Abstract
Aside from the ongoing recession, industrial action is a major threat facing
South African petrochemicals
producers, with increasing friction apparent
between management and trade unions over pay, according to
BMI’s
latest South Africa Petrochemicals Report. Double-digit food price inflation
has prompted unions
to call for a 15% pay rise in the chemicals sector.
However, the leading chemicals groups, including
Sasol, have only agreed
to average wage increases of 6%, which has raised concern about an
imminent
wave of strike action.
Even without the threat of strikes,
following a sharp recession in 2009, we believe the South African
economy
is unlikely to bounce back strongly in 2010, with subdued private consumption
and export
growth weighing on overall growth over the medium term. With
the country’s recession witnessing a
collapse in domestic private
consumption and a sharp contraction of export growth, there is little
doubt
that the petrochemicals sector – which relies heavily on the
automotive and construction industries – is set
for a severe
downturn that could continue into 2010. Nevertheless, the situation is
precarious, with a 2009
survey conducted by the Bureau for Economic
Research noting that business confidence in the
construction industry had
fallen significantly since 2008.
With a downward revision in BMI’s
GDP growth forecast for 2010 from 2.9% to 1.8%, the weak
recovery is
unlikely to provide much encouragement to local petrochemicals plants.
However,
construction activity ahead of the 2010 FIFA World Cup will give
a nudge to sales as well as helping to
lift private consumption, which
could have positive knock-on effects for petrochemicals in 2010. BMI
forecasts a dip in PE and PP imports in 2009 owing to sharp declines in
domestic consumption,
particularly from the automotive industry, which is
likely to see output shrinkage into 2010. In 2009,
polyolefins consumption
is forecast to fall 16.7% y-o-y to 850,000 tonnes. However, consumption
will
continue on its previous trend after 2010, with a pick-up in economic
activity, reaching 1.35mn tonnes by
2013.
A poorly performing banking
sector will continue to restrict credit availability and therefore weigh
on
both consumption and investment in the sector. BMI expects no expansion
in refinery capacity following
consolidation, although continuing
enlargement of synthetic oil capacity is expected. This will limit
potential naphtha feedstock availability. Drako Oil and Energy has proposed a
350,000b/d refinery at
Richards Bay in the KwaZulu-Natal province, with
start-up scheduled by end-2012, a date that has been
repeatedly moved
back. BMI doubts it will achieve financial backing for the projected US$6bn
cost of
the facility. PetroSA is also planning a crude oil refinery in
Coega, Port Elizabeth. At 400,000b/d
potential crude distillation
capacity, the plant could cost US$11bn and is expected to come onstream in
2014, but whether this deadline is realistic remains to be seen. PetroSA is
seeking partners, citing Sasol as
a potential investor. A final investment
decision for the project will be taken around 2010/2011. BMI
cautions that
if key refinery infrastructure projects are postponed or fail to get off the
ground, there could
be significant setbacks to the expansion of South
Africa’s petrochemicals industry. So far, dominant
industry players
have said that they remain committed to their big growth projects. But if the
global
economy does not begin to recover in 2010, BMI believes that more
companies will be forced to preserve
cash and make further cuts to
spending programmes.
In 2009, South Africa’s polymers production
capacity consisted of 680,000tpa of PP, 260,000tpa of
LDPE, 200,000tpa of
HDPE, 100,000tpa of LLDPE, 200,000tpa of PVC and 60,000tpa of PET.
Feedstock was supplied by domestic crackers with combined capacities of
650,000tpa of ethylene and
330,000tpa of propylene. South Africa was
fairly self-sufficient in olefins. In the long-run, South African
producers will come under pressure as a surge of new worldwide supply comes
online in the Middle East
and Asia. This is expected to weigh on the
full-year earnings of companies. But large players like Sasol,
which has a
strong cash position and diversified business, are expected to ride out the
downturn. Sasol has
invested heavily overseas – most notably in
Qatar, where it operates the Oryx GTL facility – and it is able
to
leverage its proprietary technology, which can be applied to produce fuels
from coal and gas.
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