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Resistance to fast-tracked EE Sector Targets grows

Home Government & Municipal Resistance to fast-tracked EE Sector Targets grows

IN response to a call for public comment the Steel and Engineering Industries Federation of Southern Africa (SEIFSA), representing 18 employer organisations, who collectively represent in excess of 1 300 companies, employing approximately 173 000 employees, submitted the statement that follows.

“The metals and engineering sector is an integral part of the global and domestic economy. It constitutes 26% of the manufacturing and contributes 2.6% directly to the country’s gross domestic product (GDP). SEIFSA’s affiliated members in the sector constitute the entire metals value chain from metal production, merchants, metal fabrication, heavy and light engineering. The sub-industries that make up the sector are contained in the table below.

The sector is a crucial supplier of inputs into major sectors such as agriculture, mining, the automotive sector, construction and other manufacturing sub-industries.

The sector is also a strategic avenue through which the country converts its vast mineral endowment to final engineered products, domestically.

Despite the potential of the sector, the graphs hereunder are the most effective way of communicating the distress that the sector has experienced over the last 15 years.

Production trends have been on a structural downward trajectory since the 2008/ 2009 global financial crisis, from which the sector has never fully recovered. The sector for all intense and purposes has been in a structural recession since 2008.

As is to be expected, the sector was not spared from the economic disruption of Covid-19. Whilst a sharp recovery has been noted, production levels are still 5% below pre-Covid levels.

On the employment front, the sector has lost 205 926 jobs from the 2008 peak of 577 502 to the current employment count of 374 496. As the global economic environment deteriorates, more intense headwinds are anticipated for the sector.

With the official unemployment rate edging above 33% there seems little prospect for improvement in the near future, especially with loadshedding continuing to wreak havoc on our sector and the broader economy as a whole. The electricity crisis, resulting in up to 16 hours of electricity cuts for some industrial areas, eats into everything that powers an economy that has hardly grown for more than a decade. The number of unemployed people should instil a sense of urgency into fixing the economy. Failing that, we run the risk of entrenching the kind of poverty that can upend the social compact that underpins our democracy.

The metals and engineering sector is therefore in structural decline, both in terms of economic performance and employment. This presents a structurally constrained environment, one where opportunities for new employment creation are limited.

In setting the context, we refer to the previous graph. You will note that not only has production in the sector averaged 15% below its 2008/9 peak, but it also has recorded a multi-year contraction of – 1.3% (CAGR), over this period, the SEIFSA submission continues.

In 2023, SEIFSA estimates that production in the sector could contract by a further 5.3% if the impact of loadshedding is factored in. Moreover, production of the metals and engineering sectors is a function of economic activity and infrastructure spend, both of which have disappointed over the last 10-15 years.

The table below depicts the trends of both variables (GDP and gross fixed capital formation) over these periods. It is evident that the trends are deteriorating, when the decade is compared to the 15-year period.

The above table generally explains the resulting trends noted in the metals and engineering sector.

The above table generally explains the resulting trends noted in the metals and engineering sector.

Production and employment uncoupling

Another important point to highlight is the evident decoupling between production and employment trends. This relationship has continued to widen over the last 15 years. The current estimates indicate that it takes a five percent increase in production to induce a one percent increase in employment. Therefore, the context of declining production as already presented earlier, does not bode well for employment prospects.

SEIFSA’s submission is that in such an environment of structural decline and a limited market that is also shrinking, the sector is unlikely to attract new entrants and the transformation consideration has to be considered through this lens.

The economy is expected to flatline barely above recessionary territory on a medium-term basis, which will undoubtedly lead to the upending of businesses (large, medium and small) and prospects of employment opportunities. The combination of high inflation in a weak demand environment – which has a negative carry-on profit margins – and high-interest rates – which are inversely related to new investment – the outlook for the sector is bleak.

Bleak outlook

The net effects, certainly in the short-medium term, will be that companies will simply be unable to meet the proposed sectoral targets, human capital and skills development will be severally hampered and so will the valuable and positive investments that companies have in community work, supplier development initiatives etc., with companies simply opting to close shop.

The proposed sectoral targets have come as a surprise as the Amendment Act, although assented to earlier this year, is not yet in effect. The Regulations are therefore premature and, if challenged, may be considered ultra virus.

We are firmly of the view that the Department erred in halting the consultation processes it was busy following with the different Sub-Sectors and Sectors as provided for in the Act and publishing only Sector Targets for the main sectors in an attempt to hopefully achieve implementation of Sector Targets on 1 September 2023. By doing so, it has opened itself up to legal challenges, which will inevitably lead to this implementation date not being achieved and the process that the Department had quite rightly embarked upon, being further halted until the exhaustion of the ensuing legal proceedings.

This will, in all likelihood, result in the implementation of Sector Targets being delayed for far longer than it would have been, had the Department continued with its consultation processes and not tried to fast-track the implementation of Sector Targets on 1 September 2023.

The Department is therefore urged to reconsider this course of action and to first conclude the engagements and processes that started with the different Employer Organisations in the different Sectors and Sub-Sectors, before re-issuing Sector Targets, SEIFSA urged.

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