For companies in the chemicals & oils sector, the strong rand over the past year continued to create a difficult trading background.
Profit margins have been squeezed and in some cases earnings fell. Sasol, the giant in this sector, reported a 24% decline in attributable earnings in the year to June 2004.
However, cost-cutting, restructuring of operations and, in some areas, heavy investment in new businesses have helped to ease the effects of the strong currency or to strengthen the recovery prospects. Most of these companies have also gained from exposure to a buoyant domestic economy.
Sasol is benefiting from all these factors, as well as the upswing in global energy and commodity prices. After its decline in the 2004 financial year, the group's headline earnings per share (EPS) rose by 61% in the six months to December.
Important reasons for its recovery included higher average oil prices - which partly offset adverse currency movements - better refining margins in its liquid fuels business and big improvements in its chemicals performance, helped by higher product prices in some areas.
This creates a more positive background for the new senior management team, which takes office on July 1. Pat Davies succeeds Pieter Cox as CE and financial director Trevor Munday becomes deputy CE. Cox becomes chairman.
But the new team faces considerable challenges. When the new appointments were announced, the group came under fire for its perceived lack of progress with black economic empowerment. Last year the Public Investment Commissioners (PIC), a major shareholder, publicly criticised the composition of Sasol's board.
Some of the group's existing operations are struggling. In particular, the olefins and surfactants business, which includes much of the old Condea chemicals business acquired for euro 1,3bn in 2000, is losing money.
It made an operating loss of R67m in the year to June and lost another R131m in the half year to December. Margins were squeezed by rising costs of oil-based feedstocks, with limited scope to increase prices. Management has reorganised or sold some of these businesses.
The bigger challenges, as well as the potential excitement in the share, lie in the group's ambitious capital projects and its new international businesses. Spending is expected to peak over the next three years, lifting the balance sheet's gearing close to 50%, unusually high for this group. The investments will significantly expand the group's production of both petrochemicals and energy products.
Two important new plants are due to be commissioned next March. One is a polymers plant in Iran, being developed in partnership with the National Petroleum Co of Iran. The other is the Oryx gas-to-liquids (GTL) plant in Qatar, being built in a joint venture with US oil major Chevron Texaco.
Another GTL plant is being built in Escravos, in Nigeria, also as a JV with Chevron Texaco, to be commissioned in October 2008.
Cox said last year that through its JV with Chevron Texaco, the group is "exploring opportunities" to create an installed GTL capacity of 500 000 barrels/day by 2013, of which Sasol's share will be about 260 000 barrels/day. That's two-thirds more than Sasol's existing synfuels capacity of 160 000 barrels/day.
Elsewhere in the sector, Afrox is focusing on growth in its core industrial gases division, having disposed of its health-care activities after protracted regulatory and legal proceedings.
Earlier this year the company said it had more than 40 growth projects, including a R100m re-engineering of its gases operations centre in Germiston.
CE Rick Hogben said these projects covered organic growth as well as greenfields projects. Afrox has expanded its service-related businesses, which account for a large proportion of revenue and profits, reducing dependency on the engineering sector and fixed investment-related markets.
In part, this group is capitalising on its relationship with its controlling shareholder, UK-based BOC. It is building its exports and is active in 13 African countries.
AECI suffered from the rand's strength in certain areas, particularly SA Nylon Spinners (Sans), a US dollar-based business. Earlier restructuring, including a R60m cut in fixed costs, eased the effects but in the year to December Sans' operating profit dwindled to R3m from R22m in 2003.
Profit also fell sharply in the mining solutions division because of difficult market conditions in the mining sector and competition from low-cost imports from China. However, there was compensation from good performances in other areas.
The speciality chemicals company Chemical Services - now wholly owned by AECI and its biggest profit contributor - gained from improved margins and acquisitions. The paints supplier, Dulux, is benefiting from strong domestic demand.
But the big boost to AECI's profits came from Heartland, its property division, which is selling and developing surplus land. Overall, however, group CE Schalk Engelbrecht says many performance criteria support the group's repositioning as a supplier to niche markets.
Omnia, with a market capitalisation of R1,85bn in end-March, is growing in both size and complexity. Its turnover in the six months to September jumped by 73% to R2bn, and its operating profit almost doubled to R137,9m from the previous interim.
This was the first six-month period reflecting the acquisition of Prochem, a more diversified chemicals supplier.
A few years ago, Omnia was involved mainly in the agricultural sector and its financial performance tended to be seasonal and volatile.
It now provides customised solutions in the agricultural, mining and chemical markets. That should lead to more consistent earnings, but may also produce greater challenges for management in coping with the expansion.
