recommended policy interventions

10.Key challenges facing the Metals and

Engineering Sector and recommended policy interventions

As has been demonstrated in the report, the M&E sector in South Africa is in a recovery phase from the negative effects of COVID-19 lockdown measures.

In the latest view of the first six months of 2021, the sector has experienced the following challenges: a shrinking domestic market size of key markets, lowcapacity utilisation levels (below 80%), declining contribution to the bigger manufacturing sector, declining employment numbers, increasing real per capital income, cost pressures; increasing levels of imports, weak global trade balance and low fixed investment levels.

However, green-shoots have appeared, with an improved trading picture with some regions, improvements in production volumes patterns from last year, as well as production sales. We have also observed improvements in construction and building material sales in the first six months of 2021, and improvements in product prices despite being lower than increases of input prices on average.

Our areas of concern, which we continue to monitor on a monthly basis and its proposed interventions remain as follows:

10.1 Low capacity utilisation

Due to lack of demand locally, mainly with a depressed economy, as well as reduced activity of infrastructure projects, the industry is now operating at below capacity.

Capacity utilisation levels are below 70%, a situation that has been influenced further by the strict COVID-19 lockdown measures.

GOVERNMENT INTERVENTION REQUIRED:

The Government should create incentives to support companies that want to invest and advance their technologies in production to move in step with the fourth industrial revolution, where production can continue even under pandemics. The local industry needs to look into the future to deal with any future pandemics, as the lockdown has had a massive negative impact on production.

10.2 Rising imports

The M&E sector is also facing a declining market environment domestically, with imports depressing the market share of local producers. Imports – especially from China – continue to flood into the local market, despite tariffs imposed on some products, thus putting pressure on the prices of locally-produced goods.

GOVERNMENT INTERVENTION REQUIRED:

Despite the Government’s implementation of import tariffs for some products within the M&E sector, imports continue to flood the local market. It is important that there is intensive monitoring of products entering South African borders to ensure that product classification during customs declaration is right. The Government needs to seek more support from industry to assist in training customs officials on regular product identification.

10.3 Rising Energy costs and un-reliable supply

One of the key challenges impacting negatively on the competitiveness of the M&E sector is rising energy costs. Eskom has for the last four years been increasing its electricity tariffs, and this has affected the cost base of most local producers in the sector, thus negatively affecting profit margins.

South Africa has also been facing challenges with regard to energy supply. Load shedding continues to be the order to deal with energy shortages facing the country. This has discouraged investment across the economy and within the M&E sector.

GOVERNMENT INTERVENTION REQUIRED:

The National Energy Regulator of South Africa (NERSA) should be commended for always seeking input from the public on Eskom’s intended electricity tariff hikes. However, despite such initiatives, Eskom continues

to be granted electricity tariff hikes beyond industrial affordability levels. As indicated in the report, increases in prices of electricity continue to be above those of industrial product price increases, thus eroding the competitive base. NERSA should take hard decisions against Eskom to support the economy.

The model of some municipalities providing electricity, instead of Eskom selling it directly, has also distorted the electricity pricing mode since municipalities charge an extra cost upon buying the electricity from Eskom. This extra cost is a burden to the industry. Therefore, the Government should revisit this model since it is only used to fund municipalities to the disadvantage of industrial and other consumers.

On energy supply, the Government should be commended for the construction of the Medupi and Kusile power plants, which also boosted demand for M&E products during construction. However, the country continues to face electricity supply disruptions. There is need for the Government to ensure that the two power plants reach maximum capacity soon to feed into the grid.

10.4 Rising logistical costs

The problems of logistical costs continue to make the local M&E sector uncompetitive. A responsible Stateowned entity such as Transnet has not only continued to increase its port and railway tariffs, but in some cases it has not been able to offer a proper service on its railway lines, thus leaving local producers with no options but to use the expensive road transport route. In most cases, business has complained about how unreliable the domestic railway system is.

GOVERNMENT INTERVENTION REQUIRED:

Transnet’s work is key in supporting industrial development in South Africa. There is a need to modernise the locomotive infrastructure and develop new railway networks that look not only at raw material sources to exports destination, but also connecting to the local industrial areas for beneficiation. Not much railway infrastructure has been developed since 1994.

Transnet should invest and maintain its infrastructure to ensure that it is efficient and reliable for the industry which needs raw material on time to continue with production. Also key to this is to ensure that port tariffs are competitively priced in comparison to other countries that South Africa competes with in international trade.

10.5 Raw material availability

The M&E sector still confronts the challenge of raw material availability. South African raw materials suppliers of scrap metals and other minerals such as iron ore tend to have a preference for export due to the export prices on offer. This has affected the availability of such raw materials for local producers in the M&E sector.

GOVERNMENT INTERVENTION REQUIRED:

The Government should provide enough protection to discourage exports of scrap metal, which is one of the key inputs required for the M&E sector to survive. We welcome the current dispensation which is in place, which seeks to achieve this goal.

10.6 Availability of skilled labour

One of the key components in industrial production in the M&E sector is the availability of skilled labour. Not only is there a shortage of skills, but the industry is also faced with an ageing workforce. This has affected investment and expansion within the sector.

GOVERNMENT INTERVENTION REQUIRED:

Provision of artisan training is a key component of industrialisation of any economy. There is a need to continuously develop a pool of young graduates who should be motivated to enter the engineering field at tertiary level. The Government should work with industry to support vocational work and internship programmes.

10.7 Declining trade position footprint

COVID-19 lockdown measures implemented across the world economies further depressed any potential for exports into some of the markets, especially Europe, for M&E sector products. Industrial activity is at relatively low levels. General trading trends, as presented in this report, have shown that the African continent is now an area of potential growth opportunity for South African producers. As such, this is an area that requires the Government’s attention to support local industry market expansion on the African continent.

The African Continental Free Trade Area agreement offers new opportunities for trade on the African continent in the M&E sector. The Government should support local industries by providing intelligence and required knowledge of the African region’s trading landscape. The African continent is still underdeveloped in infrastructure, and there is activity in that space.

The Government should work closely with entities such as the Development Bank of Southern Africa to ensure that one of the criteria for project financing should be utilisation of construction materials manufactured on the continent, and the M&E sector can be one of the suppliers, especially in key products such as steel, which is imported into the continent, to the disadvantage of African producers. SEIFSA can be a key partner to link the Government with industry, through market intelligence gathering and policy research support.

10.8 Liquidity challenges

Liquidity is one of the most significant issues that the steel industry faces. Working capital is stuck due to lack of industrial activity. Non-payment by first-tier steel users is caused by their customers (second and third tiers) not paying, such as construction companies, component manufacturers and mines. This lack of liquidity will force a spate of defaults and possibly some parts of the industry will not survive this crisis not because they are bad businesses, but simply because the flow of cash dries up. Manufacturing companies are integral to the supply chain of the economy, and may not recover if not supported. This will have a longer-term impact on the competitiveness of some sectors. The Government needs to come up with business support measures, as an urgent intervention, for industries in need of cash flow and liquidity.

SEIFSA applauds the Government for implementation of targeted initiatives to address some of the structural problems facing the M&E sector as stated in its policy documents. Plans announced in this year’s national budget speech indicate a continued move towards infrastructure spending, with the Government committing to spend an estimated at R791.2 billion in the next three fiscal years. State-owned companies continue to be the largest contributor to capital investment, spending a projected R293.7 billion over the next three years.

It is imperative that there is engagement on the planned and announced Government projects with the implementing agencies such as Transnet, Eskom and SANRAL, among others, so that the local industry is well positioned to be the preferred supplier in adhering to the local procurement policy. The process of engagement should be to understand the variety of products that will be required, such as steel tonnage or product type, so that the local industry can plan ahead to develop the capacity to supply these products, without having any shortages.