South Africa Petrochemicals Report Q2 2016 - New Market Study Published

The South African petrochemicals industry witnessed a contraction in 2015 amid slow overall economic growth. The industry is in recession and it could take at least two years before returning to growth as key petrochemicals sectors flatline in a difficult operating environment. The sector is the worst affected area of an economy that is enduring sub-2% growth and falling competitiveness.

In 2015, basic chemicals output fell 0.9% y-o-y, while plastic fell 2.2% and rubber declined 1.2%. However, some signs of recovery were seen in H215 with uptrends in plastics and chemicals. In terms of end-markets, the construction sector is enduring a poor performance, which is helping to depress demand for construction-related polymers. On the upside, the automotive industry enjoyed a boom in 2015 and rising local content in cars manufactured in South Africa offers further opportunities for consumption group.

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The automotive parts industry is growing in importance with increased use of local content in cars, thereby helping to boost domestic consumption of polymers. BMI continues to see upside potential in the new Automotive Production and Development Programme, which replaced the South African government's Motor Industry Development Programme. By investing in the manufacturing of new and replacement vehicle models, as well as automotive components, the programme offers incentives to manufacturers to invest in local production. The aim is to boost output, sustain employment and strengthen the automotive value chain within the local industry.

The low value of the rand, coupled with low oil prices, has not helped lift local petrochemicals output, which will track poor GDP growth figures in the near term. The South African economy as a whole will grow at a slow pace. We revised down our 2015 growth forecast to 1.4% from 1.9%. We maintain our 2016 growth forecast at 1.9%. Medium term, our core scenario is that growth will remain below 2% in the absence of structural reform momentum and the lack of a sustainable resolution of the electricity crisis. As such, a rapid recovery is unlikely and BMI does not see a return to strong growth in petrochemicals until 2017.

In 2015, South Africa had ethylene capacity of just under 700,000 tonnes per annum (tpa) and propylene capacity of 960,000tpa. Meanwhile, polymer capacities included a total of 570,000tpa of polyethylene (PE), 60,000tpa of polyethylene terephthalate (PET), 680,000tpa of polypropylene (PP) and 200,000tpa of polyvinyl chloride. This gives South Africa a relatively small yet diverse petrochemicals base. However, capacities are unlikely to change over the medium term.

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