JOHANNESBURG, 24 JUNE 2020 – The road to the metals and engineering (M&E) sector’s post-Covid-19 recovery will be long and will require extraordinary and targeted policies to walk the tightrope towards an economic reboot, according to Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Michael Ade.
The COVID-19 outbreak across South Africa and the rest of the world has slashed production and sales forecasts and the overall economic outlook. Shutdown measures implemented by the Government, starting from March 2020, have hugely impacted manufacturing activity in the broader metals and engineering industries, including in steel-using industrial sectors.
Dr Ade said this was in addition to the challenges experienced by the M&E sector over the past few years due to subdued domestic demand, increasing levels of de-industrialisation and persistent trade wars between the United States and several of its main trading partners. He said all of these factors combined had led to continued further deterioration in business sentiment and restricted investment growth throughout 2019, before the onset of the coronavirus pandemic.
“All indications are that the road to an economic revival for the M&E sector after the Covid-19 economic crisis will be long, and extraordinary idiosyncratic and targeted policies will be needed to walk the tightrope,” Dr Ade said.
He said other factores that may further delay the sector’s coming out of the doldrums include low domestic demand, erratic power supply, rising administered prices, exchange rate volatility, generally low productivity levels, capacity under-utilisation, declining net operating surpluses and high import penetration.
“Taking the M&E cluster’s production performance in Q1 2020 into account, our full-year forecast, released in our State of the Metals and Engineering (M&E) Sector Report 2020-2021 in January, has been significantly revised downward from 0.6 percent mild growth to -9.1 percent deceleration due to stagnant local demand, the COVID-19 pandemic, downwardly volatile production numbers and the prevalence of significant sector-specific downside risks,” Dr Ade said.
Commenting on the global economy outlook, Dr Ade said the pandemic highlights an urgent need for health and economic policy action – including global cooperation – to cushion its consequences, protect vulnerable populations and improve countries’ capacity to prevent and cope with similar events in future.
“Once the crisis wanes, it will be necessary to reaffirm credible commitment to sustainable policies and undertake the necessary reforms to support long-term growth and demand prospects,” Dr Ade said.
He said metals prices were anticipated to decline by 16 percent in 2020 due to a slack in demand, before showing a modest increase in 2021. The rebound in metals prices is expected to be driven by a recovery in Chinese demand, which accounts for around 50 percent of the consumption of base metals.
Local economic outlook
Domestically, Dr Ade said although the economy was already performing poorly in recent times, underpinned by two recent technical recessions in 2018 and 2019, the domestic disruptions at the end of Q1 2020 and large parts of Q2 can mainly be attributed to the COVID-19 pandemic.
“The uncertainty created by the virus has compounded low levels of domestic demand for intermediate and finished products, dampened selling prices and worsened levels of business, investor and consumer confidence. Also, the swift fall in global travel as a result of the pandemic has had a particularly severe impact on South Africa’s manufacturing sector’s logistics and supply chains capabilities, also affecting tourism spending on locally manufactured or value-added goods,” Dr Ade said.
He added that it was owing to these factors that SEIFSA has revised downwards its initial expectation of economic output in the M&E macroeconomic framework.
“SEIFSA does not expect a robust rebound in output for the broader manufacturing sector, including its diverse M&E cluster of industries, for the rest of 2020. Although there will be some level of growth largely underpinned by a weaker rand and rebounding exports, it will be weak due to poor production fundamentals, capacity under-utilisation and high volatility in production data from 2014 ,” Dr Ade said.
He said every bad situation presents a small window of hope and that an opportunity now exists for local companies to increase exports to the rest of Africa and mitigate losses from the pandemic.
“Although the African market is down, it is still a market. Local companies should mobilise resources to immediately increase exports share regionally and the new export development course offered by SEIFSA will provide some leverage to beleaguered businesses during these tough times,” he concluded.