Government needs to support the metal & engineering sector

What are the tangible solutions that the metal and engineering sector can use to tackle declining production, weak production sales and increasing unemployment? Lucio Trentini, CEO of the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) gives SA BUSINESS INTEGRATOR his view.

How can we to tackle declining production, weak production sales and increasing joblessness in the sector?

The fortunes of the metals and engineering (M&E) sector are tied to GDP growth. Therefore, higher rates of GDP have a natural positive implication for the metals and engineering sector and the reverse is true where weak economic fundamentals persist. One important avenue to sustainably grow a country and enhance the GDP performance is increasing gross fixed capital formation or investment. For this reason, the various infrastructure investment plans that the government has put in place must be implemented. The fastest growing economies have tended to target an investment to GDP ratio of 20%-30%, however in 2021, South Africa’s investment to GDP was recorded at 12.5%. A concerted effort to increase this ratio is paramount if the fortunes of the economy, and in turn the metals and engineering sector, are going to improve.

The reform of state-owned enterprises (SOEs) is also crucial. This reform should entail bringing private sector participation in the areas currently serviced by state owned entities. The monopolistic market structures that have manifested in the industries serviced by state owned entities have resulted in major inefficiencies, a deterioration of the service and increases to the cost of the service. Combined these outcomes have resulted in an increase to the cost of doing business and a lack of service delivery.

Highlight the critical importance of the M&E sector for social development in SA.

The sector directly employs 397 586 people and working on the traditional employment multiplier of 1.6 people for most industrial sectors, the M&E sector indirectly employs a further 657 896. Further, considering South Africa’s dependency ratio of 6 to 10 people per job, considerably expands the sectors socio-economic impact.

What can be done to lower local production costs?

The fundamental objective and agenda of the policy makers across the board should be how to make South African companies globally competitive. This

will naturally place them in the position to compete with imported products. Part of the policy toolset should include dedicated industrial incentives, considerations on further reducing tax rates (the laffer curve theory would also accrue to the state), allowing private participation in the provision of public utility services to reduce the cost and widen the access of electricity, transport, water, broad band and provision of general infrastructure. Adopting market friendly policies will also reduce South Africa’s risk premium which will have positive implications for the cost of finance and eliminate the punitive discount applied to South African based companies.

Another important aspect to consider is the fact that the Covid-19 pandemic has exposed the risks associated with lengthily supply chains and a general revision to the globalisation theory. Companies that typically relied on global value chains to source products found themselves exposed when economies and supply chains were closed to prevent the spread of the virus. Therefore, this debate now more than ever needs to be broadened beyond the import or export paradigm to also include risk management.

In terms of investment, what is the greatest hindrance?

Legislation is a huge factor in deterring investment.

Also, a lackluster approach to implementing economic reforms in many areas of the economy from energy to transport, all of which directly and indirectly affect the M&E sector.

Government has a number of Master Plans and a localisation policy – are these realistic in terms of implementation, resources, skills, funding etc.?

Ultimately, it is important that these plans are on the table. They allow for debate and a consultative approach to charting a way forward for an industry. The problem that continues to bedevil South Africa is implementation of the plans. On localisation specifically: State-owned entities such as Transnet purchase significant quantities of steel products, such as rail. Transnet has committed to reviewing their requirements and to work with local industry on building local supply chains for large-scale projects and consumables.

Commitment to promote localisation is set-out in the Nedlac Economic Recovery Plan covering the 2021 implementation of the localisation commitments made by social partners on identified value-chains, including steel-intensive products for construction, tools and implements, household goods, capital equipment, transport auto, rolling stock and railway lines, based on a set of targets; a set of products and champions at CEO level to drive the various workstreams.

What is needed for SA to become a preferred supplier to both domestic and international markets?

Quality of product along with pricing will make local products competitive.

Based on trade data, South Africa continued to have a favourable net trade balance with the African region in the M&E sector. South Africa’s local producers have more opportunities to increase their market footprint on the continent, especially by taking advantage of the African Continental Free Trade Area agreement which took effect on 1 January 2021. 

Lucio Trentini: CEO, SIEFSA

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