30 April 2012 00:00 [Source: ICB]
Sasol's local polymers operations and margins have been hit by a lack of feedstock availability. A new ethylene purification unit could help tackle the problem
PE producers in Saudi Arabia, the Middle East, the US and Europe have increased their sales into South Africa
"Polymers are not getting the feedstock they require all the time, and certain plants are often run in batch mode. Sasol makes losses in its South African polymers business, even though the polymers operations pay only 70% of the price paid by other non-integrated PE producers" he says.
Sasol's recent financial results reveal the impact of the volumes lost. Operating profits for the first half of its fiscal year 2012 (July-December 2011) rose 70% year on year to rand (R) 20.5bn ($2.7bn). Although the chemical cluster's turnover for the same period grew by 19% year on year to R47.2bn, operating profits at it polymers' division decreased by 5% to R546m.
Sasol CEO David Constable traced polymers' negative performance to the adverse impact from a 6% decrease in production volumes from local polymer operations.
Mohamed Kharva, an analyst tracking Sasol at South African investment bank Nedbank Capital says: "Back in 2006, when they made the polymers division, they didn't ensure they had the feedstock to supply."
Kharva says polymers are merely value-added products made from materials that are produced at Sasol's Secunda CTL plant.
"You can't run the CTL plant and produce only diesel and gasoline. CTL produces a whole pool of hydrocarbons, to which you add value and sell. If the CTL plant doesn't operate at the optimum level, the ethylene available downstream would be reduced. They would like to run the plant as hard as they can but they can't," he said.
An ethylene constraint at Sasol has consequences in the South African PE market. Sasol is the sole low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) producer in South Africa, and is estimated to hold 80% of the PE market share, along with high density polyethylene (HDPE) producer Safripol which secures its ethylene from Sasol.
Annabe Pretorius, a spokeswoman for the South African Plastics Recycling Organisation, says about the impact: "It is very difficult for Sasol customers to stockpile in case it were to happen [again]. It puts a burden on cash flow and customers have specific tonnages allocated to them. They normally only hear this when it happens and then it's too late to order from overseas."
Last year, import prices spiked during the peak South African summer season [October-Febuary] when Sasol's PE output was reduced thanks to an ethylene shortage. In a letter dated December 2, Sasol told its customers the supply shortage was to last at least until March 2012.
PE producers in Saudi Arabia, the US and Europe seized the opportunity to increase their sales into South Africa. A Middle East producer with an established base in South Africa told ICIS it has increased its sales in the country. "It is an important market for us. We have slowly increased our customer base, and we are selling more. Today, we are selling more than we ever sold before," it says.
According to an importing distributor active in the South African PE market for many years, importers are increasingly targeting the coastal areas of Cape Town and Durban. Opportunities for sales abound in a medium-growth market.
The LDPE markets consume 140,000 tonnes/year, while consumption figures for LLDPE are at 160,000 tonnes/year. Demand for HDPE is estimated at 220,000 tonnes/year, the source adds.
South Africa channels half of the polymers it buys into packaging - a sector where growth tracks GDP. The government recently cut its 2012 economic GDP growth forecast to 2.7% from a previous projection of 3.4%, reflecting the impact on the continent's biggest economy of a slowdown in Europe and the United States.
Additionally, concerns about South Africa's business environment have resulted in diminished demand from retailers for plastic packaging. But GDP is expected to pick up to 3.6% in 2013 and to 4.2% the year after when the fruit of the government's infrastructure investment is expected to filter through.
So just how does Sasol plan to run its LDPE and LLDPE plants at optimum levels to supply the South African market, and increase its polymer margins?
Sasol's Constable has confirmed the company's much-awaited R1.8bn ethylene purification unit will come on stream in second-half 2012 at the site of its PE plants in Sasolburg. The unit would "yield additional ethylene to support our polymer plants to run continuously," the company says.
"The Secunda plant is being expanded and the extra ethylene will be used at the ethylene purification unit in Sasolburg as the polymer units in Sasolburg do not have enough feedstock," Kharva explains.
The company also reduced its April LDPE prices by R1,000/tonne in an effort to regain some of its market share from importers.
Sasol's April LDPE offers are at R12,750/tonne FD, according to industry sources. The company's polymer division did not comment on prices or its PE supply situation when contacted for this article.
But will a possible increase in ethylene supply from the purification unit - estimated at 48,000 tonnes/year - and its pricing policy be enough to increase its polymer margins at some point? "It all depends on how comfortable customers are in putting all their eggs in one Sasol basket. They all know that anything could happen," a second importing distributor says.
Meanwhile, Kharva says Sasol's focus is mainly on seeking projects that would leverage its proprietary Fischer-Tropsch technology to extract liquid fuels. The company is currently studying the feasibility of the commercialisation of gas-to-liquid (GTL) initiatives abroad in Canada and the US. The proposed plants will process natural gas from newly discovered shale gas reserves in both countries.
In Nigeria, the company has a small share in the Escravos GTL project under construction that also includes US energy group Chevron and Nigerian National Petroleum.
"The growth area is in liquid fuels, with selective opportunities in chemicals as and when they come along, which includes polymers," Kharva concludes.
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