The misguided choice of coal-based technology is limiting a potentially booming sector, reports Lynda Loxton
Plastics and chemicals giant Polifin upset many manufacturers when it managed to persuade the Board on Tariffs and Trade to slap anti-dumping duties on polymer (plastic raw materials) imports.
But while many ranted and raved about “high-handed measures to reduce competition”, the incident once again underscored the folly of the decision taken during the 1973 oil crisis to “go it alone” and take the coal-based petrochemicals route.
Billions of rands have been poured into that route since then in the form of Sasol II and III, as well as Mossgas, to ensure South Africa’s self- sufficiency. At the same time, companies such as AECI and Sentrachem have abandoned plans for coastal petrochemical complexes and have moved instead to the “coalplex” near Sasolburg.
But the basic inputs for the chemical and plastics industries have, because of the coal-based route, turned out more expensive than if they were oil- based, as they are in the rest of the world.
Simultaneously, transport costs for export products have been higher, further eating into competitiveness.
According to researcher Rod Crompton, who undertook a major study into the sector for the Cape Town- based Industrial Strategy Project, this approach might be attractive from the point of view of adding value to relatively low-grade domestic resources, but it really only worked from an import- substitution perspective.
The cost structures are therefore different from those in international oil-based competitors and tariff protection is needed, while the prospects of exporting PVC of any kind are limited.
With the economy opening up and many manufacturers eager to move into export markets, such constraints are irritating and obstructive. Hence the fury of the polymer importers.
But one cannot wipe out billions of rands of investment and intensive technological development overnight, no matter how desirable in the short term. So what to do?
This is one of the many issues being examined by “cluster groups” organised by the Department of Trade and Industry to examine the structural weaknesses inherited from years of apartheid- inspired import substitution and how to right them given the globilisation of the world economy.
A case in point is the fact that the South African petrochemical industry faces crucial investment decisions over the next few years as it considers various options to meet the looming shortage of ethylene.
An essential feedstock for the fast-growing plastics industry, ethylene is a volatile gas presently produced by Polifin from feedstocks extracted as a by-product by Sasol in its fuel-from-coal process at its Secunda plant.
Sasol can produce 400 000 tons of ethylene a year, but demand is growing rapidly and a shortage is looming within two years.
The options open to the industry include an inland cracker based on coal-derived feedstock, which will further entrench Sasol’s coal-based technology, and a coastal naphtha cracker based on imported feedstock that will fill in the “missing link” that has characterised the petrochemical industry for so long.
The naphtha option will widen the slate of inputs for the chemical and plastics industries more than is presently possible with coal-based technologies. This will improve the competitiveness of the industry, both in terms of quality and costings.
But the choice is not an easy or obvious one. A naphtha cracker would cost R4-billion to R5-billion and double the ethylene feedstocks available on the market, without any guarantee that the kind of export-led downstream development would take place at the same time.
“The timing of such an investment is going to have to be very carefully based so that we do not have to export all the product,” says Sasol general manager John Marriot.
Engen strategic planning manager Dave Wright does not believe a naphtha-based cracker is an immediate priority although it would be needed “at some point in the future”.
Says Wright: “If we are looking at local consumption only, then a Secunda-based cracker makes economic sense,” he said.
The DTI’s “cluster” study groups are examining supply-side measures to develop the kind of downstream industries needed to justify further investment in ethylene production.
Polifin chief executive Trevor Munday says the cluster studies were aimed at expanding the downstream industries “into a whole new league altogether”. He recently announced that Polifin was also examining the ethylene options and the possibility of investing about R6-billion in a new petrochemical complex.
“It is early days yet … the team that we have put together is evaluating all aspects of the project including where is the most suitable site,” Munday said.