The economic potential for the African chemical industry is clear enough, with low costs of labour and materials, a relatively young and rapidly growing population, an expanding middle class and a rising demand for products. In the same light, Africa shares problems of many emerging markets, such as social volatility, unreliable electric power and a weak infrastructure hampering the movement of feedstock and products. Investors who believe in taking long view are realistic about the challenges, but they also see enormous opportunities in a continent with vast natural resources and one of the fastest growing economies in the world.
Major Economic Opportunities
For the chemical industry and its investors, opportunities in Africa center around three factors:
- High growth,
- Major oil and gas reserves and
- Demand in certain market sectors such as agriculture, consumer products, infrastructure development and construction.
The African economy was expected to grow over 5 percent in 2014, driven by the world’s fastest population growth, increased urbanization and a rapidly expanding middle class. Approximately 50 percent of Africans are expected to be living in cities by 2030. The rapidly urbanizing populace is an indication of opportunities for investors seeking to invest in Africa. Growth at the lower end of the middle-class pyramid also presents significant investment opportunities.
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Along with a wealth of gold, copper, diamonds, chromium and platinum, Africa contains 10 percent of the world’s oil reserves. Proven reserves for Africa have grown by nearly 120 percent in the past 30 years and this growth is expected to continue. African countries now make up 11 out of the top 50 countries in terms of proven oil reserves. Nigeria and Angola are among the top 20 oil producers in the world.
Demand In Chemical Subsectors
Despite some of these impressive figures, the industrial base in much of Africa remains undeveloped and economic growth is coming from a very low base. As a result, opportunities in the chemical sector are likely to be focused within a small number of subsectors.
Demand for chemicals in the agriculture subsector will continue to grow based on several factors. Africa has 25 percent of the world’s arable land and 60 percent of the world’s uncultivated arable land. Africa’s current low crop yields per hectare represent significant growth opportunities and even with existing cultivated land, a doubling of cereal yields would turn Africa into a major food surplus region. In addition, the agribusiness value chain including storage, logistics, packaging and processing will add more opportunities for investors.
In 2012, there was over US$50 billion of foreign direct investment (FDI) in Africa. While energy and natural resource investment was the main area of focus, investment is increasingly being spread across a broader number of sectors than at any time in the past. For the African chemical industry in particular, however, investment remains small scale and generally focused on a small number of segments in a small number of countries. Overall, South Africa remains the most developed economy and, accordingly, has the most developed chemical industry.
South Africa’s chemical industry
South Africa has long been the leader in chemical production for the continent. The chemical industry accounts for about 25 percent of the nation’s manufacturing sales, with synthetic coal and natural gas-based liquid fuels and petrochemicals dominating the sector. South African chemical producers are currently facing poor domestic demand and a volatile exchange rate that hampers exports. The country’s plastic and basic chemicals output declined throughout 2013. Chronic problems include ongoing uncertainty about the outcome of wage negotiations, potential electricity supply shortages and slower growth in consumer spending that is undermining confidence within the petrochemicals sector. Nevertheless, domestic producers have benefitted from both a weak rand, which has sustained competitiveness, and relatively cheaper costs when factoring in transportation of imports, which has helped maintain current production levels.