EDITORIAL: Much rests on Sasol’s bold plans

BDL

IN AN environment of doom and gloom, results from SA’s largest industrial company, Sasol, offered some rare respite this week.

And at a time when many companies in the world of commodities are cutting back on capital spending, Sasol’s reiteration this week of its commitment to spend R135bn over the next two years to expand its operations in the US and in SA was particularly welcome.

Its outgoing CEO David Constable is always one to tell a good news story, so the focus on the growth plans, and on the group’s successful efforts to cut costs, helped to steer past the fact that earnings per share increased only fractionally and that headline earnings per share were down 17%.

But with oil prices plummeting over the past year, that isn’t as bad as some others, especially in the resources sectors.

True, Sasol didn’t feel the full effect of lower global oil prices, which only really started crashing late last year — so the average oil price in the first half of its financial year was still more than $98, against $57 in the second half.

The petrochemicals giant is also more about manufacturing than mining, so hasn’t shared the pain many of SA’s resources companies have had to endure lately.

While the oil price matters to Sasol, its diversity ensures oil doesn’t matter as much as it might if chemicals and gas were not so large in the group’s mix.

Whereas miners have to spend significant capital just to maintain existing production, Sasol has the advantage that most of its capital spending is to expand its business. And it is doing that on a large scale. It has taken care to emphasise that a quarter of its capex will be on projects in SA, where its projects include a R15bn mine replacement programme.

But the real focus of the group’s expansion drive is offshore. That’s in large part because it long ago outgrew the SA market — it is the largest or often the only producer of many of the products it makes, so it runs into the competition authorities at every turn.

Add to that a difficult regulatory environment and a government that has often tried to target Sasol for windfall taxes or other developmental items, and offshore is where it was bound to go — with the market welcoming the fact that it has opted to expand in the US, where it has had an ethane cracker operation since 2001.

That operation is now being expanded to triple its output.

Five other major US producers are investing in ethane crackers too, including the likes of Dow Chemicals, reflecting the opportunity in that sector.

That should bode well for Sasol, but the fruits of its giant investment offshore will become evident only in a few years’ time.

So too will the results of the radical organisational restructuring that Mr Constable has effected in a bid to cut costs and change its culture. He announced this week that the programme had yielded savings of R2.5bn, R1bn above target, “fixing the roof while the sun was shining”, as he put it.

It certainly makes sense for groups such as this to position for tough economic times by making sure their cost structures are leaner and their managerial structures are appropriate.

It makes sense too to invest for the upturn — even though there’s often no option but to cut capex in the downturn, which leaves companies unable to take full advantage when the market turns.

So Sasol appears to be doing the right things.

The one big concern is that Mr Constable will depart before we see whether his big capex and restructuring projects were indeed the right thing to do. That will leave his successor to carry the can if it all goes wrong — but to claim the credit if it doesn’t.