The decrease in manufacturing production figures for the month of February 2020 deals a further blow to metals and engineering (M&E) companies already operating under duress of a struggling economy, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) said today.

Speaking after the release of manufacturing production data by Statistics South Africa (Stats SA) this afternoon, SEIFSA Economist Marique Kruger said the decrease in output is disappointing given the need for companies in the M&E cluster and the broader manufacturing sector to remain resilient against the backdrop of a struggling economy, which is also under duress from the Covid-19 pandemic.

The latest preliminary seasonally-adjusted production data, released today, captures a year-on-year decrease in production in the broader manufacturing sector in February 2020 when compared to January 2020, with manufacturing output decelerating to -2.1 percent in February 2020 from -1.8 percent in January 2020. On a month-on-month basis, output in the broader manufacturing sector was -2.3 percent in February 2020, highlighting the volatility which is still evident.

“The declining output trend is worrisome as it filters down to companies in the M&E sector of industries, which are under duress. The poor performance compounds the multiplicity of challenges faced by local businesses in the diverse M&E sub-sectors, including a distortion of supply chains and the recent credit ratings downgrade by Moody’s,” Ms Kruger said.

She added that it is clear that businesses are facing tough times, given the current economic environment, while also trying to deal with the spread of the coronavirus pandemic.

Ms Kruger said it was encouraging that the South African Government, local banks and civil society have responded positively by structuring various assistance, funding and loan packages aimed at cushioning the impact of the global pandemic on beleaguered companies.

Ms Kruger said SEIFSA urges its members to make use of the existing opportunities and seek clarity, where applicable, in order to improve cash flows and restart production processes. Importantly, she is of the view that existing initiatives by stakeholders aimed at improving sustainability should also be accompanied by efforts to boost local demand for intermediate products and improve competitiveness for exporting companies in challenging foreign markets.

Outlining key recommendations that may lead to a significant improvement in the M&E sector’s business activity as well as the broader manufacturing sector, Ms Kruger said there is an urgent need to directly improve the liquidity of businesses which are increasingly struggling with cash flow management, while still having to pay salaries and recurrent expenses. She said some of the support funding can be used by companies as a buffer for customers who fail to pay for intermediate goods within the stipulated terms of payment. This would allow businesses to be flexible during these difficult times and accommodate the needs of struggling clients and suppliers.

“Secondly, this is the best opportunity for the government to directly provide production incentives and targeted financial support to local companies on a case-by-case basis, given the differences in material and intermediate input costs. In a normal business environment, this approach would have been considered anti-competitive behaviour by the World Trade Organisation, but we are living in abnormal times and the survival of businesses is paramount. The initiative is necessary, given that businesses are coming from a position of weakness over the past decade, with understandably poor production fundamentals,” Ms Kruger said.

She said there was an urgent need to protect local productive capacity of the M&E industries and the broader manufacturing sector by closely monitoring imports in order to prevent excessive dumping of intermediate and finished goods into the South African economy.

She said this is particularly important, given the fact that key trading partner countries have opened up their economies post the Covid-19 pandemic, while some have also been quick in relaxing levels of restriction of economic activity earlier than South Africa. Moreover, Ms Kruger said with the pile-up of inventory during the lock-down period, dumping becomes a huge concern for the local market as international businesses seek to quickly take advantage of encouraging signs of trade and ship tonnes of stock to importing countries.

These interventions would invariably help in minimising potential losses from a decrease in local economic activity, while also ensuring the sustainability of domestic companies in the short to medium term, towards increased levels of production in the longer term.