What does the future promise?

What does the future promise?

The main question is what should be done to ensure that the sector is more competitive, export more and possibly improve profits and employment numbers?

The continued survival of the sector depends, as far as the domestic economy is concerned, crucially on the health and growth of the sectors which are drivers of its demand, namely mining, construction and automotive sectors. Hence the urgent need to conclude issues around the mining charter in order to attract so much needed investments across the board and boost domestic growth. In addition, the need to grow market share in regional markets and also mitigate potential risks from the existing trade war between two of the World’s largest economies is also important.

Also, part of the answer is that all the stakeholders within the sector must put differences aside and collaborate more. A salient and undeniable fact is that the industry is notorious for being more reactive than proactive when dealing with challenges. Although some intermediate products of the metals and engineering cluster are close substitutes, unscrupulous tactics should not be used by one sub-industry over the other, to gain competitive trade advantage. Competition is encourage, albeit in a business-as-usual atmosphere rather than belligerently. Without co-operation, all businesses including the small, medium and micro enterprises cannot flourish and expand. Intra-industry squabbles are counterproductive to the objectives of the National Development Plan (NDP) in the long run, thereby, constricting the effective implementation of its long-term socio-economic road map, with dire consequences on jobs and economic development.

There has been a relative reduction in import volumes, thanks to the protection measures for downstream steel industry (safeguard tariffs) announced by the government. Also, the establishment of a R1.5 billion (over three years) downstream steel industry competitiveness fund, through interest rate subsidy, will relieve some pressure due to a number of structural factors which have undermined the sector’s competitiveness. This had resulted in a number of firm closures and more than 6% related job losses.Longer-term survival and recovery, however, needs a whole paradigm shift in policy measures and company behavior. There is need to contain input costs and further mitigate the impact of both the 2007/8 financial and economic crises and the 2014 productions crisis which are still felt in the industry. Also, the negative effect of the Chinese economy which is simultaneously slowing down and overwhelming world markets with cheap exports need to be contained. Encouragingly early indications suggest there has been no unusual spike in imports despite the existing trade war.

Increased trade and interdependence with the rest of Africa should receive a boost from a new R13,4 billion export trade facility launched by the Export Credit Insurance Corporation of South Africa (ECIC) and the African Export Import Bank (Afreximbank). This should boost exports from South Africa to the rest of Africa with a combined population of about 1,2 billion people and GDP of roughly US$2,2 trillion. Companies in the sector need to “sharpen the saw” and focus more on the exporting to the SADC region (including SACU), especially given the favourable growth forecast for the region. Of total exports into Africa, almost 81% are destined for SADC, West Africa (8,7%), East Africa (8,9%), North Africa (1,3%) and Middle East (0,5%).

Importantly, a ‘cluster’ approach to the dynamics of each sub-industry is needed. As highlighted in the State of the Metals and Engineering Sector Report for 2018/19, each sub-industry within the sector has its own unique exposure to national and international markets, its own capital or labour intensities and its own productive capacity constraints and production cost challenges. Gross fixed capital formation (new investment) is clearly needed by all the sub components, in order to improve productive efficiencies to that of world benchmarks and to grow.

The M&E sector is intimately linked to the fortunes of the agricultural, mining and quarrying, construction and auto sectors (and to some extent, the electricity and transport sectors). The signs of recovery in each of the aforementioned sectors (and export demand) is crucial for the M&E sector over the longer term. Stimulation and redirection of domestic general government procurement demand towards domestic metals and engineering producers is a policy measure over South Africa has control. The recent initiative by the DTI aimed at designation, localisation and supplier development is lauded as a significant tool in the industrial policy toolkit’ to support the broader manufacturing sector.

This is especially given that government has the largest procurement spend.  The steel industry seems to be the earliest beneficiary but the expectation is for the benefit to trickle down to other industries in the M&E cluster. In addition, enhanced cost-effectiveness and moral suasion is also needed to ultimately attract private sector demand as well.

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