The South African chemicals industry faces numerous challenges. Whilst none of them are insurmountable, and many provide opportunities for development, they are worthy of note prior to starting business there. These challenges include:
A Water Shortage. South Africa has very limited water supplies, as Patrick Veldhuizen, Senior Manager Optimisation Modelling at Sasol notes, “South Africa is one of the 30 driest countries in the world, and the need to use water more efficiently has never been more urgent. The heavy reliance on water by several key industries, such as pulp and paper, is a cause for concern.”
Whilst the government has made strives to improve the situation, such as the 1998 Water Bill, which managed water consumption with a cumulative charging system. Currently the tariff stands at approximately $1.42 per kilolitre/cubic meter of water. This has resulted in many larger companies, such as Eskom and Sasol installing water recycling treatments.
Cultural Differences. If a chemicals trader is considering using South Africa as a gateway to the continent, then it is worth being aware of the large cultural differences from the 54 countries that make up the continent. As the KPMG report called, ‘African Chemical Industry: A hidden Opportunity?‘ advises, “Developing a continental strategy is difficult; infrastructure and education are a long way short of minimum global standards; legal, political and regulatory regimes remain complex and business practices in many instances are not transparent. It is therefore wise to take a country-by-country and segment-by-segment approach to understand the market opportunity.”
Skilled Labour Shortage. Like much of Africa, the education system is far below global standards. This has created a skills gap for the most technical positions. Furthermore, the rebalancing of society in post-apartheid South Africa and positive discrimination has driven many white South Africans abroad. Whilst the incredible growth of the chemicals industries in the Far and Middle East and South America have also acted as a draw for engineers looking for better salaries overseas in boom areas, rather than the stagnated condition of the South African economy.
As Hilton Lazarus, who works for global market analysts at IDC as Head of Chemicals and Allied Industries noted in a recent report, “One of the main challenges is certainly the skilled labour force shortage. This issue together with the presence of strong players on the market makes it hard for smaller companies to compete and ultimately slows down the development of the industry.”
This is a view supported by Prof. Thokozani Majozi of the University of Witwatersrand, Johannesburg who writes, “Alongside its successes and optimism, the South African chemicals industry faces many challenges. Foremost among these is the shortage of engineers in general and chemical engineers in particular. Currently, the South African population can claim only one engineer for every 2,114 citizens, with chemical engineers constituting no more than 10% of all registered professional engineers in the country. Compare this to the workforce in other developing countries, such as India, South Korea and China, which has one engineer for every 200 people in average, and South Africa’s staffing picture looks rather unfavourable.”
Raw Material Supply. Besides large quantities of coal, diamonds and gold, South Africa has limited chemical raw material sources, and is largely dependent on imports to meet production needs. Whilst this can provide business opportunities for traders, there are still many hurdles to pass for smooth input supply, as Dilshaad Booley, Chemicals Industry Research Specialist at Frost & Sullivan notes, “Delays at ports when importing chemicals, and strikes, add to the costs of chemicals, which are, in most cases, absorbed by the manufacturer to remain competitive, resulting in lower profit margins,”
Lazarus agrees stating that, “The chemical industry is a capital intensive one and it is highly affected by the costs of the raw materials, a particular problem in South Africa where local sources are few and logistics challenging.”
Currency Fluctuations and Growth. Business consultants BMI’s ‘South Africa Petrochemicals Report’ also highlights numerous challenges ahead, stating, “The low value of the rand, coupled with low oil prices, has not helped lift local petrochemicals output, which will track poor GDP growth figures in the near term. In 2015, construction is set to grow 3.5% while the automotive sector will rise just 1%, growth rates that represent a stand-still for a developing economy and will undermine consumption of polymers and rubbers.“
This lack of domestic demand is also mentioned by KPMG’s ‘African Chemical Industry: A Hidden Opportunity?‘ which reports that, “South African chemical producers are currently facing poor domestic demand and a volatile exchange rate that hampers exports. The country’s plastic and basic chemicals output declined throughout 2013. Chronic problems include ongoing uncertainty about the outcome of wage negotiations, potential electricity supply shortages and slower growth in consumer spending that is undermining confidence within the petrochemicals sector. Nevertheless, domestic producers have benefitted from both a weak rand, which has sustained competitiveness, and relatively cheaper costs when factoring in transportation of imports, which has helped maintain current production levels.”
There are indeed, numerous challenges ahead of the industry in South Africa that have drawn many investors to the boom regions of the Far and Middle East. So why are others still investing in South African chemicals? Are there opportunities for growth given the underdeveloped condition of much of the country?