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Despite all the challenges facing the chemicals industry in South Africa, there is still the chance to do business there. Indeed, many analysts are confident that the industry will grow, as local economies grow. Whilst much of the continent is impoverished, conditions are improving, and as they do so they will require more and more chemical products. As André de Ruyter, Senior Group Executive at chemicals giant Sasol explains in the wider context of Africa as a whole. “There is a tipping point in GDP per capita at which people become significant chemical consumers and Africa is still not yet at that point. Our [Sasol’s] local production is built upon the parts of the South African market that do behave like Western European or North American markets. At the same time, it is clear that the policies currently instated in many Sub-Saharan African countries are indeed conducive to economic growth.

The political stability, adherence to sound market policies, and respect for democracy found in most Sub-Saharan African countries reflect that countries understand the need for business-friendly policies to attract investment. This is coupled with the potential for market growth and access to natural resources. Moreover, there has been the development of markets such as agriculture in which we can introduce our fertilizer products and minerals extraction business; explosives in particular have been a focus area for us as Africa’s mineral wealth is increasingly explored and developed.”

Frost & Sullivan analyst, Dilshaad Booley agrees that local demand will foster growth, stating, “Petrochemicals growth will be driven by the demand from end-users, such as the paints and coatings, automotive, mining and construction sectors, where large amounts of chemicals are still procured locally, as the local refinery capacities meet the bulk of local demand.” He continues by adding that, “The market for petrochemicals is expected to grow at a compound yearly growth rate of close to 2%, owing to limited investment in local refineries and old technology limiting efficiency.”

This positive viewpoint is echoed by global market analyst, Hilton Lazarus, Head of Chemicals and Allied Industries at IDC, who writes when asked about the future said, ““There are many opportunities in the sector in the near future and I believe that, in order to successfully explore these possibilities, South African companies must start looking beyond the borders and enter into new countries on the continent.”

And according to Paul Victor, acting CFO at Sasol, the growth will be widespread, as he believes that, “There are a number of key industry subsectors, including explosives, agriculture products, such as fertilisers, and polymers that will drive new growth and development.”

Prof. Thokozani Majozi of the University of Witwatersrand, Johannesburg, is more cautious. Whilst agreeing that domestic demand will grow, albeit steadily for the next few years, he still maintains doubts over South Africa’s lack of domestic raw material production. He states that, “The chemicals industry still relies on imported raw materials, which are subject to international levies that reduce manufacturers’ profit margins.” He also has fears over the countries fossil fuel usage, saying, “The renewed emphasis on green economies implies significant reduction in both gaseous emissions and liquid discharges, which does not bode well for an economy that is largely based on coal.”

As discussed earlier, these challenges do need to be addressed, but could provide a chemicals demand (from the need for fuel additives or bioethanol mixes etc.) as much as they could drive business away. More significantly than the problems, is the way that industry leaders and government handle them, as André de Ruyter, Senior Group Executive at Sasol states, “With the appropriate policies there is significant room for investment in the South African chemical industry”.

Paul Victor offers some good advice for potential investors in South African chemicals, listing a number of potential problems that businesses need to manage, including, “Compliance with local regulations, addressing government policies and protecting investments with proper financing. In addition, foreign investors need to understand that, much like China, patience is required to establish good relationships with government and business stakeholders. Africa has a strong rate of growth and the industry will benefit from expanding markets and trade well into the foreseeable future.”

So it seems that the South African chemicals industry is currently a slowly emerging waiting game. Both distant and recent history has been difficult, but it now seems that domestic recovery is on the way, at the same time as the opportunity for exports is arriving.

Victor confirms this, stating that exports will be the most important market for all African chemical products, although adding that, “domestic markets will become increasingly important in the near future.”

Which of these revenue streams arrives first, and which will be the most successful remains to be seen. However, it does appear that there will be demand for products. Despite the challenges that the country faces, and there are many, if end users require, then someone will supply. Will that supplier be you?

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?

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.