Q1 Metals and Engineering Sector Performance Disappointing but Recovery is Imminent

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Although the performance of the metals and engineering (M&E) sector during the first quarter of 2019 was disappointing, recovery underpinned by stronger regional and international demand appears to be on the horizon, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) said recently.

SEIFSA Chief Economist Michael Ade said that the sector’s recovery will be driven by stronger regional demand from the SADC region and the rest of Africa, underpinned by the newly-launched African Continental Free Trade Area and globally from Europe, Asia and the Americas’. In addition, the slowlyimproving international commodity prices will also provide a strong basis for the M&E cluster to improve on output,” he added.

Ade attributed the sector’s contraction during the first quarter to continued softening of global economic activity, with trade and manufacturing showing signs of marked weakness against the backdrop of heightened trade battles driven by geopolitical dynamics.

Locally, the sector’s growth was choked by a weak domestic environment and load shedding, which also negatively impacted on the growth rate of the mining, transport, electricity, trade and construction sectors.

Despite the challenging start to 2019, Ade said there is hope that the sector will ultimately recover, albeit at a slower pace and a lower rate than usually forecast.

“Internationally there has been heightened policy uncertainty, including a recent reescalation of trade tensions between major economies, accompanied by a deceleration in global investments and a decline in confidence, which in turn weighed on the local currency, dragging down emerging markets as capital flows from investors move to the safety of the US dollar in expectation of better returns. Undoubtedly, the downside to the production growth in the M&E sector will be tempered by a generally difficult operating environment, but the expectation is for the comparatively weaker exchange rate to provide leverage over time and perk up export volumes through relatively lower prices, also impacting on production,” he said.

Commenting on the domestic operating environment, Ade said despite the prognosis being less robust, primarily as a result of slowlyimproving but volatile supply-side dynamics underpinned by regressing business and consumer confidence, SEIFSA remains positive about the sector’s long-term outlook against the backdrop of the decision by Moody’s to keep South Africa’s investment rating above sub-investment grade.

Although the decision by Moody’s augers well for existing and new investments, Ade cautions that the positive outlook depends on continuous policy reforms and initiatives aimed at promoting real gross fixed capital formation (GFCF) from the general government, public corporations and private business enterprises.

Ade said this was important, given the dismal performance of GFCF in Q1 2019, decreasing by 4.5 percent, its fifth consecutive decline from Q1 2018.

Ade said notwithstanding the decline in real GDP in quarter 1 of 2019, there was a corresponding net growth in production in the broader manufacturing sector, with preliminary data showing the sector cumulatively growing by 2.5 percent, despite the dismal performance of its M&E sub-sectors comprising roughly 45 percent.

“Although the expectation is for the M&E sector to rebound and improve during the course of the year, we are cognisant of the difficult operating environment, hence the moderate forecast of 1.6 percent growth for 2019,” Ade concluded.

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