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.