THE R1.5bn in projects that gas company African Oxygen (Afrox) announced last week may be the start of a surge of capital expenditure by South African industry.
Various industries are at the bottom of what analysts perceive as a looming upturn for companies involved in upgrading existing infrastructure and factories.
Several large listed and private groups are expected to make investments, even if these could be more focused on maintenance to existing plants or adding plants in other African countries.
The construction industry managed to work the losses of the last three years out of its system and now companies like Afrox, which serve construction, are set to benefit, says Stanlib equity analyst Anashrin Pillay.
He says construction companies and related industrial businesses should see earnings growth in line with gross domestic product growth this year.
“I think the industrials have generally worked through the head-winds of the last few years.
“Construction companies had loss-making contracts, strikes and other problems. This hurt gas companies which served them, but now, things have cleared up and profits are set to be made off of good contracts,” he says.
But until the government actually releases tenders for its multi-billion infrastructure dream, firms will not factor these promises from politicians into their plans.
“The private sector knows there will be a big lag with respect to projects in this infrastructure spend. If the government made announcements tomorrow, it could still take some 18 months before the companies were getting earnings from these infrastructure projects,” he says.
Over the next three years, South Africa’s fiscus and state-owned companies plan to allocate R827bn to infrastructure. Finance Minister Pravin Gordhan said in his budget speech last month the financing for these projects is in place even if the state needs to cut expenditure to service the current account deficit.
Afrox is 60% owned by German gas company Linde Group. The R1.5bn development programme to be rolled out over three years is the biggest in the history of Afrox in South Africa. In terms of the development programme, Afrox will create a business campus and air separation unit in Port Elizabeth, to serve customers in the Eastern Cape.
The air separation unit is worth about R300m. It is part of a bigger R1.5bn development programme.
The programme includes a R500m business campus in Umhlanga, KwaZulu-Natal, and a new R200m air separation unit at Afrox’s Pretoria West site.
MD Brett Kimber says the new unit and campus, which are to be completed by 2015, will save Afrox transport costs and make it less reliant on PetroSA and other companies in the nearby areas.
But Mr Kimber warns that chemical and gas suppliers are constrained by gross domestic product growth in South Africa.
“Industry is entering a better period than after the recession, but only slowly will things improve and a boom is not here yet. This is part of why we have made this long-term investment in one of the least developed areas of SA, the Eastern Cape,” Mr Kimber says.
“I think we will perform more or less in line with the economy this year. Last year, the truck strike made it more costly to move product. At least we should not have that extra pressure on logistics,” he says.
The truck strike in late September to early October last year cost the economy some R3bn.
Chemical and gas producers have to rely on road transport to ports at Durban because of the lack of railways. This is not set to change soon. On Monday, the state-owned freight and logistics enterprise Transnet said it may have to cut its planned R300bn capital expenditure programme by R50bn if economic growth fell short or strikes affected the sector this year.
Transnet CEO Brian Molefe said that Transnet’s plans were premised on an annual economic growth rate of about 3%.
The economy grew 2.5% last year. This year, the consensus of economists’ forecast is for unimpressive growth of 2.7%.
But flooring and specialist chemicals company Accentuate’s CEO Fred Platt is optimistic about both his business arms.
Releasing results last month, he said that Accentuate could see benefits from a recovery in the construction industry as soon as six months from now.
Mr Platt said that Accentuate’s chemical business was especially affected by the prolonged mining and transport strikes in the country last year.
However, even minor spending on infrastructure by the state could give positive impetus to small engineering and other industrial companies’ fortunes.
“Just small spending will help. The government needs to get this infrastructure plan going and SA will then see positives,” he said.