Sasol refuels for expansion

Petrochemical giant Sasol used last week to reflect on a trying year in which profits came under severe pressure from the strengthening rand, and the group suffered an explosion in its National Petroleum Refiners of South Africa refinery in Sasolburg while struggling to dispose of a plant in The Netherlands.

It was also a year that saw the group list on the New York Stock Exchange. Sasol continued to grapple, in a unique way, with the issue of black economic empowerment.

In a brutally frank assessment of its fortunes, CEO Peter Cox opened his year-end speech by noting: “For the first time since the [1998 South-East Asian economic crisis] Sasol has posted a reduction in earnings.”

Earnings in the year to June fell 20% from R9,8-billion to R7,8-billion During the period, the rand appreciated 11% against the dollar. Cox believes that if the currency had held its own during the year, the group would have posted a profit of R16-billion.

Profit for the year fell 19% from R14,7-billion to R11,9-billion. But Cox admits that the group’s woes do not begin and end with the currency.

He attributes further losses to a “disappointing” performance of Sasol’s Olefins and Surfactants, a division of its chemical business with operations in South Africa, Germany, Italy and the United States. The division posted a loss of R5-million, which, say analysts, left many investors disappointed, according to analysts.

One market report notes that although Olefins and Surfactants contributes 3% of group turnover, a significant change in operating margins of the chemical division remains highly dependent on the unit’s recovery.

This week Sasol announced plans to sell its Dutch-based Sasol Servo BV, citing “a lack of synergy with its commodity business” as the main reason. Servo BV produces coating additives, pulp, paper and oil-field chemicals.

Its sale is seen as part of a wider restructuring of the group’s overseas operations.

Sasol is now a global player, with operations on all continents except South America.

With assets of R69,6-billion and a market capitalisation of R55,8-billion, the group runs businesses in mining, synthetic fuels, petroleum, oil and gas, chemical technology and an in-house financing division to service the others.

The group’s global operations are wide-ranging in scope and complexity. Sasol Synfuels operates the world’s only coal-based synthetic fuel manufacturing facility in Secunda, Mpumalanga. The plant uses coal to produce gas and convert it to petrol, diesel and liquefied petroleum.

Through Sasol Petroleum International the group manages the Temane and Pande gas fields in Mozambique. The construction of the 865km Temane-Secunda pipeline was declared 80% complete in August. At $1,2-billion, the project ranks as one of Mozambique’s largest foreign direct investment attractors, alongside Mozal aluminum smelter and a Titanium mining project.

The company is now also involved in the construction of a gas-to-liquid plant in Qatar. The plant will provide the cleanest diesel to selected world markets by 2005.

Yet it is on the home front that the most pressing challenges remain. This year sees the end of the Main Supply Agreement (MSA) and the “blue pump agreement”. The MSA, last signed in 1988, requires local oil companies to purchase some of their fuel requirements from Sasol.

Cox remained confident that the lapse of the agreement, which provided Sasol with a guaranteed market, will not prove disruptive, noting that the group was about to conclude “mutually beneficial” agreements.

The blue pump agreement allowed Sasol to have pumps at other petrol stations. Sasol currently has a 4% share in the retail fuel market. With its planned entry into the sector, it intends eventually to capture 15%.

The group sees black empowerment as one of its most pressing imperatives, but chairperson Paul Kruger notes: “Foreign investors may be less understanding of and patient with this transformation imperative. Changes in ownership are profound events in business, especially when they are directed by legislation rather than being a consequence of market forces.”

With exposure to mining and liquid fuels, Sasol operates in sectors where empowerment is driven by charters. In 1997 it helped form Excel Petroleum, a subsidiary in which it held 22,5%, with 67,5% held by black business.

Sasol Oil and Gas and Excel have now applied to the competition authorities to approve a merger of the two entities. The Excel fuel brand will, however, remain to help drive penetration into retail.

This marks out Sasol’s approach as radically different from that of its competitors, as it gives black executives direct operational control. The other oil majors have sold equity directly to black partners and offered varying degrees of management and control.

Sasol’s listing in New York provides impetus for global expansion. The group currently has 29% of its shareholders abroad and trades at around R90 a share.

Analysts feel that relative to its peer companies, Sasol is “neutral”, suggesting significant room for improvement in its share price.

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