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The Chemical Industry Sector
Global opportunities and challenges - trends
Growth in global trade over the past decade has tended to outpace
increases in national incomes. To develop and compete effectively
and take advantage of growing international markets, enterprises in
developing countries need to constantly upgrade their production and
organisational methods, tap opportunities to specialise, exploit
economies of scale and scope, forge domestic and international linkages
and networks, improve worker skills, access appropriate technologies,
and adopt new marketing strategies.
The global chemical output, estimated in 2004 at US $3 000 billion -
50 times the size of the SA economy, is concentrated in three areas of
the world, i.e., Western Europe (EU), North America and Japan.
Excluding the major oil companies, DuPont and Company remains the
world's largest manufacturer of chemicals. With the acquisition of
Union-Carbide Corporation in 2001, Dow is the second largest chemical
company in the world.
Six of the major trends impacting the world chemical sector are:
- Slower growth in matured markets, linked with high-growth in
developing markets such as China, is changing the rules; High
demand in China is also driving up prices for inputs worldwide,
thus increasing input prices in South Africa as well.
- New low-cost producers (developing countries) are competing in
what used to be traditional markets for USA, Japan and Europe;
- Pioneering days for new molecular structures for plastics and
fibres are over - the sector is pursuing applications through
biochemical, nano-technological and genetic techniques;
- Development cost in sectors with high R&D expenditure such as
pharmaceuticals and pest control is increasing at a rate that is
not rewarded by new chemical successes in the marketplace;
- Sector is evolving from its heavy dependence on tonnage
petrochemicals and inorganics to new business, as based more
on performance and service; and
- Environmental and toxicological concerns are slowing down
new product introductions (10% of R & D and 15% of capital
spending in this area).
In response to this impact, the global companies are adopting the
following strategies:
- Internationalising and globalisation of activities (which could
result in retrenching workers and in some cases hiring workers in
countries where there is little or no adherence to international
labour standards)
- Consolidating mature businesses - migration to low-cost locations
- Going off-shore from a strong home base
- Diversifying "downstream" businesses
- Expanding activity in mergers, acquisition, alliance and joint
ventures
- Building large enterprises from diverse niche businesses
- Developing strategies for each niche
- Shifting towards flat, decentralised niche type polylithic organisation
structures
- Increasing spending on R & D - optimal Intellectual Property exploitation
(patents and licensing)
- Focusing on customer needs and marketing
- Ensuring a realistic balance between marketing, R & D production and
finance functions
- Executing smarter re-engineering exercises
- Adopting more pro-active and effective cycle management
The global economic slow-down in the early 2000's hit the chemicals
sector much earlier and harder than other sectors of the economy. Significant
regional and global production over-capacities in gas-based chemicals
(ammonia, methanol, formaldehyde), basic petrochemicals (olefins,
aromatics etc.) and even fine and speciality chemicals, led to a dramatic
fall of operating profits across the world. This was exacerbated by high
prices of crude oil and gas, which persisted from late 2000 throughout the
first half of 2001. The Western European chemicals sector was also penalized
by "eco-taxes" such as energy tax imposed by governments (e.g., in the UK)
to meet the Kyoto Protocol's emission reduction targets. The industry
recovered somewhat in 2004, with an overall growth in global volumes of
4.7%, compared to 3.4% in 2003. The expected growth in 2005 is 4.1%, and
a similar growth is forecast for 2006. China and India have the fastest
growing chemical sectors in the world, with 13.9% and 15.8% growth
respectively in 2004.
Employment in the US chemicals sector declined by 0.5% in 2001 and by
another 0.5% in 2002, due to downsizing, outsourcing and competition from
imported products. Several large US, Western European and Japanese chemical
companies announced job cuts and plant closures in 2001 and 2002. The list
includes Bayer (9,000 jobs / 7.5% of total workforce to be cut), DuPont
(5,300 jobs, mostly in synthetic fibre production - 4% of workforce),
Degussa (4,000 jobs cut), Henkel (3,000 jobs or 5% of workforce cut),
Syngenta (pesticide production - 3,000 jobs cut), Celanese (organic synthesis
intermediates - 850 jobs or 7% workforce cut), Hercules (organic chemicals
and synthetic fibre manufacture - 3% workforce cut), Akzo Nobel (2,000 jobs -
3% of workforce cut) BP (polymer production in the UK - 1,000 jobs cut), Hitachi
Chemical (4% of workforce cut). American companies are particularly badly
affected by high natural gas prices, which as a widely used energy and
feedstock input cost. In products such as ammonia, the US has declined
from around 28% of global capacity in the early 1990's, to less than 10%
currently (2005).
Two sub-sectors: pharmaceuticals and personal care products (cosmetics
and toiletries) were the chemicals sector's best performers in 2001 -
2002 as the consumption of these groups of products was not affected by
the general global economic slow-down and the aftermath of the September
11th terror attack. The upstream sub-sectors such as petrochemicals are
adversely affected by high crude oil and natural gas prices, coupled with
a cyclical downturn in prices. This situation has started to reverse itself
in 2004, and in early 2005 the petrochemicals sector shows strong signs of
a cyclical upturn, based upon higher prices and capacity shortages,
notwithstanding record-high oil prices.
Due to investment boom in the chemicals sector, which ended when the
prices of oil and gas surged in mid-2000 (but most large projects under
construction, such as crackers, could not be stopped), the global chemicals
sector was plagued by large production over-capacity in 2000 - 2003.
Crackers, which came on-stream in 2000 added 6.1 million ton of ethylene
capacity, globally; extra 6.4 million ton of ethylene capacity was added
in 2001 (for comparison, global ethylene consumption was 89 million tons
in 2000). The bottom of the ethylene cycle was reached in 2002, with
cracker operating rates at 88%; other reports indicate that in November
2001 cracker operating rates were at 90% in Europe and at just below 80%
in the USA ("levels not experienced for 20 years"). The consistent high
growth in particularly China has ensured that current (2005) operating
rates have increased again to high levels, and this has resulted in
significant price increases in most polymer types. Given the lack of a
significant amount of new capacity planned globally as of 2007, the
polymer business could remain tight through 2008.
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Domestic opportunities and challenges - trends
The domestic chemicals sector has developed into an important part of
South Africa's manufacturing sector being second only to the food sector
turnover. The relative contribution of the eleven chemicals sub-sectors
to the South Africa's Gross Domestic Products (GDP), as well as the
importance of the sub-sectors in a global context, is shown in Figure
2. Given that South Africa's GDP is about 0.7% of global GDP, it is
noted that three sub-sectors (fuels, bulk formulated chemicals and
pharmaceuticals) have a larger output that may be expected on the
basis of our GDP.
The sector is the largest of its kind in Africa and is highly complex
and diversified. From a strategic perspective the sector is segmented
into 11 sub-sectors excluding synthetic textile fibres, which resorts
under the textile industry. The following respective shares of sub-sectorial
production depicted in brackets: Liquid Fuels (31%), Plastic Products (20%),
Consumer Formulated Chemicals (5%), Inorganic Chemicals (8%), Primary Polymers
& Rubbers (7%), Pharmaceuticals (8%), Rubber Products (5%), Bulk Formulated
(5%), Organic Chemicals (6%), Pure Functional and Specialties (5%), and Fine
Chemicals (0%).
Figure 2: Relative Contribution of Chemical Sub-sectors to GDP as well as
Global Output
Click on image to display larger version
According to StatsSA sales volumes in 2004 amounted to 20% of the manufacturing
sector at about R156 billion, and the sector employed around 177 000 people
nationwide in 2003, and accounts for 4.5% of Gross Domestic Product in the
same year. It invests around R2 billion annually in upgrades, with less than
1% of sales being spent on R&D. Around 60% of upstream chemicals are consumed
within the chemical pipeline as feedstock. Products of the chemical sector are
also the basis for almost every manufacturing activity in SA.
Chemical production in other Southern African Development Community (SADC)
countries is focused upon the downstream formulation of products such as
consumer cleaning products and cosmetics, as well as plastic conversion.
Total chemical production in the SADC region amounted to an estimated 40.4
million metric tons worth $15.2 billion in 2000. South Africa is the major
producing country, accounting for an estimated 87% of the total SADC output.
SA exports of chemicals products have been in the region from R15.7
billion to R19.7 billion per year for the last three years (2002 to 2004),
while, during the same period, imports have been ranging from R26 billion
to R30.5 billion; trade balance has always been deeply negative, ranging
from R10 billion to R12.8 billion per annum. During the same 3-year period,
exports under plastics, rubber and articles thereof vary between R5.1
billion and R5.7 billion, while imports have been ranging from R10.1
billion to R11.5 billion per annum; trade balance also is deep in the
red, ranging from nearly R5 billion to R6.2 billion.
Major markets for SA exports in priority sub-sectors are as follows:
- Inorganic chemicals: USA, India, UK and Japan
- Bulk formulated chemicals: Netherlands, Zimbabwe, Malawi and India
- Consumer formulated chemicals: UK, Angola, Mozambique and DRC
- Plastic conversion: UK, USA, Nigeria and Zimbabwe
Pharmaceutical products and raw materials are the major contributors
to the chemical sector's overall negative trade balance. Imports of
pharmaceuticals reached nearly R6.2 billion in 2004, while exports
were worth just above R696 million.
SADC, the EU, the USA, India and Japan are major export destinations
for South African chemical products. Imports of chemicals are coming
chiefly from the EU, the USA and Australia. Other important trading
partners in imports and exports of chemicals include MERCOSUR (chiefly
Brazil), China and Taiwan.
Challenges faced by exporters in the chemical sector are both tariff
and non-tariff based, for example Mercosur has complex non-tariff barriers
(NTBs) such that the benefits of lower tariffs being negotiated for major
South African Customs Union (SACU) export products would not be incentive
enough for SACU manufacturers to export to Mercosur. SACU generally does
not have the same level of cumbersome non-tariff barriers relative to the
target countries to discourage imports from those countries.
For example, Brazil, the major Mercosur economy, has very complex NTBs.
Some of these, such as Industrial Products Tax and Merchandise Circulation
Tax can result in the final cost of imported chemicals approaching double
the original Free-On-Board cost. Other significant NTBs in Mercosur include:
- Policy unpredictability
- Import licensing (especially non-automatic licensing)
- Anti-dumping investigations
- Customs procedures and delays
- Reference prices/minimum import prices
- Rules of origin
- Logistics cost
- Labelling requirements
- Standards
- Intellectual property rights
There are around 30 industry associations and professional representative
bodies within the sector - paints, plastics, flavours and fragrances,
coatings. Each has its own constituency and most operate in silos of
sectoral interest.
The diversity of the sector makes it difficult for the role players to
speak with a common voice and leadership within the sector is generally
absent, with notably few exceptions. Many in the sector feel that industry
representation is focused on the interests of major operators to the
exclusion and detriment of regional, smaller, more diverse and less
influential interests. There are allegations of divisive and adversarial
positions that prevent the industry at large in engaging in effective
and constructive dialogue to develop much-needed programmes required to
benefit of industry.
South Africa has a natural advantage in mineral feedstock such as gold,
PGM, manganese, chromium, vanadium, copper, antimony, phosphate rock,
uranium, fluorspar and titanium containing heavy minerals; yet most of
these are exported in un-beneficiated form. There are substantial
beneficiation opportunities to transform the raw material using local
factors (labour and capital) to a more finished product that has a
higher value than the sale of the raw material.
Beneficiation of these minerals into value-added inorganic chemicals
for the world market should have good viability. There are also further
potential to recover chemicals from waste products such as copper and
aluminium scrap.
The unique Sasol process, based upon Fischer Tropsch technology,
results in abundant quantities of propylene feedstock. This is
converted to primary polypropylene feedstock, destined primarily
for exports in un-beneficiated form.
The structure of the industry in South Africa is biased towards
capital-intensive upstream operations, as a result of the apartheid
government's industrial policies. The realisation of industrial policy
goals of increased beneficiation, value-addition, exports and employment
requires a reversal of this historical bias.
Import parity pricing is a common practice in the pricing of many
local basic chemical products, which are important inputs to downstream
production. Import parity pricing refers to pricing by producers in the
local market, which includes notional costs that are not actually incurred.
These costs include shipping, wharfage charges, import tariffs, railage
to inland markets and indirect costs of warehousing, payment terms and
stock holding. These notional charges are added to the international
price by firms in determining the actual price to be paid for polymer
locally produced and delivered to customers.
South Africa's natural resources have been almost fully exploited at
primary level with pockets of beneficiation.
Scientific and technological skills are a crucial limiting factor to
future technological growth. However, South Africa does have current
technological resources on which it can draw, although these are not
widespread in industry.
The link between R&D and industry is generally still weak, although
there are signs of improvement. Those resources traditionally positioned
in the public sector are uncoordinated and their repositioning towards a
more commercialised approach are spearheaded by non-commercially oriented
resources - technocrats who have been conditioned over a long period of
time to deliver widely divergent R&D "products" to "market" demands and
forces applicable to "old South African" norms. Unless a national
technology strategy based on sound principles of rationalisation and
focus is established this base will be threatened.
The chemicals sector has poor access to a skilled labour pool. Labour
costs are on par with South East Asian Countries, but is more expensive
than emerging nations with similar technology levels such as China. The
Sector Skills Plan for the chemicals sector, for implementation by the
Chemical Industry Education and Training Authority (CHIETA), has identified
priority scarce skills for development, such as:
- Artisans (master artisans, rotating equipment artisans, block
artisans, pipe fabrication)
- R&D scientists in specific areas
- Metrology
- Operational supervision
The current culture in South Africa is one of low competition and
rivalry. The high degree of industry regulation and protection against
imports in the past has resulted in the present structural inefficiencies
in industry. The upstream sector has a world-class focus and outward
orientation, however there are low levels of rivalry. The downstream
sector has a low level of exports and global focus. The internal rivalry
downstream is high, but a poor focus on R&D is hampering innovation and
product differentiation.
Many existing downstream companies in particularly plastic conversion,
but also formulation and synthesis rely upon old technology and practices,
with little focus upon employing global best practice in terms of technology
and processes. Within these sub-sectors, large players produce most of the
output, while the bulk of the number of operations that are relatively
small account typically accounts for around one-third of output.
Most of the geographical clustering is around primary industry, i.e.
mining, agriculture and the agro industry. Apart from mining, the
private sector in South Africa has not been instrumental in creating
and sustaining clusters of networks of successful and competitive
industry. Most of the industry linkages to these clusters are backward
and weak and the industries have not developed many forward linkages to
competitive secondary and tertiary industry.
Contained in the networks described above are some individual companies
that are successful exporters and which compete successfully in international
markets.
Today, a few large upstream producers who are responsible for between
60% and 70% of the chemicals sector turnover dominate SA chemicals sector,
which reflects the rationalisation that has been happening globally over
the past 18 years. This is a reality of the fact that in most SA markets for
upstream chemicals there is only room for limited producers, because the markets
are small - to achieve the cost competitiveness, only limited plants per
product can be accommodated. Compared to big markets, where there may
five or even ten upstream producers of products.
Out of an estimated 80 000 types of basic or pure chemicals currently
manufactured on a commercial basis World-wide, South Africa only manufactures
around 300 types, or 0,4%. Most of the pure chemicals manufactured in South
Africa are regarded as commodity, low value and high volume products. However,
globally by far the majority (95% plus) of these pure chemicals are classified
as fine chemicals, or high-value, low volume chemicals. The fine chemical
sub-sector in South Africa accounts for only 0.002% of global sales, where
most other sectors are around 0.5 to 1.0% of global output, clearly
demonstrating its development potential.
The Chemical and Allied Industries Association has been managing the
Responsible Care programme, which is spearheaded by the International
Council of Chemical Association's Responsible Care Leadership Group.
This programme is a commitment by the chemical industry Worldwide to
continuously improve health, safety and environmental performance.
South Africa is adopting first world standards related to environmental
policies. Chemicals and chemical facilities are globally targeted by
environmental lobbyists and used for political purposes. Ozone depletion
and global warming, and made it easy for industry to become a focal point
as a potential threat to the environment.
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