Johannesburg, 25 June 2018 – Stronger global demand, firmer international commodity prices and a volatile exchange rate bode well for metals and engineering (M&E) sector production and exports in 2018, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Michael Ade said today.
Releasing an update to SEIFSA’s authoritative State of the Metals and Engineering Sector Report 2018 to 2019, based on performance in the first quarter, Dr Ade said the sector was on course to register even better performance this year than was originally forecast.
“Although the global upswing is now generally fragile due to heightened prospects of trade war which have the potential to disrupt an otherwise positive economic outlook, with possibly broad-based retaliatory actions, we still believe that the external environment holds a great deal of exports potential for the sector. This will be underpinned by firm regional and global demand and higher international commodity prices, also providing a strong basis for the M&E cluster to improve on output,” he said.
He said notwithstanding the fact that the production recovery rate in the M&E sector has been very modest when compared to the pre-crises high levels, the Federation remained firmly of the view that the cluster continues to expand, buoyed by prolonged structural shifts.
The first quarter review of the M&E sector places the three-month average production index for the sub-components at 101.0 index points. Encouragingly, this is only 2.0 index points lower than the sector’s 18-year average of 103 index points.
However, Dr Ade said concern remains that the index is still below its long-run average by 2 percent, albeit to a lesser extent than at the end of 2016 (5 percent). Therefore, support is needed in the form of right policies and interventions, political will and goodwill by all stakeholders in order to boost general output and employment in the sector. He said the sector was still locked in a deep structural adjustment and production levels were likely to reach the pre-2007/08 crisis high levels (current output is still 21 percent below peak).
Dr Ade said for M&E production to increase continually, demand for the sector’s mostly intermediate products has to increase.
“Given that the demand for M&E products is a derived demand, an environment of unsatisfactory demand will no doubt impact negatively on the sector, further inhibiting expansion of production. The expectation is that an eventual increase in demand will translate to more output which, combined with a corresponding decrease in production costs, may simultaneously improve the bottom lines of businesses and employment numbers as companies utilise more capacity,” he said.
Dr Ade said although domestic demand is still stagnant, the improvement in output in Q1 of 2018 (+3.0 percent), when compared to Q1 of 2017 (+0.5 percent), provided hope for businesses in the cluster.
“Encouragingly, the cluster is still on track to meet or surpass the modest aggregate growth forecast of 1.1 percent for the full year 2018, as reported at the beginning of this year,” he said.
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