Industrial action a major threat facing South African petrochem makers

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 the latest South Africa Petrochemicals Report on companies and markets.com. 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, 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 the GDP growth forecast for 2010 from 2.9-1.8%, 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. The report 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% yoy to 850,000 tons. However, consumption will continue on its previous trend after 2010, with a pick-up in economic activity, reaching 1.35 mln tons by 2013. A poorly performing banking sector will continue to restrict credit availability and therefore weigh on both consumption and investment in the sector. The report 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 delayed. There are 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$11 bln 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. It is cautioned 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, it is believed that more companies will be forced to preserve cash and make further cuts to spending programs. In 2009, South Africa’s polymers production capacity consisted of 680,000 tpa of PP, 260,000 tpa of LDPE, 200,000 tpa of HDPE, 100,000 tpa of LLDPE, 200,000 tpa of PVC and 60,000 tpa of PET. Feedstock was supplied by domestic crackers with combined capacities of 650,000 tpa of ethylene and 330,000 tpa 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.