South African petrochemicals market flat amid poor exports and lacklustre manufacturing growth

The South African petrochemicals market is flat at a time when export volumes are relatively poor and there is lacklustre manufacturing growth, but so far the local industry has managed to sustain growth in sales due to the high cost of imports. BMI believes that this advantage will be eroded over 2013 as margins come under pressure from rising costs, partly due to the weakening rand. The South African petrochemical industry is the largest in Africa, although it is relatively small by international standards. It accounts for about 5% of GDP and 25% of manufacturing sales. The industry is reshaping itself, striving to bring plant capacities closer to world production levels, exploiting niche markets, acquiring foreign assets and promoting foreign partnerships, although it will also face challenges from new capacities in the Middle East and Asia. South Africa has the second-largest refining sector in Africa behind Egypt, with total refining/liquid fuels capacity of 695,000 bpd. It controls a significant portion of the regional market for refined products. In 2012, South Africa had petrochemicals capacities that included 650,000 tpa ethylene, 950,000 tpa propylene, 570,000 tpa polyethylene (PE), 60,000 tpa polyethylene terephthalate (PET), 200,000 tpa vinyl chloride monomer (VCM)/polyvinyl chloride (PVC), 680,000 tpa polypropylene (PP) and 145,000 tpa methanol. Over the last quarter, BMI has revised the following forecasts/views: - We expect the South African economy to post sluggish growth over the medium term, and forecast that real GDP will expand by 2.8% in 2013 and 3.4% in 2014. Although private consumption should hold up fairly well, investment is likely to suffer due to elevated political risk. This will, in turn, dampen growth in petrochemicals demand. In our view, the weakness of the rand will mean import costs remain elevated, weighing on demand somewhat. Furthermore, the aforementioned slowdown in the growth of investment spending will also likely keep a lid on import growth. While this provides some measure of comfort for domestic petrochemicals producers and converters, it will also undermine demand activity in the wider economy and therefore have a knock-on effects for petrochemicals output. At the same time, rand weakness will erode margins by pushing up the cost of feedstock. - Sasol's Ethylene Purification Unit (EPU5) project - which will increase ethylene availability for its PE plants - is expected to be operational in H213, while the C3 stabilisation project will achieve 'beneficial operation' in mid- 2014. Sasol said EPU5 will raise ethylene production by around 48,000tpa by 2015 and will supply PE production facilities, thereby reducing South African plastics converters' reliance on imports. There are no further plans for significant expansion or new plants over the next five years, according to BMI research.