The sudden closure of SA’s largest refinery is a big deal, but not necessarily for obvious reasons such as job losses.
Some jobs will be lost when the “spend freeze” and a “pause” of refinery operations commences at the end of March at Sapref, but of greater interest are the reasons that may have motivated the decision by BP and Shell to not invest more money in the business.
The refinery industry is just one of many local industries finding it more difficult to run a profitable business in SA.
Fast-rising production costs such as energy and labour, degraded infrastructure and unreliable electricity supply have all contributed to tightening margins for businesses and made certain industries less competitive.
To rectify this, several master plans have been devised, all with the overarching intent of promoting local production.
The clothing and textiles industry, for example, through its master plan, wants to see the share of retail sales of locally manufactured clothing and footwear increase from 44% to 65%. This plan has achieved some success and even President Cyril Ramaphosa was bragging in the state of the nation address about his locally made suit and shoes. The poultry industry master plan similarly aims to increase local production to substitute imports with a target of increasing output by about 10% by 2022/2023.
One of the measures used to promote local production in these industries is import duties and tariffs, which provide protection from importers that are able to land products in SA at cheaper prices than can be produced in this country. These trade protection instruments remain controversial, however, since they can lead to unintended consequences such as higher consumer prices.
SA produces petroleum from coal and gas, or from oil that it imports from Europe and the Middle East. According to 2019 figures, roughly a quarter of petroleum is imported as a finished product. For the other 75%, which is refined and processed in SA, imported crude accounts for about 65% of the feedstock and coal and gas for the rest. Sapref is responsible for 35% of the country’s refinery capacity but for about 25% of fuel supply.
In addition to certain of the constraints faced by all business in SA, as mentioned above, refineries are facing other changes in the market that will add to their cost of doing business. They will have to spend billions of rand to upgrade their facilities to comply with rules published by the government in 2021 that lowered the sulphur content allowed in the country’s diesel fuel. Refineries will also be liable to pay carbon taxes they will not be able to pass down to consumers, further eroding already thin margins. As energy economist Lungile Mashele said, what all of this means is that there no longer seems to be a business case to continue investing in the refining of crude oil in SA.
But if it is cheaper for SA to import clothes, chicken and petroleum, rather than to produce it locally, should we not just do so? Well, no, SA should aim for a happy balance that will offer security of supply at a reasonable price for consumers.
The risk that an over-reliance on imports creates — be it for clothes, chicken or petroleum — is to make SA more susceptible to what happens in the rest of the world. Greater import dependency means that an outbreak of bird flu in Brazil or the EU could result in shortages and rapid price inflation of chicken in local supermarkets, or conflict in Europe and the Middle East can cause temporary supply shortages at our petrol stations.
Master plans and trade protections serve a purpose, but they offer no solution to high input costs, unreliable electricity supply, policy uncertainty and the other challenges that are making it more difficult and more expensive to run a business in SA.
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