"How Should South African Chemicals Companies Cope with the Economic Downturn?"

Mani James, Programme Manager

Chemicals, Materials and Food

March 19th, 2009

2

Focus Points

• Economic Downturn – the global chemicals industry

• Analysis of the South African chemicals Industry

• Key product trends

• Key industry challenges and drivers

• How to cope with the economic downturn

• Key end user market trends

• Best practices in the South African chemicals sector

• Conclusions

3

Economic Downturn

• Global chemical production is decreasing at an alarming rate, down over 4% in November as demand from core sectors collapses

• Some major announcements by companies in the chemicals sector include:

• A US chemicals, coatings and glass producer is considering more job cuts and restructuring after it was reported the company may cut up to 4,500 jobs

• US chemicals major DuPont reported a $629m (€478m) loss for the fourth quarter

• Chemical industry participants are cutting back production, shuttering or idling plants and conducting massive layoffs to stay afloat

• The Africa and Middle East chemical sector is however growing at 14%

Pe

rcen

tage

of g

row

th

CHEMICAL PRODUCTION GROWTH BY REGION %

ANNUAL CHANGE

-15

-10

-5

0

5

10

15

20

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

%

ME/Af

AP

WE

NA

Source: Frost & Sullivan

4

How is the South African chemicals sector faring?

• Consistent demand for various types of chemicals has seen the Middle East and Africa record positive growth of over 14%

• Demand for chemicals is expected to be steady as sub-Saharan African countries are witnessing impressive GDP growth and are continuing to invest

• Core sectors driving demand are infrastructure development, housing, energy and transportation

• Countries such as Nigeria, Angola, Mozambique, Zambia, Uganda and Ethiopia in particular are all expected to grow between 3% - 5% in 2009

• Africa has oil and gas feedstock, a sizeable population and relatively low cost labor which makes it a viable attractive investment destination

2008 South african Chemical Industry segments

Composistion

Base

Chemicals

41%

Polymers

and Plastics

27%

Intermediate

Chemicals

13%

Inorganic

Chemicals

8%

Specialty

Chemicals

11%

Source: Frost & Sullivan

5

How is the South African chemicals sector faring?

So

urc

e:

Fro

st

& S

ulliv

an

Com parison of PPI index for domestic output in the South African

chem icals industry

0

50

100

150

200

250

300

350

Basic organic

chem icals

Bas ic inorganic

chem icals

Fertiliser and

pestic ides

O ther basic

chem icals

Paints, vanishers

and related products;

artis ts ' colours ; ink

O ther com pound

chem ical products

Ind

ex

Feb-08

Jul-08

Dec-08

-0.1%

9.7%

36%

12%

10%

17%

6

Key Product Trends

7

Key Product Trends

Source: Frost & Sullivan

Spending on pharmaceuticals and other speciality chemicals is expected to reduce considerably.

Speciality Chemicals

Demand in metals is likely to decline in the wake of the global crisis and manufacturers are expected to cut down production in line with global trends

Intermediate Chemicals

Developing and emerging economies will continue to invest in food-related activities. Nigeria, Mozambique and Zambia are hot spots

Agrochemicals

Infrastructure spending by government and companies looking for alternates to traditional products is likely to drive growth. Angola, Nigeria, DRC, Mozambique and South Africa are hot spots

Polymers and Plastics

Petrochemicals and liquid fuels are likely to experience growth in line with global trends. Nigeria, South Africa and Angola are hot spots

Base chemicals

Indications and hot spotsTrendSector

8

Key Industry trends

Industry Challenges and Drivers

9

Major Challenges

Key Market Challenges

Key Market Challenges

Source: Frost & Sullivan

Key market challenges to the South African Chemicals industry, 2008

Current economic situation

Low product brand

awareness

Weakened supply chain

Rising raw material prices

10

Major Drivers

Infrastructure

growth – focus on

2010

Product

improvement

through technological

advances

Sustained growth in

key end user

industries

Note: The length of the arrows represent the degree of impact.

Consumer

spending to

increase

Increased

demand for

commodities in sub-Saharan

African

economies

Market drivers

Growth in core

sectors beyond

2010

11

How to cope with the economic downturn

Areasto

Concentrate

High

Low

Impact on BusinessLow High

New Geographic Expansion

Mergers and Acquisitions

Strategic Alliances

Supply Chain Network

Steady Spending

Green Products Emerging

Market Opportunities

Cost Effective Production

Understanding Customer Needs

12

Best Practices in the South African chemicals industry

Industry

Best Practices

Industry

Best Practices

Establisheddistribution

networknationwide

Establisheddistribution

networknationwide

Low-cost performancedriven products

Low-cost performancedriven products

Exceeding customerexpectations

Exceeding customerexpectations

Technologicallysuperior products

Technologicallysuperior products

Excellent productperformance

Excellent productperformance

Well establishedR&D capability

Well establishedR&D capability

13

Key End User Market Trends

• Chemical companies are expanding operations into more sub-Saharan African countries.

• Companies such as Sasol and Omnia have committed close to ZAR 50 billion in capital expenditure spending until 2011

• French energy group Total and Algeria's Sonatrach confirmed plans for a $3bn gas-based project in Arzew

• The large emerging economies, particularly China and India, are eyeing Africa as part of efforts to source energy and raw materials to feed their rapidly expanding manufacturing sectors

• Middle Eastern feedstock supplies have been largely allocated, and this is also motivating chemical majors to look further afield into sub-Saharan Africa

• With a population estimated at over 805m, Africa presents a large opportunity in terms of chemical consumption.

• The food, plastic products and textiles industries are driving growth in African demand for polymers - including thermoplastics, isocyanates, fibres and paints

• Reduction of fuel imports and a high oil price have fuelled the demand for alternative fuel sources such as biofuel

• Chemical product manufacturers in construction chemicals will capture growth opportunities in governments’ expanded infrastructure programmes

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Conclusion

• The South African chemicals sector has been largely unaffected by the current global economic turmoil

• Core sectors driving demand are infrastructure development, housing, energy and transportation:

• Focus on 2010 initiatives

• Sub-Saharan African countries – hot growth spots and growth potential to be tapped

• Focusing on fundamentals is key

• Concentrating on strategies that are aligned with growth prospects

• Adapting best practices, and doing so before being forced into it by the competition

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Next Steps

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For Additional Information

Steve LeeStrategic Account ManagerChemicals, Materials and Food, Asia Pacific(65) 6890 0914steve.lee@frost.com