mr Langenhoven explained that over a year period (ending in June 2016) the sector recorded a loss of 8 521 jobs. Despite this disappointment, more jobs were created by the electrical machinery and equipment (+1 545), ship building (+297), railway rolling stock (+378), rubber (+501), plastics (+125) and metal castings (+12) sub-industries.

“As for future employment, perceptions are generally negative and in some industries extremely negative,” he said.

The employment indicator of the Barclays/Bureau for Economic Research (BER) purchasing managers’ index (shows a further decline of 3,8% in September this year, which was a continuation of the August 2016 pattern. The latter information covers the manufacturing sector as a whole).

The BER quarterly manufacturing survey differentiates amongst the different sub-industries in the metals sector.

Mr Langenhoven further said that analysis showed that all the sub-industries, bar electrical machinery and equipment (which was highly positive), showed negative sentiment regarding employment numbers towards the end of the year.

“Basic metals indicated some easing, but still had a negative outlook, while fabricated metals and machinery were highly negative about employment prospects. The plastics industry was slightly negative, with the outlook deteriorating towards the end of the year,” he explained.

Reiterating SEIFSA’s previous sentiments of concern, he added that confidence is deteriorating regarding the sector’s future performance, with implications of an extended period of decline.

“Indications are stronger now that these conditions will only improve towards the latter half of 2017. The latest production numbers point to such an outcome. All indications are that job losses will also not ease up for the foreseeable future,” Mr Langenhoven said.

by SEIFSA .

SA’s metals sector and engineering are at a crossroads

We are locked in this zero-sum-game scenario because we are asking the wrong questions. The reality is that the sector is diverse. It does not consist individually of the basic ferrous industry and the rest or downstream industries. Analysis should be focused on the dynamics of the component sub-industries, with sustainable solutions devised that will revive them individually. In time, this holistic approach would, in turn, put the sector as a whole on a growth trajectory.

To break it down, the overall South African market for metals and engineering products consists of production by local producers, minus their exports to the world, plus imports into the country. This aggregate market kept on growing and peaked in 2013 – higher than in 2008. It has since fluctuated somewhat, but is estimated to be at virtually the same level as in 2008.

For each sub-industry, this situation differs due to its unique dependence on exports and the dynamics of its own domestic market. Since 2000, for example, the domestic markets for rubber products grew by 33%, ferrous products by 66%, metal products by 18%, machinery by 56%, electrical machinery and equipment by 54% and other transport equipment by 73%.

Why, then, is the sector production languishing at 30% below the 2007 peak levels? Part of the answer lies in export markets being important, at around 50% of production, but weak. This weakness is coupled with depressed export prices in tandem with commodity price trends. The other side of the coin is that domestic producers continued to lose market share in their own market, from about 50% in 2013 to only 43% this year. The opportunity cost is a massive R50 billion worth of production forfeited and an estimated 40 000 jobs not created (going by the current sector employment multipliers). Again, the numbers differ widely for each sub-industry.

When one looks at the current job losses in isolation, the situation looks dire, especially due to an apparent acceleration in jobs lost recently. Alarmingly, jobs are shed slower than current production declines, indicating that the worse may still come. Over the last 12 months (middle 2015 to mid-year 2016), an estimated 25 000 people lost their jobs in the sector, from a total of 400 800 employees to 375 000 at the last count (mid-2016).

The cost, in terms of company closures and value destroyed, makes for equally bad reading. At an average company size of 50 employees, these numbers translate into 500 companies closing down during the year. (The losses differ again per sub-industry.) However, in the context described above, a set of different questions should be asked.

Surely, in-depth analyses of what each individual sub-industry is exporting to which countries, and what competing products are being imported will yield an array of answers and options of what could be done to regain South Africa’s product share in the domestic market, and larger export successes. To look at the overall sector and attempt one-size-fits-all solutions seems unproductive.

The issue of the sector’s inability to compete with cheap imports is often thrown in the fray willy-nilly. Almost in the same breath, the perceived benefit of a weaker exchange rate comes up, and the fact that exports are not rising concomitantly is then used as further evidence of lack of competitiveness.

Instead, questions must be directed at how to regain domestic market share in niches where the sub-industries can compete and improving efficiencies through modernisation and fixed investment where they are lagging. Recovery in each of the mining, construction and auto sectors is crucial for demand growth. World-class cost effectiveness and moral suasion will ultimately attract private sector demand. Stimulation and redirection of domestic general government procurement demand towards domestic metals and engineering producers is a policy measure over which South Africa has control.

The net result of losing domestic market share is, of course, lower production (-4,5% over the last 12 months) and lower capacity utilisation (-2,4%). At 77% capacity utilisation (against a benchmark of 85%), it means that fixed cost of production could be up to three times higher than at full capacity. Variable production costs have also shot up dramatically during the last two years. The combination of labour costs (20% weight), dollar-based prices (40% weight), administered prices (15% weight) and other costs (25% weight) increased by 12% during the year, while producer and merchant prices increased by only 10% and 3% respectively. The continued pressure on profits is obvious.

Mitigating against some of these variable costs seems critical. A “labour partnership for growth” will have to be formed. The reciprocal damage caused by industrial disruptions (autos, mining, construction and metals) in the past is something to be avoided. The exposure to international prices for inputs makes exchange rate movements a double-edged sword. It helps with export earnings, but simultaneously pushes input prices up. The situation is different in the case of administered prices, over which the country has control.

The debate about the costs of energy (and Eskom’s flier that it may sell electricity cheaper when in surplus) and carbon taxes, for example, is critical for the survival of the sector.
It cannot be over-emphasised that each sub-industry in the metals and engineering sector has unique circumstances and has to be treated individually and policy designed to support growing and successful entities and mitigate against the constraints each may experience.

It seems as if the structural shifts in market dynamics have not sunk in for companies, with some still viewing it as a cyclical downturn, and policymakers who are largely stuck on the “pipeline” construct of how to focus policy. The result of these tendencies is that the wrong questions are asked and the changing of course on a new path of efficiency and competitiveness is delayed.

Henk Langenhoven is the Chief Economist of the Steel and Engineering Industries Federation of Southern Africa.

by SEIFSA .

SEIFSA encourages affected members to participate in review of customs duty on downstream steel products

The Department of Trade and Industry recently announced tariff protection measures to protect the basic ferrous industry in South Africa in a desperate measure to prevent the loss of another 30 000 to 50 000 in the metals and engineering sector. These measures brought with them downstream cost implications impacting the sector’s sub-industries, which need further protection.

Since the announcement, key industry players embarked on efforts to strike a balance between upstream and downstream producers regarding protection. These stakeholders included the Departments of Trade and Industry, the Department of Economic Development, ITAC and the business organisations in the sector.

Efforts for protection of the various parts of the industry are necessary since there are some metals and engineering products that are even further down the value chain, especially products with more added value. These have been under significant threat of imports, although they have less protection than the basic metals upstream.

To achieve this, ITAC has given notice, as per the Government Gazette of 22 July, for the review of the general rate of customs duty on various downstream steel products. These include steel products classifiable under tariff headings 72.17, 73.07, 73.08, 73.12, 73.18, 73.21, 83.02, 84.18, 84.26, 84.50, 84.51, 85.04, 86.01, 86.07, 86.09 and 94.06. The application process has also been simplified.

ITAC conducted a very detailed investigation of each one of these tariff headings to determine the scope for tariff increases and it is ready to support the sector wherever it can.

by SEIFSA .

Job losses in the Metals and Engineering sector

JOHANNESBURG, 27 MAY 2016 - SEIFSA Chief Economist Tafadzwa Chibanguza was interviewed on ANN7 about the job losses being experienced in the Metals and Engineering sector.

by SEIFSA .

Press Release - 2016/02/06: HIGH ELECTRICITY PRICE INCREASES WILL HAVE A CRIPPLING EFFECT OF THE ALREADY EMBATTLED METALS AND ENGINEERING SECTOR (2)

Speaking at the NERSA public hearings on Eskom’s regulatory clearing account application held at the Gallagher Convention Centre in Midrand today, SEIFSA Chief Economist Henk Langenhoven said if the quantum of the application goes through, the already embattled metals and engineering sector would be further crippled.

“SEIFSA is not in favour of any increases. If an increase is absolutely necessary, a much lower percentage increase should be proposed,” Mr Langenhoven said.

He added that collectively the mining, construction, the auto and metals and engineering sectors contribute nearly 20% of South Africa’s gross domestic product, hence sustaining these important sectors was crucial for the economy.

“The performance of these sectors has deteriorated significantly since June last year and the outlook for the next two years remains dire. Exorbitant electricity price increases will have a crippling effect on these sectors in general and the already declining metals and engineering sector in particular. The metals and engineering sector exports 60% of its production and international competitiveness is key to survival; any electricity cost increase will erode it even further,” Mr Langenhoven warned.

Production in the metals and engineering sector has not recovered since the 2008/9 financial crisis and has deteriorated further since June 2015. Production is currently 30% below the peak of 2007.

The possible overall impact of the envisaged electricity price increases on inflation had been captured by the South African Reserve Bank and the assumptions were that any increase would return to +/-13% in 2016/17 and 2017/18.

“In this scenario, headline inflation would be 0,1 to 0,4 percentage points higher at an average of 5% and 6,5% for 2015 and 2016 respectively. Most of the impact would be felt through the direct effects of electricity prices, which have a weight of 4,13% in the consumer price index basket. This does not show the impact on producers, of course. The indirect effects are estimated at 0,5 percentage points during 2016,” Mr Langenhoven said.

Although electricity was not a large portion of production inputs in the metals and engineering sector, its importance was nevertheless equivalent to blood in the human body: without pressure and/or loss of blood, death can be expected. In the metals and engineering sector’s case, business closures and employment losses would t be a given.

by SEIFSA .

Press Release - 2015/10/05: SEIFSA CHIEF ECONOMIST APPOINTED TO THE ITAC COMMISSION

ITAC was established to foster economic growth and development in order to raise income and promote investment and employment in South Africa. It strives to create an enabling environment for international fair trade through technical advice to the Ministries of Economic Development and Trade and Industries. Its core functions are customs tariff investigations, trade remedies and import and export control.

As a member of the Commission, Mr Langenhoven will be part of the team whose role entails the evaluation of investigations conducted by ITAC employees and recommendations to the Ministers responsible. As an economist, Mr Langenhoven will join specialists from diverse backgrounds, including agriculture, other business disciplines, international trade law and labour.

Informing Mr Langenhoven of his appointment, Minister of Economic Development Ebrahim Patel wrote: “I thank you in advance for your commitment to the work of ITAC and wish you all the best in what I am confident will be an exciting and interesting period in the evolution of trade policy.”

Mr Langenhoven is also an active participant in various business forums such as Nedlac, Business Unity South Africa and the South African Reserve Bank economic roundtable discussions, amongst others.

In addition to Mr Langenhoven’s appointment, SEIFSA Operations Director Lucio Trentini has recently been appointed a member of the CCMA Governing Body as well as a member of the Nedlac Labour Market Chamber, while SEIFSA Human Capital and Skills Development Executive Mustak Ally was appointed to the Manufacturing, Engineering and related services SETA and the National Skills Development Boards.

Commenting on the appointments of Messrs Langenhoven, Trentini and Ally, SEIFSA Chief Executive Officer Kaizer Nyatsumba said: “These important appointments confirm SEIFSA’s position as the undisputed voice of the metals and engineering sector in the country.

I am grateful to these Ministers for their recognition of the enormous expertise that resides within SEIFSA, which is available to serve not only the Federation’s interests, but also those of our country as a whole.

“I have no doubt that these colleagues will add enormous value in the deliberations of the bodies on whose Boards they sit. Their appointments onto key statutory bodies gives effect to our vision to promote sustainable metals and engineering industries and to ensure that they are strategically positioned for innovation and growth in the interests of a prospering South Africa.”

by SEIFSA .

THE INTIMATE RELATIONSHIP AMONG THE SECTORS MEANS THAT IF ONE GOES DOWN, ALL GO DOWN

Any disruptions or slowdown in activity in any one of the four sectors influence the others. If the slowdown in domestic car sales is severe and not counter-balanced by sustained or growing exports, it could initiate another wave of lower demand for the metals and engineering sector and exacerbate the already bleak situation, with more retrenchments resulting.
A similar symbiosis exists with mining – and the sector waits with baited breath for the conclusion of this year’s gold mining wage negotiations. We can only hope that it will not lead to a repeat of the disruptions that occurred in platinum mining at the beginning of 2014.
Retrenchments in the mining sector resulting from lower commodity prices, cost pressures and losses have already had a very negative impact on demand in the metals and engineering sector. The latest threats by the Department of Minerals to revoke mining licenses will no doubt send another confidence shock through the sector – and that will delay recovery, something which our country can ill afford.
The construction sector has been in dire straits for several years. In recent times, only housing construction, which has the smallest impact on metals and engineering demand, has shown some life. However, even in the case of housing construction, the impact of the latest confirmation that interest rates are on an upward trajectory is bound to be negative.
Both non-residential building and construction works have not had the expected impact on demand in the metals and engineering sector, even though the latter seems to be on an all-time high, according to the South African Reserve Bank. The only possible explanation is that the current phases of the investment projects are at their highest import-intensive stages possible. Unfair competition from highly-subsidised Asian economies resulted in accelerated import penetration of their products into the South African market in recent months.
As a result, the metals and engineering sector shed an estimated 16 000 jobs at the end of the fourth quarter of 2014. There were some gains during the first quarter of 2015, but this trend will not be sustained. Retrenchments have accelerated in the second quarter of 2015 and are likely to escalate in the third quarter. Our estimate is that, in the second quarter alone, between 6 000 and 10 000 workers have been laid off.
All indications are that output in the sector declined by an annualised 5% during the second quarter, with imports increasing by an estimated 5% and exports declining by 2,5%, thus resulting in a trade deficit of over R30 billion. Fixed investment within the sector declined by 9% during 2013 and a further 17% during 2014. This trend is not expected to be reversed during 2015.
The impact on the sector and the economy at large could be severe. The metals and engineering sector’s contribution to the economy declined from 4,3% in 2007 to 3,4% in the first quarter of 2015.
The four sectors (metals and engineering, construction, mining and automotive) combined contributed 20,6% to GDP in 2000, but that contribution had dropped to only 16,8% by the first quarter of 2015. Their combined workforce dropped by an estimated 30 000 people since 2014, and this could be much worse with the latest announcements of retrenchments. Combined fixed investment has declined by 2,5% in 2014.
The most worrying factor is that the four, inter-connected sectors’ combined trade balance has reversed from a R50 billion surplus in 2011 to a deficit of an estimated R70 billion at the end of the second quarter of 2015. Their collective value add to the economy is estimated to have dropped by an annualised 4,1% during the second quarter of 2015, with the total impact on the country’s GDP growth amounting to an estimated -0,7% contraction.

The one question currently on most people’s lips is: how long are the current economic difficulties likely to last? Closely allied to that question is the follow-up: what is to be done?

It is our considered view that the metals and engineering sector (and, perhaps, the other three as well) is going through a fundamental structural adjustment, and not just a cyclical correction. If this is correct, then the recommended action would be completely different from one that is reacting to a cyclical downturn.

The fact that the current crisis in the metals and engineering sector seems to be seven years in the making should also be seen in the light of fundamental shifts in the drivers behind its growth both historically and now. During the seventies and middle eighties, the sector was riding the crest of a wave of investment and economic expansion not seen since.

The mining sector was investing heavily, reaping benefits from the then commodity super-cycle peak. South Africa’s reaction to the 1973 and 1978 oil crises was to build the oil-from-coal projects, general government fixed investment (water projects and roads) was at a peak, the nuclear programme started at Pelindaba (reactors and uranium-enrichment plant), investment in the arms industry exploded and the previous round of power stations were built. Such investments have long withered away, followed by the shrinking of the metals and engineering sector base to support them.

Very little has changed to reinvigorate the base. Instead, the local mining sector has not benefitted from the most recent commodities cycle and finds itself at the bottom of the trough; there is no nuclear programme; energy price deterioration has virtually frozen expansion in the oil sector; general government fixed investment has never recovered since the middle eighties; and investments by State-owned companies (as in power stations and rail expansions) have so far proved to be highly import intensive. Ironically, the arms industry seems to have found some demand again for its products.

For recovery to commence in the metals and engineering sector, export markets need to recover and domestic demand from mining, the automotive sector and construction has to resume. Whatever policy response is considered, it must take these dynamics into account if it is to succeed. Import tariffs will help in the short term, but sustainable recovery needs a longer-term view.

Henk Langenhoven is the Chief Economist of the Steel and Engineering Industries Federation of Southern Africa.

by SEIFSA .