INSIGHT: Sasol results shed new light on its polymers business

12 September 2012 14:51  [Source: ICIS news]

LONDON (ICIS)--Sasol has in the not-so-recent past been forgiven for pulling the plug on its domestic polymers supply – primarily for polyethylene (PE) - due to technical challenges upstream, in exchange for ramping up its production performance and offering highly competitive prices.

Everything in the above statement remains contentious in the South African polymers market, especially as Sasol competes with importers to hold on to its market share. The energy and chemicals producer's annual financial results could be crucial in shedding some light on year-long production and pricing disagreements in the industry.
As a side note, with an estimated 80% market share of the major commodity PE grade almost always under its belt, huge polypropylene (PP) production capacity and a wide range of other polymer grades outputted from its two production sites in Secunda and Sasolburg, Sasol is synonymous with South African polymers supply.
Sasol CEO David Constable said on the group's overall production for the 12-month period ending on 30 June: "We saw significant improvement in the production performance in the second half."

Sasol's fiscal year 2012 results suggest, most importantly, that the company's domestic polymer production performance improved in many ways in the second half of its financial year, compared with a recorded 6% loss in local production volumes in the first.
In fact, Sasol CFO Christine Ramon adds on the polymers business: "Despite lower production achieved in the first half of the year, the second half saw a number of production records being achieved in the South African business resulting in an increase in sales volumes for the year."
This is in addition to an 84% capacity utilisation rate internationally at Arya Sasol Polymer Company (ASPC), a joint venture between Sasol and Iran's National Petrochemical Co (NPC). "Production performance at…ASPC…was strong and in line with our expectations," the company said.
Upstream, the Sasol Synfuels division improved its overall production run-rate during the second half of its fiscal year 2012, "being the best performance in the last five years". Sasol Synfuel provides feedstock supply for the group's polymers business.
Analysts had tracked Sasol's first half fiscal year 2012 feedstock ethylene, and therefore PE, shortage to instability at its coal-to-liquid (CTL) synfuels plant at Secunda, Mpumalanga, located approximately 200km (125 miles) from its PE plants at Sasolburg.
The company elaborated on the year-on-year capacity utilisation at Sasol Synfuels for its fiscal year 2012: "Production volumes were 1.1% higher than the prior year, due to improved plant efficiencies and fewer plant instabilities, coupled with a phased shutdown compared to the full shutdown in 2011."
As Sasol Synfuels provides feedstock supply for the group's polymers business, it is possible that its polymers production has improved alongside it.
At its polymers business, sales tonnage grew year on year by 1% from 1.78m tonnes/year in the group's fiscal year ending on 30 June 2011 to 1.80m tonnes/year in 2012. Most interestingly, sales tonnage for the second half of its fiscal year 2012 was at 921,000 tonnes/year, a 5% rise compared with 880,000 tonnes/year in the first half.
However, it is still not clear what the "production records" at its local polymers business are or if some polymer grades have merely improved their production performance at the expense of others as a possibly still limited feedstock ethylene is reallocated between the grades.
There are some previous indications from both Sasol and its competitors to suggest that a hike in volumes has been predominant for the low density polyethylene (LDPE) polymer grade, with one importing distributor suggesting Sasol has diverted most of its ethylene supply to the grade.

Sasol's competitors – the country's importers – have mostly maintained that it is relatively cost-effective for Sasol to produce LDPE, and at a time when operating profits at Sasol Polymers showed a decline of 55% in its fiscal year 2012 due to high feedstock costs, a diversion of ethylene from other grades to LDPE seems plausible.
The group's Andre de Ruyter said at Monday's analyst conference: "We are regularly conducting a comprehensive molecular assessment, placing our olefins in the most effective manner."
On 31 August, a source at Sasol confirmed: "LDPE supply has improved due to much better stability from our upstream supplier [Sasol Synfuels] and operational improvements in our own conversion plants. Our EPU5 [fifth ethylene purification unit] unit is still under construction, so the stable supply is yielded from our existing assets."
Sasol has in fact gone on to market its LDPE at what is widely confirmed as below import parity levels. In September, Sasol announced a price decrease for the third month in a row, reducing its LDPE offers from rand (R) 12,450/tonne ($1,522/tonne) in July to R11,450/tonne in September.
Meanwhile, imports rose in value. Sasol's offers are on a free delivered basis, while importers have to factor in additional shipping clearance, storage and delivery costs, as well as possible fluctuations in rand/US dollar rates.
LDPE imports have all but come to a standstill over the past few months, in stark contrast to earlier this year when Sasol's LDPE market share had been on the threshold of being adversely affected by the increasing trading presence of Qatar Petrochemical Co (QAPCO) with its new 300,000 tonnes/year LDPE-3 unit in Qatar.
At its analyst conference, Sasol was pointedly asked if it was discounting its polymer prices to move its volumes.
De Ruyter said: "In terms of discounting polymers, what we are seeing in the polymer market is the entry of importers of polymers into the South African market. We meet these competitors head on, compete with them… not only on price, we also offer a very significant… technical support service which our competitors do not, and therefore we are in fact able to charge a premium whilst still placing our volumes in the market. So no discounting to move volumes out of desperation."
Sasol is especially sensitive to pricing queries because of its longstanding anti-trust allegations. While importers suggest Sasol is discounting its LDPE prices, the company is alleged to have been selling feedstock at excessive prices.
The company said in its results: "The South African Competition Commission (the Commission) is conducting investigations into several industries in which Sasol operates… As part of its investigation into the polymer industry, the Commission has contended that the prices at which Sasol Polymers supplies propylene and polypropylene are excessive."
Sasol does not agree with the Commission's assessment and a Competition Tribunal hearing is scheduled to commence in mid-May 2013.
Meanwhile, the company reported on Monday that the operating profit from its polymers' division for the fiscal year 2012 ending on 30 June fell by 55% year on year to R716m, despite a 1% year-on-year rise in overall polymer sales volumes.
And despite the Commission's anti-trust allegations and its fall in polymers operating profit, Sasol has confirmed it has no plans to shut down its local polymers business.
De Ruyter responded to an analyst's query on whether Sasol was planning to restructure its struggling polymers business: "If by restructuring you mean shutting down some of our South African plants, that would not be in the best interest of the business and we have investigated those options and they don't make business sense at this point of time."
Constable said: "We've certainly got some capex projects coming along to help with efficiency and more sales volume." 
Sasol is aiming to spend "approximately two-thirds or 68%" of its capital investment in South Africa, and even a bit of this could be good news in ensuring the stability of its polymer feedstock production.
Upstream Sasol Synfuels "remains on track" to deliver between 7.2m and 7.4m tonnes of product, factoring in a phased shutdown, the company said.
Ramon added: "Both the EPU5 and C3 stabilisation capital projects which are expected to come on stream at the end of calendar year 2013 and 2014 respectively will improve the feedstock availability for the local business."
However, the company has decided to go ahead with its plan to divest the profitable Arya Sasol business.
Ramon said: "Although this operations contribution is significant to polymers, it remains a relatively small contributor at group level, contributing about 3% to group operating profit… we will make announcements in that regard at the appropriate time."
($1 = R8.18)

By: Cuckoo James
+44 (0) 208 652 3214

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