Market outlook: Africa: land of opportunity for chemicals?

23 May 2014 10:29  [Source: ICB]

As Asian and Latin American growth starts to slow, the question is: where will the next big geographic expansion opportunity come from for chemicals?

On the face of it, the African continent could be the place in the coming years. With a rich source of available raw materials coupled with rising demand from the increasing population and growing income levels, Africa could be an interesting place for chemical companies to explore for growth and investment. Clearly there are challenges to overcome; political instability; complex demographics; unstable energy supply and poor infrastructure; but it is clear that these are starting to diminish in some countries. Indeed, the chemical industry could play a role in helping to overcome some of these challenges.

Timing and where to start are critical factors to consider.

FAST GROWTH IN SUB SAHARAN AFRICA

According to the latest International Monetary Fund (IMF) data (Table 1) Sub Saharan Africa (SSA) growth is pegging nearly a couple of percentage points above overall global growth and is projected to rise to 6.1% in 2015. Clearly the base is low but in pure growth terms, based on GDP, Sub Saharan Africa looks attractive for investment. Traditionally, multinationals have used South Africa as the beach head to the rest of the continent. However due to the rising cost of energy and labour, tough regulation and critically low GDP growth, other parts of Africa are looking more attractive than South Africa for investment and for establishing a local presence.

Kenya Airways 787 Rex Features

 Rex Features

Many African economies are becoming much more sophisticated

The drivers for GDP growth and the resultant opportunities for chemicals, are largely from increasing urbanisation, rising income levels, public and private investment and infrastructure development.

However, there are still significant challenges that need to be overcome. Lack of transportation infrastructure and a consistent supply of energy are continuing challenges to investment. Political instability and corruption in a number of countries are still a big concern. In addition, complex tribal demographics are difficult to penetrate without local presence and insight.

52 COUNTRIES, 100S OF TRIBES

In the developed world there is a tendency to focus on Africa as a continent or at best as 52 countries. However, the situation is far more complex than that; with a multitude of inter connected tribes that span across borders. This creates an added layer of complexity when considering growth opportunities in Africa. Data by country can however give some indicators to growth hot spots.

It is clear (Table 2) that South Africa is by far and away the largest economy in SSA. However its growth is slow relative to other countries in the continent. Nigeria is expected to be very close to the economic size of South Africa by 2018 and is in the list of the next economic giants, the so called MINT countries (Mexico, Indonesia, Nigeria and Turkey). The remaining top 15 SSA countries are all forecast to achieve a Compound Annual Growth Rate (CAGR) greater than 5% over the period of 2011 to 2018.

IT’S NOT ALL ABOUT GDP

Opportunities for chemicals and investment are clearly not all driven by GDP. Some parts of GDP are more important than others; and factors like income levels, political stability and ease of doing business are also important to consider. A number of such factors are presented below, in Table 3, for five SSA countries deemed as having the brightest investment prospects and also for the global economy.

It is clear, that agricultural production is growing significantly, and consequently, creating opportunities for agrochemicals. This is partly driven by the use of more sophisticated agricultural methods and the need to feed a growing population. Another key driver for the demand for chemicals is manufacturing value added, and here again the data indicates good rates of growth in SSA, exemplified by the selected countries.

It is a well-known fact that most parts of the African sub-continent are endowed with large quantities of natural resources. However, possessing large deposits of such resources and having the capacity to fully exploit them are two different matters. Recent data depict a refreshing rise in the gains emanating from natural resources for the majority of SSA countries. According to the Table 3, mean total rents (income) from natural resources (coal, forests, mineral, natural gas and oil) as a proportion of GDP compare favourably with the global average. Although Angola and Nigeria show slight declines in rents from natural resources these already constitute more than half their GDP.

Africa tables

Analysis of income levels also indicates considerable increases in per capita incomes, and therefore suggests a boost to the consumption capacity of individual households. For example, in Angola and Ghana, GNI per capita has tripled, whilst it has doubled for Ethiopia and Nigeria (comparing the period 2007-2011 to 2002-2006).

It is of course critical to understand the political and economic environment for any investment decision. This is particularly pertinent in Africa, which has long been known for a chaotic and uncertain political environment that invariably translates into a risky destination for the purposes of business ventures. It needs to be pointed out, nevertheless, that many pockets of the continent have embraced western standards of government in recent years, which have enormously enhanced the political scene.

The Ease of Doing Business is a ranking of countries, established by the World Bank in 2012. Ghana has the highest ranking of 64.5, which is far above the global average ranking of 95.4. The table also reports indices of economic freedom provided by the Heritage Foundation. Indices of 80-100 imply that a country is economically free. None of the countries identified fall into this category, and although the mean values obtained are not low, they are below the global average of 59.9 that is interpreted as mostly unfree. This however, excludes Ghana, which with a mean index of 61.7, places it in the moderately free category.

A number of multinationals including DuPont and Dow, have been operating in Africa for over 50 years, using South Africa as a base from which to penetrate the rest of the continent. They have a relatively limited activity in the rest of SSA. Investment has been mainly in local sales offices rather than in capital projects. Back in 2011 when Dow opened offices in Algeria and Ghana, Dow Chairman and CEO Andrew Liveris stated “With a population of over 1bn people, significant and consistent economic growth rates over the last 10 years and improved corporate governance and transparency, there has never been a better time to expand Dow’s focus and participation in Africa.” Since then, there has been limited reported activity from the global giant in the region.

PRODUCTION FACILITIES

DuPont’s activity is mostly focused on its seeds business, Pioneer, capturing the opportunity from increasing crop production across SSA. It has production facilities in Ethiopia, South Africa, Zimbabwe, Zambia and Kenya. On the opening of the newly expanded research facility in South Africa, DuPont CEO, Ellen Kullman said “Agriculture has a vital role to play in the social and economic security of African countries. We are harnessing DuPont’s global science capabilities and resources to create local solutions that improve productivity for farmers in South Africa and throughout the continent.”

Evonik established a sales presence in South Africa back in 1976 and now has a hydrogen peroxide plant in South Africa that supplies the local pulp and paper demand, and increasingly the western and eastern Africa mining industry. Beyond South Africa, Evonik has a sales office in Ghana and one soon to be opened in Nairobi, Kenya.

BASF has been doing business in South Africa for over 45 years. BASF has a strong presence (offices, labs and two production facilities) in South Africa and offices in Nairobi and Lagos.

Sasol is the largest “local” player, established in 1950, in South Africa. It is now a global energy and chemical company operating in 37 countries. Sasol’s chemical operations are principally based in South Africa but it does have a growing commercial presence in the rest of SSA. Sasol’s chemical cluster produce polymers, solvents, explosives, fertilizers, surfactants, waxes and other specialities.

In addition, local South African Chemical companies AECI and IDC have an increasing footprint across the continent and continue to invest in production and sales offices.

Clearly there are opportunities in Africa for chemicals companies. Some countries are a better bet than others and commodity chemical companies will have more opportunities earlier than specialties. Developing a deep understanding of local markets, with on the ground resources, is critical for chemical companies wanting to make investment decisions in Africa.


Author: Bill Stringer



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