The industrial gases market in South Africa is feeling the pressure of the current downturn and uncertainties plaguing global trade, amid indications that competition in the gases market in the country is intensifying.
The price of steel is down 30-40%, while vehicle exports have collapsed 40% and in the recently announced national Budget, Corporate Tax will remain the same while the fuel levy will increase - thus putting pressure on distribution costs.
The country has run a trade deficit for five successive years and confidence among business leaders is at a five year low, according to a recent survey by the South African Chamber of Commerce and Industry.
On the upside, government has reconfirmed it’s commitment to the multi-billion rand infrastructure investment program and commodity prices are believed to be bottoming out. Stockpiles meanwhile, are being run down, which is likely to cause a short-term upswing in demand.
However, major operators in mining, steel & ferrochrome production, fabrication and automotive assembly extended their shutdown periods over December/January, with some start-ups delayed until mid February.
Companies have therefore taken this opportunity to reassess their strategies and business models to curtail output, and several have announced job redundancies or short-time operating schedules.
Industry sources have indicated that this crisis has already put the bite on demand for bulk oxygen, nitrogen and other gases, and welding products in general.
For several years South Africa has been seen as an undervalued developing economy and companies such as Air Products have been strategically investing, to more effectively compete for market share.
The recent award of a State contract has seen Afrox fight off stiff competition from it’s major bulk competitor; Air Liquide.
Nevertheless, it’s thought that Air Liquide executives should be ‘well pleased’ at breaching the company’s previously unassailable position in the government supply arena.
Demand for special gases is slightly off the peak and margins are under some pressure, as competition in the market heats up - with a fall-off in demand likely to result in lower gas prices in the short-term, as customers exploit the market situation.
Indications are that companies like Afrox, which recently completed a R1bn capex program to upgrade production facilities, are on the cusp of a complete reversal in supply and demand: lack of capacity in 2007/2008 becoming over-capacity this year.
Analysts also predict that restocking and the global demand for commodities will recover in the second half of 2009, while government infrastructure spending continues to underpin the demand for gases and welding products during the run-up to the 2010 Fifa World Cup event.
In the short-term, the demand for gases used by the food processing, hospitality and soft-drink markets is expected to remain buoyant, driven by South Africa hosting the pre-2010 soccer Confederation Cup this year.
In general therefore the outlook for the gases industry in South Arica is one of quiet confidence in the medium to long term, but with lower margins and strong competition in the short-term.
Aspirations for future growth among many executives are also focused on those West coast sub-Saharan countries where major mining and oil interests continue to invest with an eye to the future.