Chemicals drive the economy
It is easy to forget the start given by the Industrial Development Corporation (IDC) to industry stalwarts such as petrochemical giant Sasol and Foskor, one of the world's largest phosphate producers, when they were nascent start-ups.
These and many other businesses entering the chemical industry have benefited greatly from the IDC's mandate to develop the country's industrial base, particularly by drawing on its rich natural resources. The IDC's chemicals and allied industries business unit is central to this endeavour and has committed almost R2-billion over the past two years, and expects to commit another R11-billion over the next five years, in support of business development in the chemical industry.
"The theme across all the primary sectors we look at is import substitution and boosting competitiveness," says unit head Hilton Lazarus.
These sectors include the primary and downstream industries related to oil and gas; cement and building products; agricultural inputs such as fertilisers, plastics and rubber; and specialised and fine chemicals. "At this stage, our major focus is on basic chemicals — specifically gas — and we are looking at other projects in the energy space such as new refining capacity and building bulk storage facilities, both in and outside South Africa. Our major strategic focus in this industry sub-sector is the gas portion because there is an intention to change the energy mix in South Africa and we have to look at all options in terms of energy supply."
The IDC is also eyeing opportunities arising from the recent gas finds in Mozambique and further up the east coast of Africa in Tanzania.
Looking at the local picture, attention is being given to developing natural and bio gas as replacements to domestic heating staples such as coal and paraffin, while also co-operating in projects investigating gas alternatives to complement vehicle fuel.
Lazarus says a number of projects are in the pipeline, with one possible investment being a liquid petroleum gas terminal at Saldanha Bay and other similar projects in Mozambique.
"What we're doing now is looking at the regional value chains to see what other countries in the Southern African Development Community have and how we can create value in terms of industries across borders. By looking at the entire value chain, we can for instance develop projects that would benefit all the parties involved.South Africa need not be a physical link in these value chains, but could still benefit from promoting and participating in projects that develop regional capacity. "We will look at new sectors or sub-sectors to identify projects of strategic importance to South Africa and are constantly talking to industry stakeholders to find such opportunities," says Lazarus.
He says it is still too early to make any concrete plans about which opportunities to pursue in South Africa's shale gas industry.
"We can engage with shale gas industry stakeholders and hear what is going to happen, but it is exploratory engagement right now. It is more about the policy decisions from the departments of trade and industry and economic development on how they would like to build the industry around that — then you can start making plans.
"The IDC is in a unique position to support projects that are speculative but viable, and has the wherewithal to provide considerable funding for projects that generally require a long-term view."
Lazarus says these long development cycles are generally due to the effort needed to build a business case or the capacity to compete effectively in global markets, but especially because of the lead time required to prove a technology.
"In chemicals, a big thing is the technology. To get existing technology can be difficult, so you have to look to develop your own technology, which can take up to 20 or 30 years."
The chemicals and allied industries unit does not work in isolation but participates in industry bodies and platforms with relevant associations and the departments of trade and industry, economic development and science and technology.
"There are always discussions around what the industry needs and what can be done to make it more competitive, because there is a threat that imports are landing cheaper. So it's easier for someone to open an import business than to start a new manufacturing business, and therefore the manufacturing industry suffers."
The plastics and rubber sub-sector is one that is already quite established in the country and has been identified by the government's industrial policy action plan as a labour-intensive priority sector that can grow employment.
"We are trying to identify labour-intensive projects and are working very closely with the industry, its associations and the department of trade and industry to find initiatives and sectors that are going to produce more jobs. We'll probably find that out in the next two to three years as we do more projects in that area," says Lazarus.
This approach means that most investments over the past number of years have been in productive capacity, specifically in the packaging material, injection and extrusion moulding sub-sectors.
In line with its mandate to support local value add, Lazarus says there is an opportunity to beneficiate a polymer produced by Sasol that is currently exported in raw form. "So, the question is, can't we beneficiate some of that locally?"
One area of the industry in which South Africa could improve is in the speciality and fine chemicals sub-sector. It holds potential to create local value from the country's natural resources, but is a highly competitive field that requires significant capital investment.
"There are certain pockets where people are producing fine chemicals, but this is really further down the value chain," says Lazarus. "We import a lot of value-add, or have the raw material but export it in that raw form."
South Africa's rich zirconia deposits is one area that is being actively investigated, with the IDC exploring two projects that would help establish a local value chain, from the raw source to finished products. Part of this would be to establish a project to convert zircon sand and titanium into a metal form that would enable the establishment of new downstream fabrication industries within the country.
"If we see we can do it locally competitively, we will try to develop the project from conceptual to implementation stage," he says.
The local production of mining chemicals (currently mainly imported) is another way of benefiting local industries. "Some mining chemicals are produced locally, but they can be produced more cheaply elsewhere, so we always have to look at what the local industry needs to become more competitive."
The household chemicals and cosmetics sub-sectors are two examples of industries that fall squarely into the business unit's mandate, but offer limited opportunities to create competitive alternatives.
Lazarus says the IDC and the department of trade and industry investigated the cosmetics industry a few years ago, to explore the development of local replacements for imports.
"We found that the capital requirements didn't fit into what the IDC funds because they generally fall below the threshold and also it's not a very capital-intensive industry."
That being said, the chemicals and allied industries unit has funded a number of contract manufacturers that produce locally for big-name brands like Unilever and Johnson & Johnson. They have been quite capital-intensive projects, but the risk is mitigated somewhat by the long-term contracts with reputable brands that underlie them.
The glass and ceramics sub-sector is another that does not hold tremendous promise for intervention due to this being dominated by large manufacturers and the country seems sufficiently supplied for now.
"Although this is a very capital-intensive industry and barriers to entry are high, the establishment of additional productive capacity to increase competition or increase current production is always a consideration capacity," says Lazarus. "For us to play in that space we are rather looking at downstream manufacturing."
Although the chemicals and allied industries unit operates broadly within these varied sub-sectors, Lazarus says his team is always willing to look at projects that introduce more competition into the market or can add value to local supply chains.
This article was supplied and signed off by the IDC. It forms part of a larger supplement