Seeds of Opportunity: The African Growth Series
April 2022 | Issue 3
In this week's issue, you will learn more about:
- Eskom's continued struggles to keep the lights on
- KZN Floods and the Impact on South African Crude Oil Refineries
- Africa's Competitive Oil & Gas Industry
- Investments strengthening the agricultural sector potential in Ethiopia
- South Africa's shift to E-Commerce
Eskom's continued struggles to keep the lights on
South Africa’s power utility Eskom continues to face increasing pressure from the public to sort out its inability to keep the lights on, but it is looking gloomy as analysts and Eskom both agree that loadshedding will be around for a while still. Since 2019, sub-Saharan Africa’s most developed nation is being plunged more and more each year, with a record of 1,099 hrs (2,455 GWh) of loadshedding in 2021. Recent announcements and statistics indicate that it’s going to get worse before it gets better. The utility’s maintenance outages are nearly as high as during the summer months with outages at the same levels as in December 2021. Eskom’s current unplanned capability loss factor sits at 27.9% as of April 2022, with only 58.7% of its available capacity in operation while 12.4% are currently undergoing planned maintenance. Eskom’s scheduled forecast highlights only 5 weeks during which it is confident that electricity demand will be met for its “planned risk level”, with the rest of the year looking gloomy. This increase in loadshedding will, however, play well for distributed power players. It is expected that demand for generators and other off-grid energy solutions will increase, specifically with life returning to an adjusted pre-pandemic state with the population going back to offices, schools, restaurants , etc. Eskom has a monumental task on its hands, however, it is not an impossible one. There is “light” at the end of the tunnel, with the expected split of the utility into three separate divisions (Generation, Transmission and Distribution) and the opening of Bid Window 6 of the REIPPP programme as well as increased focus on maintenance and rehabilitation of the existing infrastructure.
KZN Floods and the Impact on South African Crude Oil Refineries
On the 11th and 12th of April 2022, South Africa’s manufacturing and trading hub; KwaZulu – Natal experienced heavy rainfall and extensive flooding that caused significant economic disruption. This came after the province experienced a ZAR 50 billion economic fallout after businesses were looted and damaged during the riots of 2021. According to the South African Insurance Association (Saia), the damage to infrastructure caused by the flooding is estimated to exceed ZAR 1.1 billion, with companies such as Sappi, Toyota, Hulamin and Grindrod Fortress Reit being affected while Transnet’s port operations, as well as Eskom and telecoms operators such as MTN and Vodacom, having felt the impact. Furthermore, more than 140 schools were affected, several roads and bridges were destroyed with electrical substations being submerged and power lines being severed. South Africa’s largest crude oil refinery, Sapref was also affected by the flooding, with large parts of the refinery plant submerged and workers needing to be airlifted from the plant. The severity of the damage is yet to be confirmed however a source with knowledge of operations said the flooding would not affect fuel supply as South Africa has increased its dependence on imports. During this time, Sapref was going through a shutdown after Petroleum companies Shell and BP announced a pause in operation by the end of March while they looked for a buyer.
According to the South African Petroleum Industry Association (SAPIA), South Africa will grow more dependent on fuel imports as the country’s refinery sector faces an uncertain future. With the South African government indicating that by 2023 only clean fuels will be allowed in the country, SAPIA foresees refineries converting into either storage terminals or import facilities. This is 75% cheaper than upgrading the refinery to meet the new standards.
Africa's Competitive Oil & Gas Industry
Africa has an abundance of untapped natural resources with natural gas reserves totaling almost 190 billion cubic meters and crude oil reserves at 125.3 billion barrels in 2021. Libya, Nigeria, Algeria and Angola are amongst the world’s 20 largest oil producers whilst Nigeria, Algeria, Mozambique and Egypt are amongst the world’s 20 largest natural gas producers. This shows that the continent has the potential to become the world's upcoming global energy powerhouse. From 2021 to 2025, there will roughly be 428 oil and gas projects starting operations across the continent. These and other upcoming oil and gas projects would increase Africa's mineral fuel production. Currently, the conflict between Russia and Ukraine is pushing European countries to look at Africa as an opportunity to redirect and increase their energy supply. In the second week of April this year, Italy signed a gas deal with Egypt and Algeria. The country also plans to discuss potential energy deals with Angola and the Republic of Congo. These deals could replace more than half of Italy’s current natural gas imports from Russia as early as 2023.
Investments strengthening the agricultural sector potential in Ethiopia
The success of Ethiopia’s Yirgalem Integrated Agro-Industrial Park is an important milestone and serves as an example of the high potential the country can reach if further steps are taken. Since its official commercial operation in March 2021, the development has obtained over USD4.4 million from exports of avocado oil, honey, milk, and coffee, through the five manufacturing companies it houses. Apart from these, the country is a high potential area for other agricultural products like sweet corn, chickpeas, barley, and corn amongst others when compared to its African counterparts. As the country has a relatively high dependence on the sector for GDP contribution (35.45%) and as an employment source (65.6% in 2020), such collaborative efforts by the private sector and public sector should be the standard going forward to drive increased export value. Furthermore, in light of the global food crises and growing emphasis on organic food Ethiopia has a key opportunity to strengthen its position as an exporter of both organic agricultural products and critical food supplies. In 2020, it was the third leading organic food-producing country worldwide (by the number of producers) following India and Tanzania. The call for investors to join the Yirgalem Integrated Agro-Industrial Park which since 2021 has benefited over 135,000 farmers remains open. With all the necessary infrastructure, the park can serve up to 150 manufacturing companies.
The Shift to E-Commerce in South Africa
For the past decade, e-commerce (online retailing) in South Africa has gradually been gaining some traction with limited adoption due to consumer fears of parcel theft, online fraud, high mobile data costs and challenges with last-mile delivery. In 2019, South Africa’s e-commerce industry was in its infancy stages, accounting for 1.4% of the total retail spending and 8% of total card payments spent in the retail space. In 2020, e-commerce spending grew by 30% while the average brick & mortar (or physical spending) decreased by 12%.
Due to the national lockdown imposed by the government in response to the pandemic, traditional retailers needed to reform their business models to draw their customers in without the enticements of malls. This accelerated the need for digital innovation, shifting consumer expectations to increased online consumption enabling South Africa to follow global trends. This pushed the pace of change into hyperdrive with some business models thriving and others suffering early retirement. By the end of 2020, South Africa saw a 50% - 70% growth in e-commerce, with an increased uptake in online retailing, click-and-collect and video streaming. Furthermore, online spending on goods and products (other than travel and accommodation) doubled in 2020, reflecting a 102% increase. By 2021, the industry had witnessed an additional 39% growth, with e-commerce accounting for 14% of the total card payment sales.
According to FNB Merchant Services statistics, total online sales increased by 55% in 2020 driven by increased spending in less traditional e-commerce industries. By 2021, online spending had grown by another 42% with robust transaction values reaching 500 million. By 2025 the value of e-commerce transactions is expected to surge by 150% reaching ZAR 225 billion, in response to a shift in consumer behaviours. The market is estimated to reach ZAR 400 billion by 2025, facilitated by over 1 billion transactions annually. Currently, e-commerce card purchases are at 8% of the total card purchases in South Africa. However, in the next 5 years, this value is expected to grow to 20% with an annual average growth rate of 16%.
Currently, the South African online e-commerce industry is estimated at just under ZAR 200 billion per annum and is continuing to grow rapidly, with companies such as Takealot, Checkers, Pick n Pay and Woolworths adapting to meet new consumer habits. Clothing, electronics, footwear, household appliances and health products were amongst the most popular categories in South Africa’s online market, with groceries having witnessed a 54% increase since 2019. Accordingly, 64% of South African consumers had bought groceries online for the first time and 53% had made their first online purchase from a pharmacy.
The pandemic acquainted South Africans with online shopping, highlighting its convenience while enabling the growth of the e-commerce market. The frequency of online shopping is set to increase; however, the focus of retailers needs to be on creating an omnichannel shopping experience; that provides consumers with a blended shopping experience of in-store and online shopping. Furthermore, key stakeholders in the market need to innovate and invest to overcome the challenges in the industry as insecurity remains high. Looking ahead, South African businesses that will succeed in the new world will be those that have demonstrated an ability to seamlessly meet new consumer demand preferences, shifting their bricks and mortar services to online while addressing some of the key challenges the industry experiences.
Sources:
- https://www.geopoll.com/blog/e-commerce-south-africa/
- https://www.trade.gov/country-commercial-guides/south-africa-ecommerce
- https://www.iol.co.za/business-report/economy/e-commerce-market-in-the-country-grows-rapidly-dcf56c94-a994-499b-bb29-2044b5b10a91
- https://www.fnbcib.com/news/ecommerce-to-be-worth-r225bn-in-sa-in-5-years
- Digital Commerce Acceleration. Sourced: https://www2.deloitte.com/content/dam/Deloitte/za/Documents/strategy/za-Digital-Commerce-Acceleration-2021-Digital.pdf
To find out more about opportunities in Africa, please contact Lynne Martin.
