South Africa Petrochemicals Report Q4 2009

South Africa Petrochemicals Report Q4 2009

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.

Executive Summary .5
SWOT Analysis....7
South Africa Petrochemicals Industry SWOT 7
South Africa Political SWOT 7
South Africa Economic SWOT ...8
South Africa Business Environment SWOT....8
Global Market Overview9
Global Ethylene Capacities ..9
Table: World Ethylene Production By Country, 2008 And 2013 (‘000 tonnes capacity) .9
Polypropylene.12
Global Oil Products Market Review..15
Table Global Oil Prices, 2003-2013 (US$ per barrel)19
Africa Regional Overview20
Table: Gas Reserves, Selected African Countries, 2008 (bcm) ...20
Table: Oil Reserves, Selected African Countries, 2008 (bcm) ....20
Table: Cracker Capacity, Selected African Countries, 2007-2012 (‘000 tpa).23
South Africa Market Overview ...24
Market Structure..24
Table: South Africa’s Cracker Capacity, 2008-2013 ..24
Petrochemicals Business Environment...27
Table: Middle East And Africa Petrochemicals Business Environment Ratings ..27
Limits Of Potential Returns.27
Risks To Realisation Of Returns ...28
Industry Trends And Developments ...29
Sasol 29
Other30
Upstream Developments 30
Alternative Fuels..32
Industry Forecast Scenario ...33
Table: South Africa’s Chemicals And Petrochemicals Sector, 2006-2013.34
Macroeconomic Outlook35
Table: South Africa – Economic Activity, 2006-2013 .37
Company Monitor...38
Sasol 38
Dow South Africa.41
AECI42
Shell .43
Air Liquide.44
Country Snapshot: South Africa Demographic Data .45
Section 1: Population45
Table: Demographic Indicators, 2005-203045
Table: Rural/Urban Breakdown, 2005-2030 ....46
Section 2: Education And Healthcare46
Table: Education, 2002-2005 ..46
Table: Vital Statistics, 2005-2030.46
Section 3: Labour Market And Spending Power ....47
Table: Employment Indicators, 2001-2006..47
Table: Consumer Expenditure, 2000-2012 (US$) ..47
Table: Average Annual Wages, 2000-2012..48
BMI Methodology ...49
How We Generate Our Industry Forecasts ..49
Chemicals And Petrochemicals Industry 49
Cross Checks ..50
Business Environment Ratings.51
Table: Petrochemicals Business Environment Indicators And Rationale...51
Weighting...52
Table: Weighting Of Indicators ....52