The downstream sector of South Africa’s chemicals industry has been identified as having substantial growth and employment potential by the Department of Trade and Industry (DTI), reports Creamer Media’s Research Channel Africa.

This is owing to the broad spectrum of products that the downstream sector produces and the labour-intensive nature of its production.

To increase the competitiveness of the chemicals sector as a whole, a chemicals sector expert advisory committee (CSEAC), consisting of government and industry role-players, has been established to advise the DTI on the implementation of Key Action Programmes (KAPs) for the sector.

In addition, the CSEAC has also been responsible for the drafting of the chemicals sector summit agreement, which represents the culmination of a process that started with the Growth and Development Summit agreement concluded in June 2003.

The comprehensive agreement focuses on investment in the chemicals sector, skills development, research and development, trade strategy, supply chain management, black economic empowerment, employment, promotion of cooperatives and small, medium-sized and micro- enterprises (SMMEs), and the implementation of the advanced manufacturing technology strategy.

Government has committed itself to improving the competitiveness of the downstream sector. Two processes will facilitate this, namely the DTI’s customised programme for sector development strategies, introduced in 2005, and the Industrial Development Action Plan, arising from the National Industrial Policy Framework, released in August 2007.

The customised sector programme for sector development strategies sees a globally competitive chemicals sector that produces high value added products from the country’s abundant natural resources through the use of specific technologies; while the Industrial Development Action Plan recommends that KAPs be implemented as an integrated package to achieve sector development.

Additionally, R5-billion in tax incentives has been allocated to the Industrial Policy Action Plan over the next three years to finance projects including the chemicals sector’s SMME development programme.

While the upstream sector currently dominates the chemicals industry in terms of revenue and trade surpluses, the reality is that the local market can only accommodate a limited number of such producers, owing to its small size.

Therefore, the growth potential of the downstream sector must be encouraged.

The KAP targets set for the chemicals sector include the ramp-up of titanium slag beneficiation from 5%, to 20%, across the sector. Primary polypropylene production, which is currently 360 000 t/y, also will be beneficiated to between 6% and 12%. In addition, the DTI intends increasing the fluorochemicals sector’s turnover by R1-billion over the next seven years.

The chemicals industry is of substantial economic significance to South Africa, contributing around 4,3% to gross domestic product and about 25% of the country’s manufacturing sales. The industry employs some 140 000 people and is the largest of its kind in Africa.

According to the Chemicals and Allied Industries Association (CAIA), sales of chemical products in 2007 amounted to R237-billion, with imports valued at R75,4-billion and exports totalling R35,2-billion. Therefore, in 2007, South Africa had a chemicals trade deficit of some R52,2-billion.

The South African chemicals industry is highly integrated into almost all other sectors of the country’s economy. In addition, the chemicals sector’s products are also the basis for almost all manufacturing activity in South Africa.

However, trade performance across the sector is not uniform, and it is important to distinguish between upstream and downstream sectors when evaluating the international competitiveness of the sector.

Hampered Competitiveness

A shortage of engineers and tradespeople poses a threat to the chemicals sector’s competitiveness.

The Chemical Industries Education and Training Authority (Chieta), a statutory body established by the National Skills Development Act, is tasked with the responsibility of skills development in the sector.

The Chieta’s sector skills plan aims to promote economic and social development through learnerships and skills programmes.

The upstream sector is highly concentrated, capital intensive and internationally competitive, with an export surplus existing for many upstream chemical products.

The upstream sector is dominated by Sasol, AECI and Omnia, says the CAIA.

In contrast, the downstream sector is generally not very competitive. Downstream production is more labour intensive and is undertaken by a large number of small companies.

The downstream sector is hampered by outdated manufacturing processes, which can be improved through, besides other avenues, research and development, says the DTI.

Prevailing pricing practices also affect the competitiveness of the downstream sector, specifically import parity pricing (IPP).

IPP is a common practice in the pricing of many local basic chemical products that are important inputs to downstream production. The practice involves the inclusion of notional charges, which are not actually incurred by the supplier, in the price of products being traded on the local market.

These costs include shipping, wharfage charges, import tariffs, railage to inland markets and indirect costs of warehousing, payment terms and stockholding.

Two downstream industries that have been affected by IPP are plastics and paint manufacturing. Companies add notional charges to the international price when determining the actual price to be paid for locally produced polymer that is transported from inland plants to Gauteng customers.

Similarly, local paint manufacturers are forced to pay IPP for titanium oxide, an input in paint manufacture and a commodity of which South Africa has a large trade surplus.

As in the case of plastics, paint producers do not benefit from the cheap local production of their major input. Instead, South Africa exports large quantities of raw material in unbeneficiated form rather than exporting manufactured paint.

Environmental Projects

The manufacture of chemicals and chemical products is a potentially hazardous under- taking. The chemicals manu-facturing process generates large amounts of toxic waste and is a major consumer of energy.

As a result of increasing global concern for environmental issues and worker safety, and more stringent statutory requirements, the chemicals sector has had to tackle issues associated with occupational health and safety and its impact on the environment.

Through the CAIA, the sector has adopted the Responsible Care programme, developed by the International Council of Chemical Associations. Responsible Care is a voluntary programme, which requires chemicals companies to conduct their business in a manner that maintains health and safety standards and minimises their impact on the environment.

Concern for climate change has resulted in environmental projects being undertaken by chemicals companies, including Sasol and Omnia, that can be registered as Clean Development Mechanism (CDM) projects under the Kyoto Protocol.

Sasol Nitro’s nitrous oxide greenhouse-gas abatement project reduces emissions from the business unit’s nitric acid plants at Sasolburg and Secunda by the equivalent of more than 500 000 t/y of carbon dioxide.

Omnia’s agriculture division’s Envinox plant, a reactor to reduce greenhouse-gas emissions at its Sasolburg plant, will be used as part of the group’s CDM project.

Omnia has entered into a €15-million agreement with the International Finance Corporation (IFC), under which the IFC will buy up to one-million carbon credits, known as Certified Emission Reductions (CERs), from Omnia Fertilisers, over the next five years. The CERs will be sold by the IFC to international buyers in developed countries.