A reset for Sasol
Some say that Opec is effectively dead. If that is the case, we asked Sasol CEO Fleetwood Grobler whether it will fundamentally change Sasol’s business case
A high-stakes game of chicken between Saudi Arabia and Russia is over with this week’s deal, under Opec’s banner, to cut 9.7-million barrels of oil production per day in May and June. The cuts are the biggest in history, but there’s still doubt that it will compensate for the extraordinary collapse in demand — which traders reckon to be double the size of Opec’s production cuts — because of the Covid-19 lockdowns. Still, there’s more support for the oil price, which is critical for SA petrochemicals player Sasol, whose shares have doubled since skidding to their lows of under R30 just two weeks ago. But some say that Opec is effectively dead. If that is the case, we asked Sasol CEO Fleetwood Grobler whether it will fundamentally change Sasol’s business case.
FG: You know, markets are effective in the end and markets can’t withstand supplying and pumping oil at a negative value or at $10 a barrel.
So I think there will be a balance coming in; the question is the timing and how long lockdowns will last.
But there will be sanity in the market to come back to regulate [it] and say: you can’t produce goods where it’s below your cost of production and you burn cash.
I think all of those oil-producing countries will come to that realisation very quickly because money speaks.
And it will be self-regulating, to say: OK, now we need to do something and the first thing to do is cut back.
In February, we were in a world of between $50-$60 oil [prices], in March it changed drastically to a world where oil is maybe $20-$30, and once the impact of Covid-19 and supply-demand works through, we will probably not recalibrate [back] to $50-$60, but maybe it’s a world of $40-$50, which is a sustainable price.
In that world we will have to be fitter and be able to still be relevant, and that’s what we’re preparing ourselves for.
Are you saying that Sasol is still a relevant business in both synfuels and chemicals, where oil is abundant and very cheap? Will Sasol as it exists now still be here in 10 years?
FG: That’s the question. Will we be able to weather, for the next five years, an oil price at $20? The answer is no.
What I’m asking is whether it would render parts of the business obsolete?
FG: There are two lenses in this. And the one lens is outside SA, where we’ve got chemical and production facilities that produce into an array of industrial, medical, home-care, laundry and [other] applications — there we would normalise and the world will go on and that will stay relevant.
The pressure is really on the SA value chain that is based on the facilities that we’ve got here based on coal.
Now, if you ask me how it will play out in the long term, just remember two things. The one is that the world needs more energy. There are more people, and the need for energy is not going to fall away, and there’s no way that renewables will be stepping into the space of energy demand growth given population growth. So I think that is one specific anchor. Energy, whether in the form of renewables, gas, or oil — is needed for us to survive in the next 10 years and there is growth still.
The second thing is, everyone in this industry is under the same pressure. We are not under more pressure than some of the big guys. We are just aggravated because we are in a Fischer–Tropsch coal value chain. But if we get ourselves further reset we would still be relevant. That’s the quest of any company: how do you survive, what do you need to do. And we will come up with ways to live in that world.
You must be relieved that the share price has recovered somewhat. Would you now go ahead with a rights issue?
FG: From a management point of view the share price will be what it is. What we control is the plans we’ve announced.
So we will do the self-help measures of about $2bn, which we as management need to deliver, and we are making solid plans against that.
The second thing we said is we will have to dispose of assets and that has to be between $2bn and $4bn — if it’s only $2bn we need to consider a rights issue, but if we deliver more [through] the disposals we will do fewer or maybe zero rights issues. That’s our first prize and we are working day and night to avert a rights issue, so that is the way we think about it. I’ve got no reason to believe we will not be successful.
How do you remain calm in this market?
FG: Of course there is agony in terms of how we got ourselves into this position and we see the results [of that] in the destruction of value of our shareholders and that’s the sad part. But the point is, you can feel sorry for yourself but that won’t help to get it back on track.
In your update last week you said Sasol and Total SA had decided to suspend production at oil refinery Natref until further notice. Besides the impact that will have on fuel volumes, is a full shutdown going to be costly and logistically complex?
FG: Every two years there’s a scheduled turnaround and then you go into shutdown mode and start up again after the work has been done.
So it’s not a big deal, it’s well practised. But we can’t use this opportunity to do some of the maintenance work because you need to plan for things you want to replace: equipment, catalysts, process materials et cetera. To shut it down takes a couple of days and to get it back will take around a week to 10 days.
People may worry about security of supply and if you can’t start it up again what’s going to happen? But there’s adequate inventory.
So, for example, at OR Tambo, all their facilities are full, we’ve got another 20 days’ storage that’s full in Sasolburg, so it’s well covered and there’s no risk that we won’t be able to supply demand should that come back after lockdown.
Clearly there’s been a big cut in demand for synfuels, but according to your update, you haven’t seen a reduction in demand for chemicals. Why is that and where is the demand coming from?
FG: In SA we have a number of markets that chemicals go into: we’ve got some explosives and fertilisers [businesses]; of course some of the nonessential mining activity has been halted during lockdown so there is a demand impact there, but, for example, coal mining continues and we still supply explosives into these industries.
We’re still doing fertilisers, so the lockdown isn’t systemically going to impact that.
On the polymers side — polypropylene and polyethylene — there are still essential industries that continue to produce materials, for example in use for packaging for food, so we have seen a slowdown in demand but we can up our export focus, and there is still a very resilient demand [there].
In industrial solvents there is big demand for [products] that go into sanitisation and disinfectants, so there we aren’t impacted at all. In fact we’ve seen an almost eightfold increase in demand from February to March, it’s really big so we can prioritise that to supply locally.
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