Strangely, one of the key potential advantages of the South African chemicals industry arises from one of its disadvantages. For it is often thought that by having such much undeveloped land and neighbours whose economies are largely agricultural, means that the market for chemical products is small. However it also means that there is significant room for growth and development. This is especially true in the agrochemicals sector, as a recent KPMG report entitled ‘African Chemical Industry: A Hidden Opportunity?’ makes clear. “Demand for chemicals in the agriculture subsector will continue to grow based on several factors. Africa has 25 percent of the world’s arable land and 60 percent of the world’s uncultivated arable land. Africa’s current low crop yields per hectare represent significant growth opportunities and even with existing cultivated land, a doubling of cereal yields would turn Africa into a major food surplus region. In addition, the agribusiness value chain including packaging and processing will add more opportunities for chemical traders.”
Whilst recent years have been difficult for the South African economy, which has resulted in stuttering growth for the chemicals industry, many experts believe the future is generally bright, and predict growth in most areas. As Patrick Veldhuizen, Senior Manager Optimisation Modelling at South African chemicals giant Sasol notes, “The chemicals and petrochemicals industry in South Africa is expected to grow by about 2-4% per year during the coming decade, and the commodities and specialty sectors are expected to grow as well. While most of this growth will stem from innovation and operational efficiency improvements, the growth in petrochemicals, in particular, is likely to be driven by the demand from end-user industries, such as paints and coatings, automotive, mining, and construction, which procure large amounts of chemicals from domestic refineries and manufacturing plants.”
Veldhuzien also believes that government legislation is helping the chemicals industry, although in a different way and for a different purpose. He notes how the recent Clean Fuels II regulations will aid demand for fuel additives. The legislation, which is due to take effect in 2017, “mandates fuels with reduced sulphur content of 10 ppm”. Additionally, the government’s ‘White Paper on Renewable Energy’ is due to become law within the next two years. It will require all diesel fuels to have 5% biodiesel content, and ethanol to have between 2% and 10% bioethanol.
Imposing such laws on a large country that is heavily dependent on automobiles for transport is certain to have repercussions. Many industry analysts believe that whilst it may drive up delivery and energy costs, the benefits of encouraging demand for fuel additives and biofuel production outweigh the disadvantages.
Others believe that focusing on biofuels may draw research funding away from oil based technologies. As stated in a report by international consultants BMI’s entitled ‘South Africa Petrochemicals Report’ which warns that, “The drive toward alternative fuels production risks neglecting the much-needed expansion of crude refining capacity that is essential for raising local naptha feedstock output for use in the petrochemicals industry.”
Whilst the laws were primarily enacted to assist the development of the farming industry, it is hoped that it will also provide support for the chemicals market.
The government is also providing further legislative support in the chemicals industry stronghold of ZwaZulu-Natal. Here it has helped to develop the public-private partnership of the Durban Chemicals Cluster, with the aim of coordinating industry development and establishing mutual competitive advantages between local businesses, as well as helping overcome generic problems.
Veldhuizen also notes that the government is promoting the development of domestic pharmaceuticals, “in part to bolster the domestic companies that provide raw materials to this sector.”
Whilst these initiatives are far from unique to South Africa, it is an acknowledgment of the importance of the chemicals industry to the country’s well-being and an indication that efforts must be made to get growth in this vital sector. Although the question remains: will it be enough?
One key advantage that South Africa does have, although it has yet to start actual extraction, is shale gas.
Successful taping of this resource could be the ignition spark that the region requires, possibly turning around their fortunes, much as the American chemicals industry has done in the last decade. As Prof. Thokozani Majozi of the University of Witwatersrand, Johannesburg states, “The recent discovery of shale gas deposits in the country’s southern Karoo basin [is] likely to be a game changer for the economy. South Africa is in the top ten countries with the largest technically recoverable shale gas resources.”
The resources are significant, with the United States Energy Information Administration’s June 2013 report ‘World Shale Gas Resources: An Initial Assessment’ estimating that there are 390 trillion cubic feet to be extracted. The Petroleum Agency of South Africa is proceeding with processing Exploration Licences, and work is expected to begin as soon as early 2016.
Once the true amount and quality of the gas is known, the full impact of this discovery will be felt, not only in the region, but with significant repercussions on prices worldwide.