Not fair dinkum, Sasol
South Africa’s home-grown fuel giant Sasol published its annual results recently against the background of continuing high fuel prices and intensifying debate over how well the current regulatory regime serves the country.
Pump prices internationally are in the spotlight.
In France, there have been some price cuts after threats from the government to increase corporate taxes on fuel companies.
In Britain, there are threatened refinery blockades and demands for reducing fuel taxes.
In Poland, diesel prices have been cut following pressure from farmers.
In South Africa, the Democratic Alliance has called for Sasol to re-pay subsidies it earned when fuel prices were low.
Sasol reported that its headline earnings were up by 88% to R10,7-billion.
I asked a colleague who covers the oil markets in Singapore to suggest an international company to compare with Sasol. His suggestion: Caltex, Australia.
The South African and Australian fuel markets are removed from the major oil centres. Both import crude but also partially meet their own needs from gas to a varying extent. Urban centres in both countries are also far apart.
A major difference is that the Australian market is deregulated while South Africa is highly regulated. Motorists care little about this as an issue so long as they get the best prices.
Sasol and Caltex Australia are the leading companies in their markets, supplying about 9,6-billion and 10-billion litres of fuel respectively.
Caltex Australia, co-owned by Caltex and Chevron Corporation, is listed so its financials are available.
Caltex reported its interims — numbers used here have been annualised — at the end of last month, Sasol this week.
The Australian market leader reported operating profits of R1,42-billion on sales of R76-billion, a margin of just 1,9%. Chief executive David Reeves told a national radio show that first half earnings were ‘in the neighbourhood of two cents a litre (about R0,10) after tax”.
Sasol is significantly more profitable; its South African operating profits for the year topped R12,2-billion on sales of R35,3-billion.
At the group level the respective numbers are R15,7-billion and R69,2-billion, a 22,9% margin.
Sasol spokesperson Johan van Rheede says the two companies cannot be meaningfully compared because Sasol also produces crude oil from coal while Caltex Australia is a refiner and retailer.
‘If you include the upstream activities of Caltex, it will make far better comparison. You can do the same with ExxonMobil, Shell and BP.”
Sasol is an international player with operations in many parts of the globe, but its profits — 85% of the total — come from South Africa.
‘Sasol has assets of R35-billion in South Africa which produced profits of R12-billion,” one industry observer remarked. ‘Its offshore assets of R35-billion only managed to produce profits of R2-billion.”
Its South African operations produce R1 of operating profit for every R3 of sales, an excellent margin for a high-volume business.
This 33% margin is much higher than the 20% it realised in the rest of Africa, the 8% in Europe, India and the Middle East, and the 10% in the Far East.
‘We achieve the best margins in South Africa because our production facilities are backwards integrated and we don’t have significant distribution costs,” says Van Rheede.
‘Operating margins are calculated by dividing turnover into operating profit. In Africa, our operations are at project stage, with little turnover and high distribution costs.
‘As far as Europe is concerned we have distribution costs from South Africa to our chemical operations in Europe, which in turn have very low margins because they are not backward integrated. We also have distribution costs to get product to India, the Middle East and the Far East.”
Sasol’s core, its synfuel operations, remains its key profit driver, accounting for R7,6-billion of operating profit, a 40% margin on revenues of R18,6-billion. These synfuel profits accounted for 50% of Sasol Group profits last year.
Two-thirds of all Sasol Group’s operating profits come from its South African fuel operations, R9,6-billion of R14,5-billion.
Liquid fuels — Sasol’s conventional refining activities — contributed R1,9-billion (8% of turnover).
A shortage in refining capacity, driven by rampant Chinese demand in recent times and Hurricane Katrina in recent weeks, has seen refining margins, refinery gate prices minus crude oil prices, rise to stratospheric levels.
There is no equivalent margin for Sasol, in that its synfuel is made from coal, not crude.
Merrill Lynch analyst Michael Kavanagh uses a proxy to calculate Sasol’s refining margin, being the difference between the basic fuel price (BFP), as calculated daily by the government using Singapore and Mediterranean refinery prices plus notional shipping costs, and Brent crude.
Sasol’s refining margin rose to $26,80 a barrel on September 2 from $13,50 on August 19. At mid-week it was $17,80.
Sasol, a fact sheet handed out at the results presentation tells us, is the country’s largest company with its primary listing here. Anglo and BHP Billiton are both larger but their primary listings are offshore.
Sasol is also our largest investor, investing R24-billion in the past four years, a figure equivalent to 90% of all foreign direct investment into the country. It pays the most tax, contributing R6-billion annually in taxes and levies.
Fuel markets internationally are likely to remain on the boil for some time. So too will be the intense scrutiny of the oil industry and responsible government officials.