INSIGHT: Chemicals deliver at Sasol

12 September 2011 17:58  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--It was not so long ago that chemicals were a headache for South Africa’s Sasol. They had spearheaded the internationalisation of Africa’s foremost coal, oil and gas producer. Integration into a complex coal-based hydrocarbon network was the key. But the business segment’s performance belied the benefits. It was dire and prompted widespread rationalisation and reorganisation.

In the latest financial year to 30 June 2011 though, chemicals more than proved their worth. Enough to prompt analysts to question whether the new-found performance and value should be monetised in a spin-off. Whichever way you play it, at times it seems you cannot win.

However, the turnaround in chemicals at Sasol has been impressive, particularly in the olefins & surfactants (O&S) unit that in the latest financial year lifted operating profits by 67% to rand (R) 4.16bn ($571m, €419m). Historically, O&S margins were negative and in recent years only ranged between 3% and 5%. Sasol said on Monday, however, that it was confident of maintaining O&S margins at between 7% and 11% through the (chemicals) cycle.

Chemicals have become an important business for Sasol, in monetary and integration terms at least. Producing liquid and gas streams from coal – and now from gas – throws up all sorts of opportunities.

Sasol is raising its ethylene capacity at Sasol Polymers in Sasolburg, South Africa, for instance, to take advantage of feedstocks from the Secunda coal conversion complex.

The conversion unit will add a further 48,000 tonnes/year of capacity.

The company is also studying gas-to-liquids (GTL) plants for western Canada and in the southern US, where it is considering adding chemicals to GTL in Louisiana.

The big Arya Sasol joint venture project in Iran looks finally to be generating decent value.

Sasol sees all sorts of plays utilising its GTL, and coal to liquids (CTL), technologies. Chemicals, sometimes, play a part in these project plans but GTL and CTL now lead the charge abroad. 

What the company calls “offshore businesses” – GTL, the Iran chemicals business, most of O&S – contributed 36% of the group’s profit in 2011.

In the latest financial year, however, chemicals produced R8.7bn of Sasol’s R30.0bn operating profit, a healthy proportion of the total by any standard.

Chemicals profits were up 59% year on year on stronger volumes and higher prices for the major products: olefins, polymers and solvents.

Arya Sasol Polymers – Sasol owns 50% – was running at 80% over the year and helped lift the earnings of this segment. Business in South Africa was better but margins were not easily won.

Sasol Polymers' operating profit was up by 65% at R1.58bn, with the operating margin at 9.2% from 6.7%. In the fiscal year ending on 30 June 2008, the polymers margin was 13.4%.

Solvents profits were up by 43% at R1.66bn on higher prices and cost savings, the company said. Indeed, cost savings and restructuring were important positive factors across the chemicals business in fiscal 2011. Solvents margins rose to 9.6% from 7.3% in fiscal 2010.

O&S margins rose to 13.1% in 2011, from 9.9%. They were just 5.3% in 2008.

The waxes and explosives businesses produced higher returns, with stronger global sales volumes on the back of increased demand. Fertilizer sales volumes were down following the exit from retail sales.

Sasol CFO Christine Ramon talked on Monday about a “great set of results” for the group, adding: “We’ve delivered on our operational and cost control targets for the year.”

She believes the company is now better placed to deal with the potential impact of what might prove to be a global recession. Cash flow has been high, with the chemicals contribution significant and clearly recognised.

There were signs of the slowdown in the fiscal fourth quarter, Ramon admitted, and margins in the polymers segment were below historical levels, but she suggested that new projects in polymers would help improve profitability. The turnaround in O&S, she said, had been successful.

While GTL (and CTL) add some of the major growth opportunities for the group, chemicals can do more than hang on to their coat tails, as long as they deliver acceptable returns.

($1 = R7.28, €1 = R9.93)

For more on Sasol see ICIS company intelligence

By: Nigel Davis
+44 20 8652 3214

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