Opportunities in the South African Cotton & Wool Value Chains

As a single market, the EU is South Africa’s largest trading partner, making up 30% of South Africa’s imports and 24% of South Africa’s exports in 2019. The EU is also the largest investor in South Africa.

Increasing trade and investment between the EU and South Africa in the wool and cotton value chains

The implementation of the SADC Economic Partnership Agreement (EPA) in 2016 removed almost all tariff barriers on trade between Europe and South Africa.

In 2019, South Africa exported US$ 1.3 bn in clothing and textile products globally.

  • Total wool exports amounted to US$ 357 million.
  • Total cotton exports amounted to US$ 61 million.

Whereas the EU accounts for just 7% of South Africa’s total clothing and textile exports, EU companies absorbed more than 40% of South Africa’s total wool exports in 2019 (up from around 30% in 2017 and 2018).

  • In 2019, China restricted the import of SA wool.

Increased cotton production in South Africa has contributed to a rise in the export of good quality fibre, albeit in small volumes, to the global market.

  • Current exports to the EU are insignificant, though some South African producers are supplying products directly to EU brands’ value chains.

Data sources: SARS and ITC Trade Map

Opportunities for deeper collaboration and increased trade and investment

The European Union-South Africa (EU-SA) Partners for Growth Programme supports the EU in maximizing bilateral trade and investment.

The South African wool and cotton industries have repositioned themselves in recent years to pursue export opportunities.

The Programme has identified a number of opportunities in the South African natural fibres industries that may be of interest to EU investors, buyers and providers of technology and equipment.

To explore these opportunities in more detail, the Programme aims to establish an EU–SA Natural Fibres Industry Platform to facilitate discussions between business associations, growers, manufacturers, potential investors, equipment suppliers and buyers in South Africa and the EU.

The South African Wool Value Chain

▪ SA exports more than 75% of the 45 000 tons of wool it produces in raw form. Wool is a top export earner in SA agriculture.

▪ The majority of SA wool is derived from merino sheep, with an internationally acclaimed fibre quality that attracts a premium price in world markets.

▪ The fibre is quality-graded and sold in a weekly auction, centralised and managed with international buyers (including EU manufacturers) able to bid and purchase.

▪ The sub-sector is well-organised and is represented by a single industry association, Cape Wools SA.

▪ Cape Wools SA assures sustainable production, animal welfare audits, on-farm practice standards, and fair labour practices; it also oversees a national traceability programme for wool.

WOOL Opportunities for EU business

There is an immediate and attractive opportunity to produce wool tops in South Africa.

Specifically, Cape Wools SA has developed a business proposal for a national wool tops project, requiring circa EUR 5 million in investment or soft loans. Some of the possible opportunities of this project for EU business:

▪ Sourcing of Sustainable and Specialist Products: The Cape Wools brand would be targeted at high-end EU retailers. This would provide retailers with direct access to wool tops with product quality consistency, reliability of supply, traceability, and sustainable manufacturing practices.

▪ Supply of New Technology and Equipment: EU technology is already well-respected in the South African market, and the leading contenders for the initial Cape Wools project are EU companies.

▪ Upskilling of Local Capacity: The establishment and scaling up of the industry will need to be accompanied by significant skills development. There may be further opportunities for skills and technology transfer from the EU.

The South African Cotton Value Chain

▪ The industry body, Cotton SA, has recorded an 800% increase in cotton lint output over the last 6 years in South Africa, with exports growing dramatically.

▪ The Government’s Clothing and Textiles Masterplan 2030 aims to build on this increased capacity to revive the local manufacturing sector.

▪ The resurgence in cotton production has not been matched by an upgrade in spinning mills and new fabric production technology.

▪ The cotton value chain requires a doubling of local spinning capacity to support the development of downstream manufacturers.

COTTON Opportunities for EU business

Various funding options exist, involving both African and EU Development Funders, to recapitalise the cotton manufacturing value chain in Southern Africa. This would reposition the region as a lint, yarn and eventually fabric and garment sourcing destination. The resulting benefits for EU business include:

▪ Local Focus: Overseas brands with South African stores can absorb local suppliers into their international sourcing value chains.

▪ Off-Season Trading: The Northern summer peak production period coincides with the lower output period for SA garment manufacturers, presenting an opportunity to shift production to South Africa.

▪ Decentralised Sourcing: The Covid-19 pandemic has raised the need for brands to look at alternative sourcing partners.

▪ Development Financing: A syndicated Sector Investment Fund between African and EU Development Funders for the recapitalisation of the cotton manufacturing value chain in Southern Africa, which could arrange concessional funding over the next 10 years.

An industry platform for bilateral collaboration

Main features of the EU SA Natural Fibres Platform:

▪ Information sessions for the EU: to inform industry stakeholders in the EU on recent production and policy developments in the South African cotton and wool industries.

▪ Information sessions for SA: to inform industry stakeholders in South Africa on trends, technologies and regulations in the EU market.

▪ B2B engagements between potential EU investors, buyers and suppliers and their counterparts in South Africa.

The Programme will also be able to facilitate bilateral discussions on any other topics that may be of common interest to industry representatives in the EU and South Africa.

All of these discussions will take place virtually in 2020, though the Programme might be able to support study tours or visits between the two regions once travel restrictions are lifted.

The Policy Environment for Trade and Investment in South Africa

The South African Government and the prevailing legal framework are strongly supportive of trade and investment in the clothing and textile sector:

▪ The Department of Trade, Industry and Competition (DTIC), together with manufacturers, unions and retailers, has launched a 10-year Clothing and Textiles Master Plan (to 2030) to recapitalise, modernise and upscale clothing and textiles manufacturing output.

▪ The industry associations for wool and cotton have invested significantly in international sustainability benchmarks and traceability capabilities, including the involvement of small-scale farmers.

▪ The implementation of fair labour policies, prohibition of child labour, minimum wage rates, and the freedom for labour unions to organise; has positioned SA favourably for fair and ethical trade.

▪ SA’s legal framework protects the intellectual property of investors bringing their expertise into the market or signing licensing agreements with local companies. There has also been a serious effort to eradicate counterfeit goods, linked to the tightening of customs processes.

▪ SA is building a sourcing profile for EU companies seeking partnerships to upgrade, outsource or relocate their core production.