FLZA - Resource Shortages Likely To Disrupt Critical Supply Chains In South Africa

Summary

• Water, electricity, and fuel supplies have come under pressure in South Africa from deficiencies in infrastructure, atypical climate patterns, and global supply chain disruptions.
• Manufacturing and agriculture will continue to experience power cuts in municipalities struggling to distribute water, which requires electricity for operations and transport.
• South Africa has moved from importing fuel to meet 40% of its domestic fuel demand in 2019 to using imports to meet 60% of its fuel demand due to the closures of its oil refineries.

Water, electricity, and fuel supplies have come under pressure in South Africa from deficiencies in infrastructure, atypical climate patterns, and global supply chain disruptions. These resource shortages are snarling critical supply chains and affecting many industries in the country.

Water shortages

In Eastern Cape, Gauteng, and KwaZulu-Natal provinces, increasing incidences of water shortages are likely to continue over the next 12 months, affecting the mining, agriculture, automobile, and energy sectors, all of which are heavy users of water.

Protests over water shortages in communities close to manufacturing hubs are likely to interrupt ground cargo movement to and from port terminals in Durban and Richards Bay. Although most protests are likely to be non-violent, in the Durban port and Richards Bay port areas, they are likely to involve incidences of arson and looting.

Deficiencies in infrastructure maintenance and development, as well as flood damage, increase the likelihood of more-frequent water shortages in the next 12 to 24 months in South Africa's Eastern Cape, Gauteng, and KwaZulu-Natal provinces, despite good rainfall.

In residential areas, these water shortages will probably trigger disruptive but mostly non-violent protests over service delivery in 2023. However, along the National Road Three (N3), which connects Durban port with the commercial capital, Johannesburg, and around the Richards Bay port area, these protests would probably turn violent, with acts of arson and looting of goods and trucks in transit.

There is a moderate likelihood that the highest level of water-use restrictions - requiring non-residential water use to be cut by 45% and agricultural water use to be cut by 60% - will be applied by 2024 due to contingencies caused by water shortages.

Power generation

Manufacturing and agriculture will continue to experience power cuts in municipalities struggling to distribute water, which requires electricity for operations and transport.

Breakdowns in power-generation units at power stations, as well as prolonged delays in the return of generating units already on planned maintenance, mean that any further breakdowns in generation units will very likely cause an increase in the frequency and length of power outages for most of 2023.

Policies to boost private-sector electricity supply have been implemented only recently, and known private commitments on generation capacity to be operational in 2023 are unlikely to meet power demands.

The adverse developments relating to electricity supply represent a further dampener on economic growth. As a result, in 2023, S&P Global Market Intelligence forecasts GDP growth to slow to 1.4%, before improving to 1.8% annually by 2025, with little prospect of reducing high unemployment or the widening inequality gap.

The risk of social unrest will remain elevated and could result in further sporadic reductions in economic activity, as indicated by the October 2022 illegal strike and sabotage incidents at strategically important coal-fired power stations and their associated economic costs.

Fuel supplies

South Africa has moved from importing fuel to meet 40% of its domestic fuel demand in 2019 to using imports to meet 60% of its fuel demand due to the closures of its oil refineries. This has left the country more vulnerable to external shocks. It has also increased the vulnerability of South Africa's fuel supply chains to opportunities of sabotage against state infrastructure, such as arson attacks on storage facilities, trucks, and rail transport.

South Africa's increased reliance on refined fuel imports increases the probability of intermittent fuel shortages for major industries in 2023 and increases ground cargo vulnerability to sabotage. The sectors most reliant on fuel imports are energy, mining, manufacturing, agriculture, and tourism. Increased vulnerability to the importing of refined fuel resulted in several incidents of jet fuel shortages in 2022, which probably will recur intermittently in 2023.

Labor strikes arising from trade unions seeking to protect their members from job losses in the fuel sector will probably result in intermittent interruptions of supplies of diesel for electricity generation and distribution. Such strikes would also affect the movement of manufactured goods, especially textiles and automobiles, to harbors.

Diesel supply interruptions either through acts of sabotage or labor strikes would also very likely disrupt agricultural production for domestic consumption and export.

Indicators of changing risk environment

• Specific reference in the 2023 budget to infrastructure deficiencies, as opposed to drought weather conditions, as the cause of shortages, would be a likely indicator of the government's intent to address the shortages.
• Operational disruption to the provision of water by tankers would likely result in greater protest activity targeting government vehicles, including but not limited to those associated with water supply, in central business districts.
• Government compromises to accommodate Natref, the country's remaining oil refinery, by raising the gas emissions threshold to allow it to continue operations or by introducing a system of purchasing gas emission credits from other sectors that emit less gas (capital injections for refinery facilities being less likely), likely reducing operational barriers to further investment in existing refinery facilities.

- With contributions from Zelbe Boshoff.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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