ECONOMICS AND COMMERCIAL DIVISION
T
he Economics and Commercial division’s mission is to raise the profile of SEIFSA in the national discourse on economic, industrial and trade policies. To achieve this, the division provides the following services: • Continuous economic research to understand and communicate industry market intelligence to the associations, members, government and the general public. • Maintaining and expanding the price and index product as the eminent cost tracking product for the metals and engineering sector.
Economic Conditions The fortunes of the metals and engineering sector did not improve during the financial year ending in June 2016. The metals and engineering sector share of manufacturing stood at 24% and its direct contribution to the gross domestic product of the country was 3,3% at the end of the financial year. Production of companies in the sector stood at R522 billion, with valued added to the economy of an estimated R126 billion.
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of 85%. This situation has a crippling effect on competitiveness (fixed costs). Variable costs have also shot up dramatically during the last two years. The combination of labour (20% weight), dollar based prices (40% weight), administered prices (15% weight) and other costs (25% weight) increased by 12% during the year while producer and merchant prices increased by only 10% and 3% respectively. The latter two represent the selling prices of the sector and in combination with higher cost inflation shows the pressure on profit margins.
What does the future hold? In the short term, further downscaling will probably happen. SEIFSA foresaw a contraction of 3% in production for the full calendar year 2016; the first half of the year recorded a very disappointing decline of 4,5%, on an annualized basis. Early indications are that imports have started to drop due to the protection measures for steel (tariffs) announced by government. Even outside the possible impact of tariffs, input costs for downstream producers rose by 30% since January 2016. A substantial initiative has been launched by the International Trade Administration Commission to investigate the scope for tariff increases on downstream products to their bound rates, in an effort to strike a balance in protection measures. Longer-term survival and recovery, however, needs a whole paradigm shift in policy measures and company behaviour. Apart from rising costs, the sector has been hard hit by the aftermath of the 2007/8 financial crisis and the dynamics of the Chinese economy simultaneously slowing down and overwhelming world markets with cheap exports.
The South African market for metals and engineering products outstripped local production by a very large margin over the last number of years. Domestic producers’ market share declined from about 50% in 2013 to only 43% this year. The costs in terms of production losses (R50 billion), employment opportunities (40 000) and company closures (+/- 500) are huge forgone.
It seems as if this structural shift in the market dynamics have not sunk in for companies (some still viewing it as a cyclical downturn) and policymakers (largely stuck on the ‘pipeline’ construct of how to focus policy). The result of these tendencies is that the wrong questions are asked. A ‘cluster’ approach to the dynamics of each sub-industry is needed.
After the contraction in production during the previous financial year (-3,9%) a further decline was recorded (-4,5%) over the reporting period. Capacity utilisation numbers continued to decline (-2,4%) and stood at 77% by the middle of the year, against a benchmark
Each sub-industry within the metals and engineering sector has its own unique exposure to domestic and international markets, its own capital or labour intensities, and its own production cost challenges. Investment is clearly needed by all, but not necessarily
SEIFSA ANNUAL REVIEW 2016
