JOHANNESBURG, 20 AUGUST 2020 – As South Africa ends its first week under alert level 2 of the national lockdown to curb the spread of the COVID-19 pandemic, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) is hopeful that increased economic activity from the reopening of key sectors will boost the recovery of metals and engineering businesses brought to their knees by the pandemic, SEIFSA Chief Economist Dr Michael Ade said today.
The demand for metals and engineering products was derived from a demand for finished or final products manufactured by other industries, Dr Ade said. He hoped that increased business activity from other industries and the consequential demand for consumer goods due to people now being able to earn some level of income would, in turn, result in higher demand for intermediary goods.
He gave, as an example, increased demand for vehicles, which was likely to have positive implications for the Metals & Engineering (M&E) sector since, on average, 900kg of steel is used per vehicle manufactured, with components spanning the body structure, panels, doors, trunk, engine block cast iron and fuel tank.
“Manufacturing activity may need to be ramped up as demand consistently increases, but this could be a difficult challenge, especially for small and medium enterprises (SMEs) in the M&E and the broader manufacturing sector, as cashflow has been drastically reduced as a result of little or no business activity during the lockdown period,” he said.
The COVID-19 pandemic has added to the plethora of challenges already faced by SMEs in the M&E sector, such as high operational costs and reduced demand for their goods, thus impacting negatively on production, margins and profits. SMEs represent 66% of the member companies SEIFSA represents as a national federation of employer associations.
Dr Ade said generally, SMEs made up the majority of employers in South Africa. He cited research by McKinsey, which showed that SMEs made up more than 98% of businesses in South Africa and employed up to 60% of the country’s workforce across all sectors. As a result, he said, it was important for policy makers to provide relevant support to SMEs, which would enable them to navigate this critical time and sustain production as economic activity gained momentum.
“SMEs are in deep crisis and desperately need financial assistance in order to stabilise operations and improve margins. Cash flows are extremely tight and some businesses have closed down. Any further delays may complicate matters, leading to significant job losses and even more company closures,” Dr Ade said.
He said the Federation believed that liquidity or cash flow was the most significant area where the Government could intervene urgently to support the industry. He proposed that the Government, through one of its funding institutions, created a temporary lending/bridging facility for SMEs to allow them to continue operating.
Dr Ade said while there had been various COVID-19 relief funds made available for SMEs during the pandemic, many companies could not take advantage of these funds for a number of reasons, including BEE status and credit-qualifying criteria. He said it was important that the Government created a fund that would enable those businesses that had fallen through the cracks to secure funding.
Dr Ade said there was also a need to promote access to competitively priced inputs for the mid- and downstream sectors: “Locally-produced steel is considerably more expensive than imported steel (especially prior to the imports tariffs), putting local producers on the back foot when trying to compete with the cheaper Chinese imports. The loss in competitiveness is driving most sub-industries to import components, leading to high import penetration of components and standard parts.”
Dr Ade also called for an immediate review of the quantity of imported products that could be manufactured locally to prevent a flood of products into the market from countries that had opened up earlier after their respective COVID-19 lockdowns and had surplus inventory which could then be dumped into the South African market.
“We believe that it is critical that the Government provides immediate support to businesses – and SMEs in particularly. It is this short-term assistance that will arrest ongoing de-industrialisation and ensure a need for the long-term support proposed by the Government,” Dr Ade said.