Africa And Changing “The Facts On the Ground”

Business, China, Economics, India

Africapolymers8June

By John Richardson

WHAT if your chemicals company has got it completely wrong? What if your board of directors needs a whole new way of thinking as the New Normal  further develops?

If you plan to be working in the industry for the next ten years or more, rather than cashing-in your share options before then in order to retire to the golf course, these are the questions you need to be asking yourself.

I think many chemicals companies have, indeed, got it just about completely wrong. Over the last few years, as the New Normal has become a reality, they have continued to focus almost entirely on analysing their feedstock advantage. The results of this analysis has been almost the sole basis for expansion plans. In the US, for example, large additions in polyethylene (PE) and other commodity chemicals and polymers are being planned because of, of course, the shale-gas revolution.

If you only work in Excel, rather than also in how people, societies and governments interact with one another, the investment case for the US seems blindingly obvious: Nothing short of fantastic margins today that should pretty much continue into the next decade and beyond. And the other thing is that the financing for these projects has been fantastically easy because of badly misguided central bank stimulus policies. This is a subject I shall come back to in later posts.

As for the rest of this post, what should you do instead of only focusing on feedstock advantage? First of all, accept these two realities:

  1. China will very likely become pretty much self-sufficient in basic chemicals and polymers. There goes your outlet for most of your surplus volumes because China’s import requirements vastly exceed all the other emerging markets put together.
  2. India, a longer-term hope, is also, I think, set to remain a “local for local market”. Domestic producers, because they understand how India works, will gain the lion’s share of consumption growth. Plus, both the strength and nature of consumption growth in India will be greatly different from what many people think. The reason is that it is impossible for India to follow China’s old template for growth.

That leaves the rest of the emerging world, including obviously Africa – hence, my chart above.

What the chart shows is our projections for demand growth in three basis commodity polymers in Africa up until 2025. As you will see  demand is set to only creep-up over the next decade.For example, in polyvinyl chloride, we see consumption rising to just 2 million tonnes in 2025 from 1.3 million tonnes this year. Africa is expected to have a population of 1.4 billion to 1.5 billion by then.

This is very weak growth, indeed, compared with the rest of the world. Take India as just one example to illustrate this point. We expect it will consume 5 million tonnes of PVC in 20215 when its population is forecast to have reached 1.4 billion.

Our forecasts for Africa are based on current projections for of GDP growth – i.e. the facts on the ground remaining pretty much unchanged.

But what if your board of directors resolves to change the facts on the ground? We know that in the developing world in general, future success is all about satisfying basic needs. These include access to modern sanitation and fresh-water supply, decent roads, railways bridges and more reliable and cheaper electricity supply. How can your board help provide these basic needs?

Let’s just look at the example of electricity supply, where in Africa:

  • More than 600 million poor people do not have access to grid electricity. They may spend as much as 16% of their income on energy and pay up to $10 per kilowatt per hour for fuels such as kerosene or disposable batteries for cooking and lighting. This is about 100 times more per unit than people in the richer world.
  • Across sub-Saharan Africa alone, shortages of electricity are holding back economic growth by as much as 4% a year, according to the World Bank.

Armed with these facts, you could reach out to, for instance, companies in your country who provide the technology and hardware for concentrated solar-power plants (CSP). CSP and hydroelectricity are identified by The Economist as two of the ways that Africa can solve its power crisis.

Then you could agree to partner one of your local CSP companies in providing low-cost loans to African countries, maybe with support from the World Bank etc., which will fund new CSP plants.

Once millions more Africans are hooked-up to lower-cost and much more reliable electricity, they will be able to escape from the misery of extreme poverty. As a result, they will need far more of the three fantastic polymers detailed in the above chart.

The uses for PVC include water pipes and window frames, both of which will suddenly become more affordable in Africa.  Linear-low density PE   is used for wrapping and preserving food, and for making roto-moulded water tanks.  High-density PE again goes into pipes, including high-pressure gas pipes, along with petrol tanks for motorbikes and cars, detergent bottles and kitchen utensils etc.

If you have helped fund the electricity supply that unlocks growth in applications such as the ones listed above,  your brand will already be out there, and so governments and companies are more likely to buy your products. In fact, you could even tie-up long term offtake deals with governments and companies as part of preferential financing packages for CSP projects.

Still, though, this won’t be enough. The sad reality for the US petrochemicals  industry in particular is that will find it impossible to shift anywhere close to  the additional volumes that might, theoretically, come on-stream over the next ten year. Project cancellations, therefore, remain inevitable.

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