METALS AND ENGINEERING SECTOR PROJECTED TO REMAIN IN THE DOLDRUMS IN 2020 – SEIFSA

SEIFSA Cefa

JOHANNESBURG, 13 FEBRUARY 2020 – Last year was generally challenging for both
the domestic and global economy, as weakening demand, manufacturing as well as trade
and investment restrained progress, with extended negative implications for the Metals
and Engineering (M&E) sector, which is poised for unremarkable growth in 2020.

This is according to the Steel and Engineering Industries Federation of Southern Africa
(SEIFSA), which will release its flagship annual State of the Metals and Engineering
Sector Report for 2020-2021 tomorrow (Friday) morning.

Speaking ahead of the launch of the Report, SEIFSA Chief Economist Michael Ade said
prevalent challenges underpinning the sector’s poor performance last year, leading to the
closure of companies and downsizing of operations, are generally expected to continue
in 2020, with the potential to reverse the gains made in the preceding two years.

“The forecast for 2020 is for the entire M&E sector to expand by just 0.6%, with the
existence of predominant downside risks, while the various sub-sectors will register varied
levels of growth, with some expanding and others contracting,” Dr Ade said.

The prediction aligns with a disconcerting slowdown in growth globally in advanced
economies, in Emerging Markets and Developing Economies and in commodity exporters
and importers. The deceleration in global growth to 2.4% last year was its slowest pace
since the global financial crises, amid a broad-based weakening in trade and investment,
production of intermediate and capital goods, contracting manufacturing export orders,
decline in commodity and metals prices, and persistent trade tensions between the US
and China.

These developments, Dr Ade said, have serious extended implications for the M&E
sector’s growth prospects, which is a small open sector and very sensitive to negative
external shocks.

Although positive, the demand for finished steel in 2020 is expected to continue slowing,
alongside falling steel prices, before a rebound in 2021. Dipping apparent global steel
consumption is worrisome, given its implications for the South African economy and its
steel and steel-related products industry. Moreover, he said, traditionally slower growth
in steel consumption demand has a negative impact on steel prices.

Contrary to earlier expectations, Dr Ade said, 2019 was generally difficult for businesses
in the M&E sector, which found themselves in the doldrums as growth rapidly decelerated,
underpinned by stagnant domestic demand, production volatility and persistent
challenges (including rising intermediate input costs and imports penetration), which are
expected to continue into 2020.

“Judging by the performance of the various sub-clusters last year, the existing conditions
of the broader M&E industries are disturbingly volatile, with growing doubts on the ability
of businesses to remain sustainable in an increasingly challenging economic environment
and nondescript domestic growth,” said Dr Ade.

However, he said, the situation is not invariably a zero-sum game for the M&E sub-
components. Although downside risks predominate, there is also the possibility that the

local economy may be stronger than expected in 2020, if existing headwinds to growth
could be dealt with decisively by implementing strategic macro-economic and industrial
policies, which would boost production and exports from the M&E sector.

Encouragingly, Dr Ade believes that the Sub-Saharan African region will provide some
impetus for M&E sector trade, based on auspicious prognosis of 2.9% growth in 2020
and 3.1% growth in 2021. Investor confidence in some of its large economies is expected
to improve, while oil production in some major oil exporters is also expected to pick up,
bringing in much-needed foreign currency and boosting the demand for South African
steel, construction and engineering inputs.

“The impetus will likely translate into continued M&E exports, as the rest of Africa is still
the highest export destination for goods produced in the broader M&E sector. The African
Continental Free Trade Area agreement, therefore, presents an enormous opportunity for
the M&E cluster of industries to capitalise on broader regional trade opportunities,” Dr
Ade said.

He said given the continuous existence of domestic challenges, including energy
constraints, the expectation is for benefits from improved trade in advanced economies
to trigger to the M&E sector at a sluggish pace in 2020, before gaining momentum in
2021, as ongoing difficulties are addressed and local policy support gains traction.

In conclusion, Dr Ade said while some very moderate growth is expected to return to the
M&E sector, the general expectation is for 2020 to continue to be a difficult year for M&E
businesses. However, the current downturn of the M&E sector is likely to permanently
bottom out if domestic risk factors such as lingering policy uncertainty or indecisiveness,
low demand, erratic electricity supply, galloping electricity costs and logistics expenses
are urgently addressed.

Ends

Issued by:
Ollie Madlala
Communications Consultant
Tel: (011) 298 9411 / 082 602 1725
Email: ollie@seifsa.co.za
Web: www.meindaba. seifsa.co.za

SEIFSA is a National Federation representing 21 independent employer Associations in
the metals and engineering industries, with a combined membership of 1600 companies
employing around 200 000 employees. The Federation was formed in 1943 and its
member companies range from giant steel-making corporations to micro-enterprises
employing fewer than 50 people.