Sasol could soon join the great trek that has seen several top South African companies list abroad
Belinda Beresford
Sasol, the oil and petrochemicals company which was synonymous with countering anti-apartheid sanctions, has outgrown the country of its birth.
The industrial weakling that was nurtured to shelter the apartheid regime from the vagaries of international oil prices and the bite of sanctions by transforming coal into oil has worked as dramatic a transformation upon itself. Sasol is now a respectable multinational and straining to escape the confines of South Africa.
“Sasol has become too big for South Africa to continue growing,” says Sasol head Pieter Cox.
Last year 27% of Sasol’s earnings came from foreign sources, and the company expects this to rise to 50% within five years. An offshore listing is on the cards.
Such international moves are ironic: Sasol was created 50 years ago to examine ways of creating synthetic fuels (synfuels) since, despite its mineral wealth, South Africa lacks its own oil supplies.
A home-grown industry creating liquid fuel would, the theory went, buffer the country’s economy from sudden rises in the price of crude oil – or sudden falls in the country’s currency. In later years it had the advantage of increasing self- sufficiency under the pressure of sanctions.
Such self-sufficiency comes at a cost: as part of the apartheid government’s total onslaught economic programme, Sasol was lavishly fed with the milk of taxpayer subsidies and protected from competition by protectionist legislation. The same applied to Mossgas, the offshore gas production company which was also designed to increase South Africa’s fuel autonomy. However, unlike Mossgas, Sasol has developed into an increasingly highly rated company.
Analysts are predicting up to 50% growth in Sasol’s earnings for the latest financial year, and while Cox won’t confirm figures he says the company does have a “very robust” bottom line. With a market capitalisation of R27-billion, Sasol is one of the largest companies on the Johannesburg Stock Exchange (JSE), where it listed after being privatised in 1979.
This has to be put into context: oil multinational BP Amoco alone has a greater market capitalisation than the whole JSE combined. But Sasol is becoming a noteworthy player on the international stage, especially because of its technological know-how in converting gas into liquid fuel.
This technology is the primary reason why Sasol is in the final stages of negotiating a joint venture with United States oil giant Chevron. This will include gas-to-liquid plants in Nigeria and Qatar, as well as Mozambique, Alaska and Angola.
The South African company is also involved in numerous other joint ventures, such as an alliance with Norwegian company Statoil. Increasingly it is looking at higher-value petrochemical derivatives as an area for growth.
One advantage of Sasol’s gas-to-liquid technology is that it also produces high- quality diesel fuel, uncontaminated with sulphur compounds and thus more environmentally friendly. This should add a price premium, especially in countries where environmental awareness is increasing.
But there are other factors: “It is technically competitive to convert gas, especially gas in remote areas, to diesel fuel. It has a universal application, is easily transported and [there is] often a local market,” says Cox.
He says Sasol is considering an offshore listing, primarily if it needs to raise more capital. But “[we] wish to remain for the moment as a South African company, based here”.
London and New York are considered the most likely stock exchanges for Sasol to look at joining. Given that Cox says Sasol does not wish to move its domicile, the US looks more likely. Companies listed on the London Stock Exchange have to be domiciled in the United Kingdom to enter the benchmark FTSE 100 index. Being included in the index gives a boost to company shares, since it means index fund managers have a strong incentive to buy shares. Either way, Sasol could soon join the great trek that has seen several top South African companies – including mining groups Anglo American and Billiton, financial services company Old Mutual and paper giant Sappi – list abroad.
Contentiously Sasol still enjoys import tariff protection: the Democratic Party recently said it estimated Sasol had received R8-billion in state subsidies over the past decade. If the oil price drops below $16 a barrel tariff protection kicks in, with Sasol receiving payments to allow it to compete with cheaper oil products.
As one analyst points out, there is no synthetic fuel plant in the world which could compete on an equal basis with refined crude oil. But given Sasol’s diversity and success there is increasing debate whether Sasol should still be receiving such protection.
Cox is adamant that Sasol has “a valid case for tariff protection” given the amounts of foreign exchange it has saved South Africa. Whether foreign investors would view it in the same positive light is debatable. While protection gives the company an advantage, it is an artificial situation which could be taken away when the government chooses.
Sasol last received payments in August last year, and there is a possibility that it won’t receive them again. Cox says the company expects oil prices to remain above the $16/barrel floor price over the next two years. Meanwhile, the government has expressed an interest in removing the tariff protection. One Department of Mineral and Energy Affairs expert says the subsidy is being “phased down”.
Another part of Sasol’s history under review is its supply agreement with the major oil retailers in South Africa. The deal means approximately 40% of the fuel sold in South Africa comes from Sasol.
Sasol gave the required five-year notice of termination of the agreement 18 months ago.
“We gave notice of termination because the agreement dates to the 1970s and circumstances have changed,” says Cox.
The company is still uncertain whether it will enter the retail market under its own banner or sign a new supply agreement with one or all of the major oil companies.
One question is why, despite all the positive news about Sasol, its good reputation for labour relations and its international ties, the company’s share price continues to languish. Perhaps the answer was given by one oil analyst.
“It’s a very good company, there’s nothing wrong with the company … It’s an intriguing investment, but it’s still a South African company.” But probably not for much longer, one suspects.