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Sasol chairman's annual address
Weathering the rand storm
Sasol prides itself on its robust performance with regards to safety. We therefore deeply regret the loss of life in some industrial accidents recently, the most notable of which was the explosion at the ethylene plant at Secunda on 1 September 2004. We again offer our sincere condolences to the loved ones of the deceased and to those who were injured.
Positive interventions soften fiscal and market impacts
In my chairman`s statement of 2003, I informed Sasol stakeholders that if the prevailing strength of the rand was to persist, it would be unlikely that rand earnings in the forthcoming financial year (2004) would match those of the previous year. In this financial year, high international oil prices and the improvement of some US dollar-based chemical product margins somewhat reduced the serious unfavourable impact that the further strengthening of the rand had on earnings and cash flow. The average rand-to-US dollar exchange rate strengthened by about 24% and resulted in net adverse currency effects amounting to R6bn relative to the previous financial year. Productivity improvement and cost reduction initiatives have advanced successfully in most businesses in recent years. In these tough business conditions, however, the initiative by management to intervene and call for further cost reductions in all businesses was timely and necessary. The benefit of this intervention contributed meaningfully to earnings and much of it will be sustained into the future. Attributable earnings of R5.9bn was 24% lower than in the previous year. It is note-worthy that earnings in the second half of the year was 39% higher than in the first half, mainly because of the benefit of higher oil prices, cost reductions and improved margins in some chemical businesses. Earnings per share dropped by 24% from 1 283c to 974c. The total dividend declared for the year of 450c is equal to the dividend of the previous year. Gearing at 30 June 2004 was 41% and within the group`s target range. Last year we reported that various businesses in the chemical portfolio were being scrutinised and reviewed to ensure strategic fit and the ability to meet financial targets on a sustainable basis. Consequently, a number of businesses were closed or sold as this process of optimisation and increasing focus on core activities advanced. The review process continues.
The acrylates complex at Sasolburg was commissioned and is expected to be an important contributor to future group earnings. The Mozambique Natural Gas Project was completed by year-end when the autothermal reformers at Sasolburg were commissioned.
The feedstock requirements of our chemical plants at Sasolburg provide the anchor demand for this project. Bringing this stranded gas to Southern African markets is a major contribution to the development of the region. Monetising the gas will have a material positive impact on Mozambique`s economy and is a welcome addition to the group`s commercial gas activities. Notable projects authorised by the board during the year included Project Turbo - the fuel enhancement and polymer expansion project in South Africa, as well as a world-scale ethylene and polymer project in Iran (Arya Sasol Polymers) in partnership with the National Petrochemical Company of that country.
Unity among business associations
Last year, I encouraged South African business leaders to pursue unification of our many business chambers, associations and related entities so that business collectively could play its rightful role in influencing the economic transformation and growth of our great country. It is therefore pleasing that business organisations are being unified under Business South Africa (BUSA). All role players are now obliged to ensure that this new association of business leadership grows into an effective force in order to serve the interests of the country`s business community and thereby the economy at large. Business has such a key role to play and much to contribute as the transformation processes of our country advance. It is therefore imperative that strategic views and a long-term vision prevail over short-term cost-driven approaches and that businesses throughout the country take heed of the need to promote and protect business interests and offer the required financial support to ensure the success of the unification.
Black economic empowerment (BEE)
During the year, important announcements were made about two major BEE initiatives in our liquid fuels and mining businesses. These are high-performing and core businesses at Sasol. Our Main Supply Agreements with other leading fuel companies expired at the end of 2003, thereby enabling Sasol to accelerate plans to introduce BEE ownership into our liquid fuels business. This will be a substantial transaction and we wish to achieve a suitable combination of capacity building - with the associated need in our technically oriented businesses for competence, experience and skills - and broad-based BEE equity participation. We are advancing discussions with a high-profile consortium of black business leaders who will both provide the necessary skills and arrange the required broad-based owners` representation. The latter is essential as far as we are concerned and we are determined to achieve it. It is envisaged that any resultant ownership structure will probably migrate into the merged liquid fuels entity of Sasol Oil and Engen, assuming this exciting planned merger materialises and is approved by South Africa’s competition authorities. This will result in this BEE venture becoming one of the most substantial and sustainable empowerment partnerships in the South African oil and fuels industry.
The highly successful BEE liquid fuels retailing venture, Exel, was integrated into Sasol Oil. Exel shareholders enjoyed substantial capital growth from their investment in this Sasol initiated enterprise and some shareholders have been offered a position in the larger liquid fuels business mentioned above. We also announced the signing of an MOU with Eyesizwe Coal in terms of this empowerment company’s expected equity participation in Sasol Mining. Likewise, this will be a substantial transaction and a meaningful partnership between two competent and successful mining companies. An equity empowerment opportunity in our chemicals portfolio is also being evaluated. Our Mozambique Natural Gas Project, which has been successfully completed, also presents potentially significant empowerment opportunities. The South African and Mozambican governments together have an option on a 50% equity position in the gas pipeline which, if not retained by them, can contractually be sold to BEE enterprises. This could result in the entire natural gas value-chain having significant BEE ownership in the future. We have made pleasing progress and have significantly increased the quantum and value of goods and services procured from empowered suppliers. In various instances, our businesses have coached and nurtured suppliers in order to ensure both their sustainability and ability to meet our stringent quality standards. We run complex and potentially hazardous plants and it is essential that at all times our quality standards are maintained in the interests of our employees, contractors, customers and surrounding communities. Our commitment to these transformation processes is high and we fully understand the crucial role we play in them from a national perspective. We appreciate that the future stability of South Africa is dependent, inter alia, on historically disadvantaged South Africans participating on a widely representative basis in the economy. Succeeding with these transformation processes is clearly a strategic imperative and, as a patriotic South African company, we promote their merits both locally and internationally. We at Sasol believe firmly in the future of Southern Africa and, from an investment perspective, have given ample tangible expression of our confidence by spending R21bn on capital projects in the region over the last three years. It is noteworthy that the foreign shareholding in Sasol increased by 20% during the year, to 30%. This underscores the strong foreign interest in Sasol and the confidence held internationally in our management, technologies, operating skills and strategic intent. It also confirms the fine efforts made by management to convince foreigners of the merits of investing in South Africa. I offered the view last year that changes in ownership are profound events in business, especially when they are directed by legislation, rather than being a consequence of market forces. In addition to investments being made by ourselves and other South African-based companies, our country needs direct foreign investment to boost job creation. While we South Africans understand and support the sense and motive for our transformation processes, we should appreciate that from a foreign investor’s perspective it is important that certainty prevails and these processes are finalised expeditiously if major investments are to be made.
When offering views on empowerment matters it is also necessary to comment on progress relating to employment equity. Sasol is a technology-oriented and complex business and it relies on substantial technical skills for its success. Window dressing, when it comes to employment equity, does not work in our environment. As a result, we have established specific plans to ensure we succeed and play a responsible and sustainable role in advancing historically disadvantaged South Africans. A few years ago, our investment in black bursary holders and leadership development programmes was increased significantly with a longer-term view to meeting our obligations. We set ourselves a target of having 40% of our leadership positions filled by people from the designated groups by mid-2005, and I am pleased to say we should meet that target. We are conscious that this target can only be seen as an interim one and that this journey will continue. We also aspire to improving our position at the more senior levels of leadership. Recent interventions in this regard have had positive results and, generally, were well received by our employees throughout the group.
Currency and growth
We congratulate Tito Mboweni on his reappointment as the Governor of the South African Reserve Bank and compliment him on his achievements during his first term, particularly with respect to inflation control. We fully agree that inflation must be kept under control and managed between a lower and an upper limit. In this regard I would like to repeat the view expressed last year that the lower end (3%) of the targeted inflation range is probably too low and that the target should rather be toward the upper end (6%) of the range. Moreover, we emphasise again the importance of pursuing this target in a holistic manner that takes cognisance of other important priorities, notably the overriding need we have in South Africa to fight poverty and crime through job creation. Not many currency experts forecast last year that the rand would strengthen from R7.50 : USD1.00 on 30 June 2003 to R6,21 : USD1.00 a year later on 30 June 2004. Some economists feel that the rand is overvalued at these levels, although its current strength can probably be attributed to many factors, including our continuing high real interest rates, relative to our trading partners. A significant volume of South African exports cannot be sustained at the current levels of the rand, notably - for example - in our mining and agricultural industries, and grave economic consequences and social hardships may transpire should it strengthen even further. We know within Sasol the extent to which we have had to reduce costs and, in some instances also jobs, in our response to the strong currency and in our endeavours to reduce its punishing impact on our earnings. Our cost reduction efforts have also resulted in job losses at some of our suppliers.
South Africa`s relatively high interest rates make investing in production assets costly and also make our money market an overly attractive destination for surplus short-term overseas funds. In order to stimulate investment and regain some of the competitiveness of the South African export industry, it is essential that the interest rate differential between South Africa and the developed world is reduced. In this regard, we welcome the recent 0.5% reduction in the interest rate. This was a bold move and we encourage the Reserve Bank to consider further easing of the rate in the near future should inflation remain at acceptable levels and the rand remains strong. Any temptation to follow the global interest rate cycle, which is currently on the rise, should be avoided at this stage. It is important to stress that we are proposing a weaker and stable rand, and not a weak rand, and we appeal accordingly for a policy approach that will better take other key needs of our economy into account.
A sustainable business philosophy
Increasingly, and correctly, businesses worldwide are embracing the attitudes, principles and operating practices of sustainability and, commendably, leading South African companies are at the forefront of this new-millennium shift. The introduction earlier this year of the JSE Securities Exchange Socially Responsible Investment (SRI) Index is welcomed and I am pleased that Sasol featured successfully in it. I am satisfied with the progress of wide-ranging initiatives by the board and management in the areas of people development, governance and compliance, environmental management, empowerment and social investment. The independent nature of audits and reviews such as the JSE Securities Exchange SRI Index and the Dow-Jones Sustainability Index, in which the group also participates and has achieved pleasing progress, have an important role in the measurement of enterprise performance in these key aspects of business.
Profit outlook
We now have a few years of history to confirm that oil prices have repositioned and moved from the average range of USD18.00 - USD20.00 a barrel that prevailed in the 1990s to a long-term level closer to USD25.00 a barrel. Overall, this is obviously beneficial to Sasol, although detrimental to the margins of some of our chemical products. In the year ahead it is expected that oil prices will remain relatively high, although their vulnerability to socio-political events makes forecasting risky. Likewise, it is not easy to forecast currency movements because even leading currencies have shown how susceptible they are to major institutional interventions. Nevertheless, it will be prudent to plan and run the company on the basis that rand strength will continue. The substantial improvement in earnings during the second half of the year under review should maintain momentum, thereby probably resulting in a material increase in earnings in the new financial year. This outlook should be viewed, however, in the context of the views expressed above with respect to oil prices and currencies. This profit outlook has not been reviewed by our auditors. In pursuit of our growth ambitions, the group is expected to reach a peak of investment spending over the next three years, especially because of the capital cost of Project Turbo and the initial rollout of our GTL plans. Our stakeholders know that we have a self-imposed gearing limit of 50%, which was authorised last year by the board after careful deliberation. In reviewing the capital expenditure forecast the board is satisfied that, while the funding capability of the group may be stretched to this limit, the balance sheet itself will not be stressed and its integrity and strength will be maintained.
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Sasol employees go on strike
Sasol employees belonging to Solidarity Union today embarked on a protected strike at Secunda this morning. They were protesting against the company`s wage increase offer of 6.5% instead of the 10% that the workers are demanding. Solidarity was also unhappy that the company was not involving organised labour in the internal investigation into an explosion that occurred at the Secunda plant on September 1where Seven people were killed and more than 100 injured.
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Blast kills five and injures 142 people at Sasol
Five people have died and 142 other injured in an explosion at Sasol`s ethylene plant at Secunda this morning. The plant was undergoing planned maintenance and there were several contractors in it when the blast occurred.
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| Closing price data source: JSE Ltd. All other statistics calculated by ProfileData. |
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