International executive recruitment firm Odgers Berndtson describes the current state of the South African chemicals and petrochemicals industry as stagnant, if not diminishing, says energy, consumer and technology specialist for sub-Saharan Africa Guy Lundy, a partner in the firm’s Cape Town office.

He tells Engineering News that much of South Africa’s chemicals industry, prior to 1994, was protected by import tariffs, which are now far lower or nonexistent. “The industry was also supported by local demand from the South African Defence Force, mining customers and large manufacturing firms, all of which are now less prominent in our economy than before.

“Further, the structure of South Africa’s economy has changed steadily over the past few decades. It has become far less dominant in terms of the total gross domestic product percentage of primary production sectors, such as agriculture and mining, and secondary production sectors, such as manufacturing,” explains Lundy.

He adds that chemicals firms are consolidating more to remain competitive amid foreign competition and are considering opportunities further north in Africa to gain new customers. However, he says these kinds of operations require large facilities, therefore making it increasingly difficult for smaller companies to compete in the industry.

In terms of development capabilities, Lundy notes that the Department of Trade and Industry (DTI) has identified chemicals as a key sector. However, he tells Engineering News he is inclined to think that the DTI is providing little more than moral support in terms of real innovation or significant research and development (R&D).

“It is often easier to import and distribute chemicals and petrochemicals. The industry needs to work more closely with research institutions and universities to encourage and support local R&D,” he says.

Challenges
Lundy notes that cheap imports from Eastern countries, especially India and China, are the greatest challenge that the chemicals and petrochemicals industry currently faces. “This results in manufacturers struggling to compete in terms of pricing, whereas Asian competitors are not subject to the same environmental laws or labour conditions as South African companies.”

Nonetheless, a short-term benefit for South Africa is that it is a major importer of crude oil, which forms a significant part of the input costs of the refineries that produce several chemicals as a by-product of the refining process. “However, these input costs will eventually increase again as the oil price rises,” he notes. Lundy predicts the oil price to increase within the next 12 to 18 months.

He further highlights that refineries worldwide also benefit from the lower oil price. “There is generally overcapacity in refining globally, so prices are already competitive,” he says, adding that this is one of the reasons why South African oil refineries are displeased with government encouraging national oil company PetroSA to build a new refinery in the Coega industrial development zone, in the Eastern Cape.

“This will just add more downward pressure to the price of chemicals and petrochemicals,” he asserts.

Oil Price Drop Ramifications
Lundy predicts that a likely scenario to materialise from the lower oil price will be the short- to medium-term mothballing of some refineries outside South Africa.

He also believes that new builds might be put on hold as their viability is challenged by the lower oil price. “This is the case, for example, with petrochemicals major Sasol’s multibillion-dollar project in Louisiana, in the US, which is being put on hold for now while the oil price is so low. In the longer term, these projects will restart once viability improves.”

Nevertheless, Lundy applauds local expertise, stating that South Africa’s chemicals and petrochemicals industry has built and retained good skills and experience in the broader chemicals and refining areas. Companies like Sasol and explosives and speciality chemicals group AECI, among others, have continued to promote local skills development, he points out.

However, in the next five to ten years, if South Africa were to pursue shale gas exploration in the Karoo and find significant deposits, a significant number of experienced people will be required to fully exploit gas production, gas processing and the gas distribution value chain, says Lundy.

Unattractive Career Path
Lundy says ‘dirty’ industries, such as the chemicals and petrochemicals, oil and gas, construction and civil engineering sectors have, for several years, been perceived by young people as career paths that are not ‘sexy’ enough.

“Learners and tertiary education entrants are more interested in fields like information technology, advertising and finance,” he says.

He adds that the chemicals and petrochemicals industry needs to make a concerted effort to market itself as a career option to schoolgoers so that they can choose the right subjects early enough to ensure that they are prepared and accepted for specialist career paths, such as chemical engineering.

Advice for the Industry
Lundy advises emerging chemicals and petrochemicals companies to focus on the quality of products and to establish partnerships so that smaller companies can benefit from larger companies’ supply chains. “To do so requires ongoing access to skills to enable these companies to provide top-quality products and services that are not available from cheaper, foreign competitors.”

He adds that keeping costs down while ensuring industry personnel are appropriately skilled for the long term is essential: “This will ensure that industry can produce a higher-quality product more efficiently than international competitors.”

Environmental Considerations
The environmental standards and requirements stipulated by South African legislation are significant when compared with several other emerging economies, says Lundy, adding that South African industries often base their requirements on the standards of developed countries.

“This is a good thing, but it increases costs and makes it difficult to compete with lower-cost producers that are not subject to the same level of regulation.”

He cites the terms of the minimum emission standards of the Air Quality Act, highlighting that this Act applies strict environmental controls that require capital investment and downtime to implement infrastructure change.

“The companies applying for postponement to meet these standards need more time to implement the necessary upgrades,” concludes Lundy.