JOHANNESBURG, Friday 09 May 2014 – The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) believes that the positive latest data released by Statistics South Africa (Statssa) on metals and engineering production and capacity utilisation is encouraging – but warns of tough times ahead.

 

SEIFSA Chief Economist Henk Langenhoven said the latest data released by Statssa on metals and engineering production and capacity utilisation show encouraging trends, albeit gauged in isolation.

The first quarter of 2014 recorded 2,5% higher production than 2013 and capacity utilisation up by 1,7%, touching the 80% utilisation level. On an annual basis, production improved by 3,5% and capacity utilisation by 1,3% compared to 12 months earlier.

“However, this may be the proverbial calm before the storm, when looking at the domestic economy,” said Mr Langenhoven.
The first quarter confidence levels (measured by the Purchasing Managers’ Sub-index for business activity) are strongly negative (-5%), in contrast with production trends.

“Although the 12-month pattern is positive, (+4%), looking back on the PMI trend 18 months to two years ago (being the lag between the PMI changing direction and production following suite), one would have expected an imminent slowdown in production by now,” said Mr Langenhoven, adding that with the short-term confidence levels strongly down, the likelihood has increased substantially.
Supporting this view are indicators showing that price escalation has slowed down substantially in the first quarter, normally indicating low demand. Furthermore, indicators of the levels of new orders are also down, and so are expected employment indicators, all pointing to a possible slowdown during the latter part of the year.

The domestic outlook for metals and engineering is heavily influenced by prospects of mining, auto and construction sectors.

“The mining sector is currently under siege from industrial action, the auto sector has revised its production forecasts downward and construction shows very little signs of recovering from its three-year slump. These weigh heavily on the medium-term outlook as the dynamics in the four sectors feed on each other.”

The one possible explanation for production levels picking up, despite the domestic scenario, is improved exports, which form 60% of the metals and engineering market.
“Export trends must be carefully evaluated to ascertain its influence on the sector – and is reason for optimism,” concluded Mr Langenhoven.