Today, the South African chemicals industry is still heavily dependent on coal for both energy and raw material supplies. It has few major raw material deposits or access to ores and rare earth minerals, except for its huge gold and diamond deposit
This general lack of supply makes the industry reliant on imports for production, whilst its coal reserves have also developed the industry in a specific way. A fact noted by Thokozani Majozi of the University of Witwatersrand, Johannesburg, who says, “The abundance of coal in South Africa – 92% of the coal consumed on the African continent is produced in South Africa – has fostered an economy largely dependent on this fossil fuel. The petrochemicals sector in South Africa is built on coal gasification. Additionally, more than 95% of South Africa’s electricity is generated by burning coal.”
He continues by noting the importance of petrochemicals in the industry, stating, “In South Africa, petrochemicals comprise about 55% of all chemicals produced.”
Such a reliance on one source of material for energy and chemical material may be a cause for concern, but perhaps more worryingly, in the modern world, is its distance from major markets. South Africa is a long way from America, Europe and the Far East, whilst its neighbours are poor, with largely underdeveloped economies. Whilst this does mean that the country is in a position of production leader in Africa, currently its producers are reliant on domestic demand to maintain growth.
Recently, this has caused negative expansion, as home markets have stuttered. As a report by industry research specialists, BMI Research states, “The South African petrochemicals industry is in recession and it could take at least two years before returning to growth. Key petrochemicals sectors are flat lining in a difficult operating environment. The sector is the worst affected area of an economy that is enduring sub-2% growth and falling competitiveness.” The report continues to outline the severity of the decline, which has hit rubber and plastic production particularly hard. “In the January-May period of 2015, basic chemicals declined by 1.8% year-on-year, while plastic fell 3.8% and rubber declined 7.1%. The decline in plastic and rubber output came after a poor 2014 when the rubber index fell 6.9% and plastic fell 3.1%. The factors causing the decline include poor domestic market performance, lower international petrochemicals prices and rising costs of inputs, including raw materials and labour”.
Despite these problems, there is still a thriving industry with a diverse range of production, as this chart produced by South Africa’s Small Enterprise Development Agency showing percentage share of chemicals production by sector in 2011 shows.
These statistics are supported by South Africa’s own Ministry of Trade and Industry, which noted in a recent report that, “The synthetic coal and natural gas-based liquid fuels and petrochemicals industry is prominent, with South Africa being the world leader in coal-based synthesis and gas-to-liquids technologies.” The report then goes on to highlight a problem facing the industry as a whole, as it states that, “The South African chemicals sector has two noticeable characteristics. Firstly, while its upstream sector is concentrated and well developed, the downstream sector – although diverse – remains underdeveloped.”
Much of this underdevelopment is caused by limited funding for research. The government has many social problems to overcome to develop the country as a whole. Years of racial segregation placed many on the poverty line, with slum dwelling and poor education and health care. Whilst the nations limited financial resources focus on returning a balance to everyday standards, there is little money left to fund advanced product development. Instead, it is left to multinational corporations to establish the nation’s intellectual competitive advantage.
However, as Dilshaad Booley, Chemicals Industry Research Specialist at Frost & Sullivan notes, foreign companies are not always willing to develop products for a country’s benefit. She writes, “Currently, there are limited research and development activities in the local [South African] chemicals industry. [Instead] technological advances are primarily driven by multinational corporations that want to maintain their global brand image and standards, which results in these corporations adopting foreign technologies, thereby advancing the local chemicals manufacturing sector.”
Worse still, Booley continues by noting the sluggish growth in the South African economy and the knock on effect this is having on chemicals industry expansion. “The South African chemicals industry offers major input materials, such as solvents and polymers, to the manufacturing sector. But as there has been slow growth over the past two years, the sector is expected to continue being a slow-growth market for the chemicals industry.”
Whether the South African chemicals industry can recover without a dramatic increase in domestic demand is hard to tell. But if local demand does not recover, then the industry must surely look to export, if it is to survive. But what competitive international advantages does the industry have to expand its export market?