Africa to experience chemicals boom in 50 years?

Africa: the next big thing?

25 February 2008 00:00  [Source: ICB]

In fifty years, with a different geopolitical climate and an established manufacturing industry, Africa could become a significant petrochemical force

Anna Jagger/London

AFRICA HAS feedstock, a sizeable population and relatively low cost labor. So could the continent become the next big thing for petrochemicals?

As Asia's chemical boom continues apace and the Middle East remains the focus for new investments, Africa is not attracting much attention. Although Africa has oil and gas feedstock in the North and in Nigeria in the West, as well as the sophisticated South African market, potential investors are wary about economical and political uncertainties in many regions.

"Infrastructural barriers are significant and governance is problematic in many parts," says Ross McLean, business director and area manager for Dow Chemical in Sub-Saharan Africa. Other business risks include the impact of the HIV/AIDS pandemic on growth, and power shortages in many countries.

There's nothing companies hate more than uncertainty, says Roger Green, a principal at global consultancy Nexant ChemSystems. When Algeria, for example, changed its rules governing the purchase of stakes in companies, plans to float a wave of new gas-based projects ground to a halt, he says. There was a bidding frenzy "but then the rules changed and everyone lost interest."

INVESTMENTS MEET SKEPTICISM

Algeria's prospects for attracting petrochemical investments improved in December when French energy group Total and Algeria's Sonatrach confirmed plans for a $3bn gas-based project in Arzew. Sonatrach is also planning two joint venture fertilizer projects in Arzew, and a methanol joint venture is also on the cards. However, some commentators remain skeptical, given Algeria's poor record in completing projects. "Time will tell whether the government can set aside political interference and allow projects to develop in a timely fashion," says Green.

Next door in Libya, the lifting of economic sanctions prompted US-based Dow to explore joint venture opportunities in the country. Libya is part of Dow's strategy to supply the fast-growing Asian market from advantaged feedstock positions including the Middle East, Latin America and North Africa. The fact that Middle Eastern feedstock supplies have been largely allocated is also motivating chemical majors to look further afield, experts say.

CHINA & INDIA LOOK TO AFRICA

The large emerging economies, particularly China and India, are also eyeing Africa as part of efforts to source energy and raw materials to feed their rapidly expanding manufacturing sectors. "China is rushing to establish supply sources across Africa," says McLean. "India, Russia and the Middle East are also paying a lot of attention to the region. And in the developed world, the US gets nearly half of its oil imports from Africa."

As a result, many African countries will benefit from the surge in trade and investment. "Those with sound economic management practices will take advantage of the bonanza to balance their trade account, build foreign reserves and fund social and infrastructural development," McLean says.

With a population estimated at over 900m, Africa presents a large opportunity in terms of chemical consumption. Per capita consumption of polyolefins is low, and annual consumption growth is estimated at 6%. The food, plastic products and textiles industries are driving growth in African demand for polymers - including thermoplastics, isocyanates, fibers and paints, according to global consultancy Accenture.

Despite expansions of polymers production in North and West Africa, the continent relies heavily on imports. In 2006, Africa produced about 3m tonnes of polymers, compared with a consumption of more than 5.5m tonnes, according to Accenture data (see graph).

A DIVIDED CONTINENT

In terms of chemicals, Africa can be broadly split into three regions: North Africa, which presents interesting feedstock opportunities, South Africa, which has a well developed market, and West Africa, where Nigeria is a significant oil producer. The main basic chemical production sites are along the North African coast (Libya, Algeria and Egypt), at Sasol's sites in South Africa and in Nigeria. Fertilizer production is mainly located in South Africa and in the northern nations of Tunisia, Morocco and Egypt.

About half of Africa's chemical revenues are generated in South Africa, according to the national Chemical & Allied Industries' Association (CAIA). The sector employs some 180,000 and represents 25% of the country's manufacturing revenues, says Mike Booth, director of information resources at the CAIA.

Sasol, South Africa's largest chemical producer, has a leading position in coal and gas conversion technologies, enabling it to benefit from new projects in Asia and the Middle East, says Booth. Sasol supplied its technology to the Oryx gas-to-liquids (GTL) project in Qatar and is also supplying technology for GTL projects in China and Nigeria.

Over the last decade, South Africa's chemical sector has increased its focus on specialties. The transformation began following the dismantling of apartheid and the change of government in 1994, when South Africa became a global player and started to seek opportunities to export specialty chemicals, says Booth. AECI, for example, has transformed itself from a commodities player into a specialties player, treading a similar path to that of UK group ICI, he adds.

"Commodity chemicals are the backbone of this industry and they are fairly well established here," Booth continues. "From time to time you hear of companies expanding to meet the demand, but the growth will be in the specialty market. Small-volume plants with good returns."

South Africa's diversified economy presents opportunities for growth in various sectors, including automotive, coatings, food, paper and pharmaceutical, says McLean. And the hosting of the 2010 soccer World Cup has stimulated the construction sector.

South Africa wants to be a global player. But while the country's relative isolation provides a barrier to imports and protects the local market, it makes exports a challenge. "They're an awful long way from anywhere," remarks Green.

At the opposite end of the continent, North Africa provides opportunities for Middle Eastern producers, which might view the region as an extension of their local market. "If you're in the Middle East sitting on a lot of petrochemical capacity, then accessing that market is of great interest," observes Green.

But will North Africa, with its significant feedstock resources, be able to engineer a petrochemical boom? Egypt is already moving in the right direction, says Green. The government is creating a master plan to develop its chemical industry, and sees the industry as a route to prosperity for the country. And investments in Libya are expected to rise dramatically in the next five years, with Dow leading the way.

In Nigeria, years of military rule and corruption have hampered economic activity. But the country has benefited from large-scale investments from the oil majors, and a ban on flaring associated gas putting pressure on oil companies to valorize their streams. Last month, Viva Methanol, a subsidiary of Singapore's EuroChem, said it was working on a methanol-to-oelfins (MTO) project in Nigeria based on UOP technology.

"West Africa's lack of diversification, political instability and poor record on governance makes it a challenging place to do business," says McLean. "However, foreign investment is flowing into the region and growth rates are good."

In other sub-Saharan regions, political instabilities continue to curb investment opportunities. In Kenya, which has a refinery and soda ash production, ethnic violence continues following disputes over the presidential elections in December. Meanwhile, the Sudan, where Khartoum Petrochemical Co. has a small polypropylene (PP) unit based on refinery propylene, has been at war continuously since independence in 1956.

Although sub-Saharan Africa is weak economically, combining the long list of small economies produces a significant market. And together with opportunities in the North and South, Green predicts that over the next 50 years, as the Asian economies mature and their growth rates slow, Africa will become "the exciting growth area." Low-cost labor will contribute to the development of Africa's manufacturing industries, enabling the continent, eventually, to undergo a growth phase similar to that taking place in China, he suggests.

Latin America is almost reaching the boom phase, "and Africa is a step beyond that," he says. "As you go around the continents, Africa will probably be the last one to go through the development boom."