MARKET INSIGHT

What Is Your Strategy In Africa?

By Avril Harvey – Team Leader, Chemicals, Materials and Food Group

Africa

Frost & Sullivan | Market Insight

Frost.com

2

AFRICAN MEGA TRENDS TO 2020

Frost & Sullivan Africa has along with our customers, and our customer’s customers, identified andhoned down five Mega Trends that highlight the growth opportunities and challenges experienced bychemicals companies in Africa. These Mega Trends include ongoing trends such as:

• Urbanisation and infrastructure development. An important and necessary building blocks forAfrica. New identified opportunities include:

• Energy Demand

• Water and Food Scarcity

• Supply Chain Efficiencies

• Emerging African Economies

The last Mega Trend is especially exciting as we move beyond the traditional focus on South Africa,Nigeria, Kenya, and Ghana to highlight the MATZ and RUBEN countries.

Urbanisation and Infrastructure Development

By 2025, there will be six new mega cities in Africa (mega cities are defined as cities with populationsof more than 5 million). These include cities such as Nairobi, Dar es Salaam and Luanda. Growth inurban populations will continue to impact industries like water treatment, construction chemicals andpaints and coatings as infrastructure is needed for supply of housing and potable water and energy. Assuch investment in infrastructure in the key African economies must increase to keep up with this demand. Despite this need, research shows that most key economies in Africa are not reaching the required level of spend on infrastructure.

Kenya has had the fastest growth in investment in its infrastructure sector, where investment increasedby 15% to $2.9 billion. Despite this increase total spend compared to budget is just over 50% and it isestimated that Kenya still requires $4 – $5 billion per year through 2020 for infrastructural projects.Lagos in Nigeria is the 7th fastest growing city in the world and yet the Nigerian infrastructure deficitis measured at nearly $20 billion per year and due to delays in projects, only 60% of the estimatedbudget was spent on infrastructure activities. Ghana has experienced significant lack of access to fundsto complete its planned affordable housing projects and it is believed that an infrastructure deficit of$2.5 billion will hinder expected GDP growth of 8% in 2014. Even South Africa has only reached justover 75% of infrastructure budget during the past three years.

Energy Demand

Another related challenge in Africa, which presents opportunities for growth is the inadequate supplyof power. In South Africa, some progress is being made to increase the mega watts produced throughthe building of the Kusile and Medupi power stations, in addition to new coal power plants, there hasbeen significant success in introducing renewables to the energy mix. Currently renewables only represents 1% of the total energy mix but may contribute up to 12% to the energy mix by 2020. Thereare 64 approved renewables projects in South Africa now which includes wind, solar photovoltaic andconcentrating solar power. The capacity for these projects is equivalent to 3900 MW and is valued atmore than $10 billion in investments. The long term plan for South Africa (REIPPP) is to have 30% of

Frost.com

3

Frost & Sullivan | Market Insight

energy mix from renewables.

Nigeria and Ghana have insignificant wind and solar projects producing energy in the respective countries, but the potential is high and this could see increased growth in the future. This is mainly dueto limited investment and the cost of these projects. However, hydro energy is growing in both thesecountries as fossil fuels decline. Kenya has a fair share of fossil, hydro and other renewables such as geothermal, wind and solar. Energy from fossil fuels declined significantly over the 2010 to 2013 periodas renewables are taking the market share and will continue to do so in the short to medium term.

The big game changer in Africa is set to be natural gas, with the potential for this to be the primarychoice for technology and feedstock by 2020.

The Shale Gas revolution is also taking the world by storm, with the United States leading the way. Reserves in Africa are minute, but South Africa is one of the regions with reserves of 468 trillion cubicfeet. The impact of shale gas on the economy could be significant if locally processed. It could save onimports, increase local manufacturing and reduce input materials such as ethane in other applications.

Water and Food Scarcity

Green economy definition as per United Nations Environment Programme– “improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities. Inits simplest expression, a green economy can be thought of as one which is low carbon, resource efficientand socially inclusive.”

In South Africa, a green economy initiative in the agricultural sector could increase jobs by 170,000 andincrease crop yields by 24% by improving the management of natural resources and investing in the environment. It would also significantly increase the amount of available water says a study on the South

Figure 1: Natural gas in Africa, 2014 - 2020

Source: IMF, Work Bank, Frost & Sulllivan

Frost & Sullivan | Market Insight

Frost.com

4

African Green Economy Modelling”. Other key findings in the study point to investment in a green economy which could contribute to an increase of 46 % in more restored land by 2030. This will allowfor more water to be available without reducing land required for the agriculture sector. In addition, itcould create jobs for 737,000 people compared to 568,000 under a business-as-usual scenario.

Kenya also has initiatives do drive its green economy activities with preliminary modelling on key sectorswhich include agriculture and energy. Investing in green initiatives in the agricultural sector of only 2%of its GDP, crop yield could increase by 15% by 2030.

Supply Chain Efficiencies

Low projected growth in the Western markets, and stagnation in the BRIC economies, means that thereis renewed interest by multinationals and South Africa chemicals companies in Africa. The African continent currently houses some of the fastest growing economies and has large growth potential.

There are challenges that need to be overcome in order for companies to “win” in the African market.The lack of adequate infrastructure and power supply issues can escalate costs beyond competitiveness. Although countries like Tanzania and Ethiopia have begun to address poor infrastructure, reaching lower tier cities and rural areas remains a challenge. The distances betweencommercial clusters, reaching large numbers of traditional outlets, political and safety risks and lack oftechnology for tracking and monitoring supply also poses a risk.

A key difficulty has also been finding and financing the right distributor which requires development,training and access to capital, and third party logistics (3PLs) with sufficient vehicles, the required skillsand professionalism and ability to incentivise workers. Finally, counterfeit and parallel imports continueto be dumped on African markets.

Emerging African Economies

Much focus has been placed on the big three African economies of South Africa, Nigeria and Angola

Figure 2: The supply chain of the future. African growth projections to 2020

Source: United Nations, Frost & Sullivan

Frost.com

5

Page Header - 9pt Gills Sans Regular

which together contribute 85% of the GDP of the top ten countries in Africa (representing 75% ofGDP). However, growth in Africa for chemicals and materials should not rely on these economies. Following an analysis on African GDP figures, expected GDP growth rates (2015 to 2019), GDP percapita, inflation rates, the manufacturing size of each country, and the ease of doing business, Frost & Sullivan has identified a second and third tier of countries – which includes Mozambique, Angola,Tanzania and Zambia (MATZ) and Rwanda, Uganda, Botswana, Ethiopia and Namibia (RUBEN) countries. The below tables highlights some of these important metrics.

A few points worth mentioning include the manufacturing size in Angola ($7,220.4 million in 2012) andTanzania ($2,609.2 million in 2012); the high rankings of Rwanda 32/189 and Zambia at 83/189 on theease of doing business rankings – Mauritius has the highest ranking 20/189 in SSA; and finally thesignificant forecasted GDP growth rates for Tanzania (7.0%) and Mozambique (7.8%).

Strategy

The African Mega Trends highlight many of the challenges in African markets that need to be overcome;however, for many companies these challenges also represent opportunities for development and newbusiness. Thus, the race is on for Africa and as the saying goes “if it is easy to do business, it is probablytoo late for entry”.

Source: IMF, Work Bank, Frost & Sulllivan

Table 1: Metrics for MATZ and Table 2: Metrics for RUBEN

*2011

Precious Metals Market Opportunity and the Role of South Africa

6

© 2014 Frost & Sullivan

Text

AucklandBahrainBangkokBeijingBengaluruBogotáBuenos AiresCape TownChennaiColomboDelhi/NCRDetroit

Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionaryinnovation that addresses the global challenges and related growth opportunities that will make orbreaktoday’s market participants. For more than 50 years, we have been developing growth strategies for theGlobal 1000, emerging businesses, the public sector and the investment community. Is your organizationprepared for the next profound wave of industry convergence, disruptive technologies, increasing competitive intensity, Mega Trends, breakthrough best practices, changing customer dynamics and emergingeconomies?

Contact Us:

+27 (0) 21 680 3260 • enquiries@frost.com • www.frost.com •

MumbaiMoscowOxfordParisPuneRockville CentreSan AntonioSão PauloSeoulShanghaiShenzhenSilicon Valley

SingaporeSophia AntipolisSydneyTaipeiTel AvivTokyoTorontoWarsawWashington, DC

DubaiFrankfurtIskander Malaysia/Johor BahruIstanbulJakartaKolkataKuala LumpurLondonManhattanMexico CityMiamiMilan

Cape Town

First FloorMaitland 2River ParkLiesbeek ParkwayMowbray 7700Cape TownSouth Africa

Tel: +27 (0) 21 680 3260 Fax: +27 (0) 21 680 3296Email: enquiries@frost.com