EDITORIAL: Why the Sinopec deal is intriguing
SA stands to be the base for the Chinese company’s African aspirations
Economic Development Minister Ebrahim Patel has now intervened several times in incoming foreign investment deals to extract public-interest conditions aimed at ensuring SA’s economy derives broader benefit from such deals.
But the latest set of public-interest conditions he has negotiated with the China Petroleum and Chemical Corporation (Sinopec), which has made a $900m bid for the 75% of Chevron’s Southern African business that the US parent put up for sale, are particularly significant — and intriguing.
The Sinopec bid, announced in March 2017, was a welcome show of foreign interest and confidence in one of SA’s more difficult industries, especially coming after Malaysian group Petronas failed in its attempt to sell its controlling stake in Engen to PetroSA a few years ago.
The public-interest commitments that Patel and Sinopec announced last week seem to signal even greater confidence by the state-owned Chinese oil major, whose acquisition of Chevron SA, if implemented, would be the single-largest acquisition by a Chinese company of a controlling interest in a major South African company.
Apart from the purchase price, Sinopec has agreed to invest R6bn to upgrade and modernise Chevron’s Cape Town refinery "with a view to establishing it as a world-class refinery". It will also set up a $15m development fund for small and black-owned businesses and will introduce and develop new black-owned fuel retailers to add to the Chevron/Caltex network. It had undertaken to increase the empowerment shareholding in Chevron SA from 25% to 29%, a statement from Patel’s office said.
And, crucially, Sinopec will make SA its regional headquarters for Africa, using it as a base to expand into the continent.
SA should be under no illusions: China’s multinationals are willing to take a very long-term view and it’s not the local market that’s the prize for them; it’s Africa. At least in Sinopec’s case, SA stands to be the base for, and beneficiary of, the Chinese company’s African aspirations. That is to be welcomed.
All of these public interest undertakings are in terms of the Competition Act, with the Competition Commission having agreed earlier in January to recommend the Sinopec deal subject to these conditions.
Of course, it’s far from a done deal because global oil trader Glencore has also made a bid for Chevron SA, essentially by getting the 25% empowerment shareholders in Chevron SA to exercise their pre-emptive right to buy the company, which they would then onsell to Glencore. But the Sinopec conditions certainly up the ante for Glencore. If it wants the deal, it will surely have to match the conditions. That suggests that if — as widely speculated — Glencore wants to get its hands on Chevron’s Cape Town refinery just so it can shut it down and use it as a storage terminal for imported fuel, it will fail.
The surprise, though, is that Sinopec is willing to invest in modernising the refinery, essentially as a contribution to getting it up to the new cleaner fuel standards (CF2) at a time when there is still no clarity over CF2. The government had planned to implement the new CF2 requirements in 2017, but the fuel-refining industry has demanded that the government find a way of funding the huge investment required to upgrade refineries to meet the new standards, possibly through a special fuel price levy.
After years of talks, there is still no progress and there are fears that refineries could ultimately close, with imports coming in to fill the cleaner fuels gap. That makes Sinopec’s R6bn undertaking particularly welcome but it raises the question: does Sinopec know something the market doesn’t?
If the government has made CF2-related promises to Sinopec, it should share those with the other local and multinational players in SA’s fuel-refining market. Going all out to attract a new foreign investor in return for concessions is well and good, but the government must be even-handed in its treatment of existing investors in the industry.