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By 21st Oct 2015Sep 20th, 2019No Comments

Mr Nyatsumba said that the South African manufacturing sector was going through a structural adjustment phase, rather than a cyclical downturn. A rethink of South Africa’s approach to manufacturing was, therefore, most crucial.

“The metals and engineering sector is without doubt going through a fundamental structural adjustment, not just a cyclical correction. The sector almost doubled in size over a 14-year period from 1994 until the international financial crisis of 2008-2009 hit South Africa, resulting in a 21% contraction in output that year. Since then the sector expanded by about 6%, but the level of value added to the economy today is still 16% lower and output is 25% lower than it was during the peak of 2007/8,” Mr Nyatsumba said.

The extreme volatility in the economic environment since 2007 made planning very difficult. In addition, prices for South African metal sector exports were also depressed and could continue to be so for a long time. Research showed that metal price cycles last on average 35 years. The latest cycle started in 1999 and reached its peak in 2007 and the downswing had already lasted seven years. This meant that there could still be another 10 to even 20 years of depressed markets ahead.

Mr Nyatsumba said that domestically the sector was critically linked to the mining, construction and auto sectors, which as a group directly contributed 17% (R570 billion) to South Africa’s GDP in 2014 and, depending on the indirect and induced multipliers, up to twice this number.

“These vital sectors are one another’s customers and suppliers, which means that instability affecting one sector inevitably affects the others.”

Furthermore, these four sectors were very electricity intensive and were almost equally hard hit by electricity outages which disrupt production, lead to under-utilisation of production capacity and higher costs, substitution of locally-manufactured products by imports, the threat of not fulfilling export orders and losing contracts, as well as uncertainty about the viability of fixed investment.

Mr Nyatsumba said that the consequences of the rise of China and India, as well as the structural adjustments taking place in those economies, will be significant.

“There are massive surpluses generated in those markets, which find their way onto the world market. The current rebalancing taking place will shift their input demand patterns downward permanently. Demand out of Africa could decline in sync, due to its dependence on Chinese demand for its commodities for its own growth.”

“For recovery to commence in the sector, export markets need to recover and domestic demand from mining, the automotive sector and construction has to resume. Far more important, however, was the need for South African manufacturing in general and the metals and engineering and related sectors in particular to be much more efficient in their production processes in order to be competitive internationally.

“While there are certain factors that are not within their control – such as the comparative cost of South African labour, power supply and various administered costs – local manufacturers will have to do more about those factors that are within their control. Inevitably this will mean embracing advanced manufacturing methods and processes and investing in latest, more efficient technologies. In the end, that will be the only way to ensure higher levels of international competitiveness than is the case at the moment,” Mr Nyatsumba said.
Regrettably, higher levels of mechanisation would have adverse effects on job creation, at a time when South Africa needs more jobs to be created. It would, therefore, be vital for the Government and its various agencies like the SETAs to invest heavily in up-skilling and re-skilling the general South African workforce to place it in a position to operate high-technology machines and to get jobs in the resulting adjacent sectors.
Equally important to prevent the manufacturing sector from withering into oblivion were policy adjustments from Government and cohesion between business and labour.

“We are in uncharted waters. Cooperation amongst business, government and labour to find solutions is critical. We are encouraged by recent approaches to tackle the current steel crisis, and we can only hope for more such trilateral approaches in future. Only such an approach will stand a good chance of lasting success,” Mr Nyatsumba concluded.

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