In Sasol, SA has one of the world's leading and most innovative petrochemical companies. Yet few business opportunities have developed in the downstream chemical industry that could use feedstock from Sasol and other chemical firms in SA to develop products such as plastics.
WHAT IT MEANS
 Import parity means high local chemical prices
IDC looking to back SME and BEE firms
|
However, that has not prevented the Industrial Development Corp (IDC) from seeking out investments in the sector. But the head of the chemicals and nonmetallic minerals strategic business unit (SBU), William Smith, is aware of the limitations of such a move.
"Even though we are sitting on ample feedstock, the high prices and global shortages of ethylene and polymers make it difficult to develop a downstream industry," says Smith. He says chemical prices are set based on import parity pricing (the global prices) which makes it almost unaffordable for most SA manufacturers.
Importing polymers and ethylene is also not affordable as high transport costs and 10% import duty make it expensive, he says.
As a result of Sasol's pre-eminence in the SA market, the number of foreign investors in the industry - which could have introduced competition - has been limited. High raw material prices have created few incentives for downstream firms to invest in research & development or new technologies "with little focus on employing global best practice", he says.
High chemical prices are one of the reasons the chemicals & nonmetallic minerals unit has only recently started growing its funding approval again, but even this is volatile.
In the nine months to end-March 2005 the SBU approved 14 projects worth R550m. This fell to 17 projects worth R100m in the financial year to end-March 2006. The SBU looks set to approve 25 projects with a total value of almost R260m in financial 2007. More significant is that in each of the past two financial years the approvals have resulted in more than 1 000 new jobs each.
This is in line with the IDC's overall shift to more job-intensive investments that have a strong black economic empowerment (BEE) focus. In the chemicals and minerals industry one of the key sectors that stands out is the consumer chemicals sector, in other words the manufacture of chemicals for products such as toiletries and cosmetics.
One of the SBU's longest-standing clients, Amka, operates in this market. Amka, established in 1965 and controlled by the Kalla family, manufactures a wide range of fast-moving consumer goods and has been an IDC client since 1988. The company has received almost R140m in loans from the IDC, with the latest R40m tranche awarded in 2005. Of that R24m was for expansion and R15m for acquisitions, including 50% of Black Like Me, the hair products company founded by Herman Mashaba, a black entrepreneur who operated well before BEE was in fashion.
Five years ago Black Like Me hit a cash crunch after its offshore expansion did not proceed as well as hoped for. The IDC saw the potential of using Amka's wealth of experience in the consumer market to assist Black Like Me and structured the deal. Black Like Me products are recovering under Amka, Smith says.
The other area that has proved useful for the IDC's twin aims of job development and BEE promotion has been the nonmetallic minerals sector, particularly building materials. In the past financial year the IDC has approved nine deals worth R100m for brick-making firms.
One of the firms on the SBU's book is Phula Machabang Construction, a black women-owned group that manufactures cement bricks in Virginia, Free State.
The IDC first financed Phula to the tune of R600 000 in 2005 for plant and equipment purchases and is currently looking at a second R500 000 facility for working capital. Smith believes there is a market for smaller cement manufacturers, even though the market is capital-intensive and controlled by four large manufacturers, including PPC and Holcim. "SA is already importing large amounts of cement from China and India," Smith says. the IDC has been looking at smaller plants.
As in the downstream chemicals industry, SA has an advantage in mineral feedstocks such as chromium, uranium, fluorspar, titanium and phosphate rock. With the exception of phosphate rock, few of these minerals are beneficiated in SA.
Though Foskor is on a recovery path, for other minerals the beneficiation picture is poor. "SA has 30% of global titanium reserves, the second-largest reserve of fluorspar and 85% of chromite reserves, yet most of these are not developed in SA," says Smith. "We have adopted a strategy, in line with the department of trade and industry's chemicals customised sector programme, to change that and invest strongly in mineral beneficiation projects."
He says the group is looking at three or four large projects, which are in the pre-feasibility stage. The most promising is the beneficiation of fluorspar, the primary mineral feedstock for the global US$11bn/year fluoro-chemical industry. SA is the third-largest producer of fluorspar at 260 000 t/year and has the second largest reserve (80 Mt). "However we export more than 95% of our production bringing in a mere R260m, the equivalent of US10c/kg. Our aluminium industry imports one of the fluorspar products, aluminium tree fluoride (ATF), at a cost of about $1/kg. This should be done in SA," says Smith.
The IDC is looking at teaming up with JSE-listed miner Metorex and Tunisian ATF producer ICF to build a R500m beneficiation plant in SA. Smith says the IDC could take a 25%-30% equity stake in the venture and a large part of the debt.
The IDC is investigating producing hydrogen fluoride (HF) from fluorspar; HF can be used in uranium enrichment.
Bringing in BEE players is proving financially difficult given the large investments involved in mineral beneficiation. "Our strategy is to participate directly, take the risk and make the project operational and profitable.
"Only then will we sell out and make our shareholding available to BEE groups," says Smith.
