Sasol to increase local footprint in Polyethylene: Investment justified?
The recent announcement by Sasol Limited that it will be expanding ethylene production is the result of high demand from the local market. Imports of polyethylene, the main product manufactured from ethylene, reached approximately R2.0 billion in 2008, indicative of the high local demand. Polyethylene is used in the manufacture of plastic bags, plastic wrap packaging, and light containers.
The R1.9 billion investment by Sasol is further justified by the increasing commodity price of ethylene. From April 2009 to date, the price has increased by almost 60% from $730 to $1160 per ton. A major end-user globally remains the packaging industry, where demand is strongly driven by consumer spending.
With increasing consumer spending in the fast moving consumer goods (FMCG), pharmaceuticals, and export packaging sectors, African markets are key opportunity areas. Sasol is, however, not likely to increase exports in the short to medium term since there is significant local demand to be met. Sasol Polymer’s current presence in East and West Africa is small, with primarily ad-hoc supply upon request.
Frost & Sullivan’s analysis of the Southern, East and West African markets has shown large packaging markets, attributable to large consumer bases and high agricultural exports. The figure below puts into perspective the relative packaging market sizes. The cumulative market size for the countries analysed, amounted to R11.6 billion in 2009. It is clear that South African demand remains the driving factor for Sasol’s expansion.
Total Plastic Packaging Market: Relative Market Sizes by Country (Africa), 2009
The large local market size, ever-increasing consumer spending, and potential export market size justifies Sasol's investment. The investment will increase Sasol's polyethylene capacity from approximately 180,000 tons per annum to just over 220,000 tons per annum. Sasol Polymers produces various grades of Linear-low and Low Density Polyethylenes (LL/LDPE), with primary uses in the packaging industry.