Our latest South Africa Petrochemicals Report anticipates a gradual recovery in the domestic industry led by construction activity, restocking of inventories and growth in the regional market, although competition from Asia poses a long-term threat to the sector.

Although South African manufacturing output continued to contract in Q409, the rate of decline was slower than the record 21.6% fall reported in April 2009 and largely related to non-chemicals divisions.

In November 2009, the petroleum, chemical products, rubber and plastic products division saw a 3.1% drop in output. Manufacturing is expected to slowly improve. Overall manufacturing output for the three months ended November increased by 2.9% compared with the three months ended August 2009, according to Stats SA. We expect this trend to continue into 2010, with the chemicals and petrochemicals sector mirroring the trend. Most new demand for petrochemicals will be the result of restocking following the depletion of inventories. Looking beyond 2010, the petrochemicals market should grow in line with our expectation of a recovery in GDP growth, provided that the global economic environment is adequately supportive.

On the upside, the polyvinyl chloride (PVC) segment has been lifted by strong growth in construction.

we forecast construction growth rate of 12.8% in 2009 and 8.9% in 2010, making South Africa's construction industry one of the best performers worldwide and stimulating demand for construction products using PVC. The main driver behind this activity is the country's preparations for the 2010 FIFA World Cup, which is compelling the construction of stadia and hotels as well as investment into the country's transport network, with airports and rail as the focus. As we expect construction activity to die down following its hosting of the tournament, we believe that construction industry growth will even out at around 2.5% per year until the end of our forecast period, which has now been extended to 2014.

Growth in construction activity is more than offset by declining domestic industries that use other forms of polymer. The automotive industry, a major consumer of polypropylene (PP), is facing a somewhat bleak scenario due to the downturn in the global car market, which is negatively impacting the domestic petrochemicals industry.

Another factor that will determine the recovery in South African petrochemicals is the strength of the regional market. The Sub-Saharan African (SSA) petrochemicals market is set for a return to growth in 2010, following a contraction of around 2% in 2009. Producers are hoping to raise product prices to return healthy margins, which had been eliminated amid the economic downturn. However, the market is likely to remain volatile as Chinese and Middle Eastern output ramps up, risking a situation of oversupply.

Producers may have to maintain low operating rates to ensure that the market remains tight and prices do not collapse as they did in H109. We are forecasting regional real GDP growth in SSA of 4.9% in 2010, which will almost mark a return to trend following 2009's trough. Strengthening commodity prices and an increase in foreign investment will provide impetuses to growth, aided by accommodative fiscal and monetary policy. However, if demand remains low in Q110 and prices suffer as a result of a flood of Asian imports, the modest gains achieved in H209 could be wiped out, thereby imperilling the recovery in the SSA petrochemicals market. Nevertheless, some growth in output is still expected even in the worst case scenarios, as a result of the depletion of inventories. Packaging is expected to grow strongly, thereby helping to boost polymers; but on the downside, construction is likely to remain weak.

In 2009 South Africa had petrochemicals capacities including 650,000 tonnes per annum (tpa) ethylene, 330,000tpa propylene, 560,000tpa polyethylene (PE), 60,000tpa polyethylene terephthalate (PET), 200,000tpa vinyl chloride monomer (VCM)/PVC, 680,000tpa PP and 145,000tpa methanol. There are no plans for significant expansion or new plants over the next five years, according to surveys.