The chemicals and oils sector has yet to show any benefit from the upswing in the commodities cycle.
As Sasol noted with its half-year results to end-December, margins on many of the bulk chemicals remained tight. Much the same applied to refining margins in its liquid fuels activities.
Though prices of crude oil have been stronger than most analysts expected, particularly during the first half of this year, the benefits for Sasol compensated only partially for other problems.
The key challenge for much of the sector was the rand's relative strength over the past year. The larger listed companies operate in widely different markets, but virtually all are directly or indirectly exposed to the currency.
For Sasol, the rand is the single most important price variable. It affects the price the group receives for liquid fuels produced by its synfuel operations, its exports and the returns on its foreign activities. In the year to June 2003, exports from local operations and turnover from activities outside SA (mostly chemicals) accounted for 52% of group turnover.
Sasol, whose earnings historically have shown considerable resilience, reported a more striking setback. Its headline earnings per share fell by 19% in the 12 months to June last year. In the six months to December 2003, they fell 50%. In the interims, CE Pieter Cox again cited the rand, which on average was 29% stronger than in the comparable period a year earlier.
Energy Africa, a company involved in oil exploration and production, differs as its business is entirely US dollar-based. Its activities are all offshore and it reports in dollars. In theory, its net asset value, cash flows and rand valuations should be boosted by the recent strength in the oil price.
However, its ultimate parent, Malaysian state oil company Petronas, wants to sell its controlling stake. In April this year the London-listed Tullow Oil said it would offer US$500m for 100% of Energy Africa. The exchange rate of about R6,80 results in an effective buyout price for shareholders of less than R35/share, below the 4 375c/share Petronas offered when it sought - unsuccessfully - to delist the company in October 2002.
AECI is exposed to the rand on at least two fronts. Its speciality fibres division, SA Nylon Spinners, is an exporter and has a factory in the US. Its mining solutions operations, which make explosives and initiating systems, depend heavily on demand from the mining sector. The firm currency has forced local mines to curb capital spending and new projects where possible.
Afrox, whose core businesses are industrial gases and welding, is also an exporter. However, it has gained from its association with its parent, UK-based BOC Group, which has global activities and has designated the SA company a significant player in its global strategy.
In the local market, Afrox has widely diversified its customer base. It has also benefited from innovation and its success in developing new products and markets.
Fertiliser producer Omnia, too, has sought to develop a business that differs from the typical commodity chemicals model. It, too, has focused on innovation, speciality chemicals and customised products. At the same time, it has expanded its exports.
It did well in the year to March 2003, with revenues up 25% and headline EPS rising 122%. But this was followed by a 46% slide in EPS in the half-year to September, blamed on the strong rand, exchange losses and adverse grain market conditions.
Several significant deals occurred in the sector in the past year, and more are planned, aside from the likely delisting of Energy Africa.
Afrox sold its listed health-care subsidiary, AHealth, in an empowerment deal valued at R3,1bn. Net proceeds were to be paid out to shareholders.
There was another delisting when AECI bought out minorities in speciality chemicals company Chemical Services (Chemserve), which had long produced excellent returns for shareholders. AECI wants to infuse Chemserve's "performance culture" across the group. It has already gained from Chemserve's management approach: Lex van Vucht, who retired last year as group CE and who led AECI's revival a few years ago, was previously CE of Chemserve. Schalk Engelbrecht, who now runs AECI, is another ex-CE of Chemserve.
In April this year, AECI said it would sell 25,1% of its explosives business to an empowerment consortium led by Tiso Group, for R401m. Given that customers in the mining industry will be evaluating their suppliers' empowerment credentials, this should be an important strategic move.
Sasol has said it is considering an empowerment deal, though agreement and details have yet to be finalised. However, this deal would lead to a major restructuring of interests in the energy sector.
Talks were being held with Petronas about a possible partnership for their respective liquid fuels interests in SA. Aside from its synfuel plants, Sasol has a 64% stake in the Natref crude oil refinery and a presence in the retail market. Petronas owns 70% of the unlisted Engen, with Worldwide African Investments holding the other 30%. Engen has a refinery in Durban, has about a 27% share of the retail fuel market and (for now) controls Energy Africa.
