Sasol cuts output as Covid-19 eats into fuels and chemicals demand
Embattled chemicals and energy group Sasol reports that South Africa’s lockdown is having a significant impact on fuel demand, as well as demand for chemicals used in the mining and construction sectors. The JSE-listed group has, therefore, been forced to curtail production at certain plants.
In a statement to shareholders on April 23, Sasol said production rates at its Secunda Synfuels Operations (SSO), in Mpumalanga, had been cut by 25%.
The group also revised its full-year production forecast for SSO, warning of a decrease to between 7.3- and 7.4-million tons, based on an operating rate of 75% of capacity for the remainder of the financial year.
The drop in domestic fuel demand had also led to a decision, taken together with its partner Total, to suspend production at the Natref refinery, in the Free State.
Natref was decommissioned between April 9 and April 20 and the planned May shutdown would now proceed earlier than initially scheduled.
The decline in mining construction chemicals demand during the lockdown had resulted in the suspension of production of Sasol’s ammonia, nitric acid and chlor-vinyl plants in Sasolburg.
Demand for Sasol’s other industrial chemicals had not been significantly impacted, however, and SSO’s residual operating capacity was prioritising chemicals production for supply to domestic and export markets.
“We are proactively investigating the opportunity to conduct critical and statutory work during the current period of lower product demand at SSO, which could allow the maintenance intervention planned for September 2020 to be optimised significantly or even postponed.”
LCCP LOSS WARNING
The ramp-up of the group’s Lake Charles Chemical Project (LCCP), in Louisiana, was continuing, but Sasol dramatically lowered its earnings outlook for the plant for the 2020 financial year.
Having initially forecast LCCP earnings before interest, taxes, depreciation, and amortisation (Ebitda) of between $50-million and $100-million, the group is now warning of an Ebitda loss of between $50-million and $100-million.
Even prior to the Covid-19 pandemic the group announced several actions aimed at improving its financial sustainability, which had been knocked by major cost overruns at the LCCP and a sharp drop in oil prices, after Saudi Arabia announced in early March that it would boost production in light of a failure to reach a production deal with Russia.
Oil prices had since been undermined even further by the Covid-19 pandemic, which had slashed global demand for fuel.
Besides so-called ‘self-help’ measures to reduce costs and raise capital through the sale of assets, Sasol said it could pursue a $2-billion rights issue to help it “reset” its capital structure and reduce its $10-billion debt burden by $6-billion by the end of its 2021 financial year.
“The ongoing negative demand impact from Covid-19 requires management to consider further self-help measures,” the company said on April 23, while announcing some additional measures to cut costs.
The additional self-help measures announced included:
- a 20% to 40% reduction in directors’ fees;
- a two-part salary sacrifice for the president and CEO, which entails a donation of 33% of Fleetwood Grobler’s salary for three months from May 2020 to the Solidarity Fund set up by the South African government to support the fight against Covid-19, with a 20% salary sacrifice for the remaining five months to December 2020;
- salary sacrifices for the group executive committee and senior leadership members of 20%, and 15% for middle to junior management levels; and
- a freeze on all salary increases for 2020.
Sasol said a review of how best to position the business for sustainability in a low-oil-price environment was progressing and reported that its expanded asset disposal process had yielded “good interest”, despite market uncertainty.
“We are currently in the process of assessing the impact of lower-for-longer macroeconomic assumptions on the value of our assets ahead of the 2020 financial year-end process,” the group said, adding that details would be provided in future trading updates.