South Africa Petrochemicals Report Q3 2009

Future expansion of the South African petrochemicals industry will be limited if the financial crisis affects plans for new refineries, thereby limiting potential naphtha feedstock availability, according to BMI's latest South Africa Petrochemicals Report.

BMI expects no expansion in refinery capacity following consolidation, although continuing enlargement of synthetic oil capacity is expected. This will limit potential naphtha feedstock availability. Drako Oil and Energy has proposed a 350,000 barrels a day (b/d) refinery at Richards Bay in the KwaZulu-Natal province, with start-up scheduled by end-2012, a date that has been repeatedly moved back. BMI doubts it will achieve financial backing for the projected US$6bn cost of the facility. PetroSA is also planning a crude oil refinery in Coega, Port Elizabeth. At 400,000b/d potential crude distillation capacity, the plant could cost US$11bn and is expected to come onstream in 2014, but whether this deadline is realistic remains to be seen. PetroSA is seeking partners, citing Sasol as a potential investor. A final investment decision for the project will be taken around 2010/2011.

BMI cautions that if key refinery infrastructure projects are postponed or fail to get off the ground, there could be significant setbacks to the expansion of the petrochemicals industry. So far, dominant industry players have said that they remain committed to their big growth projects. But if the global economy does not begin to recover in 2010 as many expect, BMI believes that more companies will be forced to preserve cash and make further cuts to spending programmes.

In terms of market conditions, South African producers are likely to experience depressed demand for the rest of 2009, and even though conditions will improve in 2010, they are expected to remain challenging.

The global petrochemicals industry is facing a cyclical downturn that is being exacerbated by the deepening global economic downturn and an anticipated glut of new supply. South African producers will feel the impact of a fall in consumer demand, particularly from the automotive and construction sectors.

They will also come under pressure as a surge of new worldwide supply comes online in the Middle East and Asia. This is expected to weigh on the full-year earnings of companies. But large players like Sasol, which has a strong cash position and diversified business, are expected to ride out the downturn. Sasol has invested heavily overseas, most notably in Qatar where it operates the Oryx GTL facility, and, it is able to leverage its proprietary technology that can be applied to produce fuels from coal and gas.