Commenting on the data released by Statistics South Africa (StatsSA) – which indicated a general 4,6% decline in spending on gross fixed capital formation and a 3,8% decline in metals and engineering production – SEIFSA’s Chief Economist, Henk Langenhoven, said while sustained improvement in economic conditions was necessary to arrest the decline in the metals and engineering sector, it was equally important that gross fixed investment improved simultaneously.
“Surplus capacity in many important sectors makes gross fixed investment unnecessary at the moment, and the drawdown on inventories further suppresses the signal to restart. The intensity of such a signal may be small in the sense that it could be a warehouse running empty, but it could be massive as fear of possible misalignment between electricity generation capacity and demand begins to show,” Mr Langenhoven said.
He said the only positive was that a substantial drawdown had taken place on inventories (-R35 billion), which will have to be replenished at some stage in the future, thus potentially generating demand. He cautioned that there is likely to be a time lag before this happened.
While welcoming the fact that the economy has averted a recession, Mr Langenhoven said regrettably that did not offer much consolation to the metals and engineering sector. This is because so far production in the three related sectors – mining, construction and auto manufacturing – has not yet fully recovered.
According to the information released by StatsSA, mining sector production recovered from a very low base (+12%), construction sector production recovered by 0,1% (and mainly in building activity, which is also not as metal intensive as construction works which need reinforcing and structural steel as well as machinery), and automotive sector production has also suffered due to greatly reduced demand for its products.
However, export sales of basic (ferrous and non-ferrous) metals – the only sub-industry to record improved performance – were slightly higher in the second quarter of 2016.
Mr Langenhoven said the real contraction of the main demand drivers for the metals and engineering sector is shown in expenditure on fixed capital in the economy. According to StatsSA, overall gross fixed capital formation declined by 4,6% in the second quarter (after a contraction of 10% in the first quarter). Although spending had improved on some of the other components, such as residential (+20%) and non-residential (+5%) building, spending on construction works had declined by over 14% and spending on machinery and other equipment by as much as 13%.
He said while the latter two components contributed over 60% of capital formation in the economy, collectively they represented the bulk of demand for the metals and engineering sector.
Mr Langenhoven said that it was worrying that, according to indicators from the Bureau of Economic Research’s quarterly manufacturing survey, production in the sector deteriorated substantially during the third quarter, with the exception of plastics.
The BER survey results showed that all sub-industries in the sector are less confident about the third quarter than they were over the last 12 months – and this trend was more negative than that reflected recently in the purchasing managers’ index recently.