The operating environment of South African petrochemicals will become increasingly hostile over the medium-term due to a slackening in exports, according to BMI's latest South Africa Petrochemicals Report.

The South African economy is poised for a slowdown in 2012, with real GDP growth forecast to come in at 2.7%, down from an estimated 3.1% in 2011. Although private consumption should hold up relatively well, serious headwinds from the global economy will inevitably take their toll on growth and South African exports, both petrochemicals and products utilising petrochemicals, will inevitably suffer. Given the poor outlook for growth in the US and eurozone, as well as the potential for a hard landing in China, South Africa is likely to suffer from the weak global growth environment and potentially high investor risk aversion. We maintain our core view that economic growth in South Africa will be driven by the consumer spending, while manufacturing continues to remain weak. This will continue beyond 2012, although exports should pick up.

The main issue that faced the performance of the South African petrochemicals industry over 2011 was the value of the rand. We have concerns over the ongoing strength of the rand, which threatens a plethora of South African exporters, particularly petrochemicals and key petrochemicals consuming industries such as the automotive sector. We now see some modest appreciation in 2012 from an average of ZAR7.26/US$ in 2011 to ZAR8.00/US$, a level it should maintain over the following four years. While this should improve competitiveness in 2012, over the medium-term it will be undermined by inflation. At the same time, domestic plastic converters are struggling with fluctuating polymer prices and low-cost imports from China, which have flourished since the South African government signed trade agreements with the country.

Southern Africa's distance from high consumption markets restrains plastic exports. Nevertheless, over the short term, South African petrochemicals production will be more reliant on external demand, particularly from Africa, and price rises for growth in both volume and margins. This will be somewhat undermined by a surge in capacities in the Middle East and Asia coupled with high oil prices, which are fuelling growth in naphtha feedstock costs. The Sub-Saharan Africa (SSA) region is poised for growth through 2012, which should help lift South Africa's external market environment. However, there are risks in the form of rising inflation and interest rate hikes that could undermine the regional private consumption growth that drives exports of South African petrochemical and plastic products to the SSA region.

Capacities are not expected to rise significantly or at a rate that will challenge competitors in the Middle East and Asia. In 2011 South Africa had petrochemicals capacities including 650,000tpa ethylene, 330,000tpa propylene, 560,000tpa PE, 60,000tpa PET, 200,000tpa VCM/PVC, 680,000tpa PP and 145,000tpa methanol. Sasol's construction of an ethylene purification unit at its Sasol Polymers plant is set to come onstream by mid-2013. The company hopes it will raise production by around 48,000tpa by 2015 and will supply PE production facilities, thereby reducing the import dependency of South African plastics converters. There are no further plans for significant expansion or new plants over the next five years, according to BMI research.

In BMI's Middle East and Africa Petrochemicals Business Environment matrix, South Africa comes seventh with 54.5 points, up 2.1 points since the previous quarter due to an improvement in its country risk score. It lies behind Israel and ahead of Turkey.

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