Why SA’s refineries are out of action

The Sasol Natref force majeure won’t hurt consumer pockets or business profitability too badly: Wilhelm Hertzog – Portfolio Manager, Rozendal Partners

FIFI PETERS: We got news from Sasol that it has declared force majeure at its oil refinery. And that essentially means that South Africa’s refineries, all of them, are out. We have around six major ones, including the Natref refinery jointly owned by Sasol and TotalEnergies SE. And that’s where the announcement came from.

So production at the other refineries in the country have been suspended, for some time due to a string of other issues over the years. But just to discuss what Sasol’s force majeure means in the greater scheme of things I am joined by Wilhelm Hertzog – portfolio manager at Rozendal Partners. Wilhelm just, looking at Sasol’s share price today [Monday], it would indicate that this announcement wasn’t really material, specifically from a shareholder-, or an earnings point of view. Would you say that that is the case?

Read: Sasol outage means all South African oil refineries are now shut

WILHELM HERTZOG: Yes. I would say that is the case. Keep in mind, so Sasol produces annually about 55 million barrels of refined product in South Africa. Of that 55 million barrels, the bulk is actually produced as its coal-to-liquid facility at Secunda.

Its 26% interest in Natref, effective share of production of Natref is only about 18 million barrels of refined products.

And the refining margins earned by Natref historically have been far lower than that earned at Secunda. So Natref is a lower-margin operation for Sasol in South Africa and it’s also not as material in terms of size as its Secunda operation. So yes, a cessation of production like we experiencing currently for call it a month or so, is really not too material in terms of the bigger scheme.

FIFI PETERS: All right. With the share price finishing up 3.5% on the JSE today [Monday]. It has run in the past year or so to around 58%. So not a big thing for shareholders. What about for South Africans, motorists? Is this going move the dial in terms of the price that I pay for petrol at the pump?

WILHELM HERTZOG: I think it’s unlikely. I think both government and Sasol said that they don’t expect any major disruptions to the country’s fuel supplies overall. And keep in mind that South African petrol is already priced effectively at import parity, so we essentially already pay petrol prices equivalent to what it costs to import fuel. And keep in mind that even when South Africa’s refineries were all up and running, they did not, supply nearly all of the fuel consumed in South Africa.

So we have already been importing a substantial percentage of South Africa’s fuel demand for many years.

So if Natref goes down for a while, which means you have to import more refined products, yes, the refined product is expensive currently globally, but it’s not really much more expensive than we currently pay for petrol in any event. So it won’t hurt consumer pockets or business profitability too badly.

It will, of course impact South Africa’s balance of payment. So we will have to import more higher value items than we would if we are only importing undefined crude oil. So that may impact the currency longer term, but in the short term, no material impact on consumer wallets.

FIFI PETERS: And what’s the backstory again? Why was the force measure declared? Sasol spoke about the fact that there were delays getting shipments of oil coming in, and I’m just interested in what the reasons for these delays were?

WILHELM HERTZOG: To the best of my knowledge the delays are merely a manifestation of the global logistics issues that are being experienced across the world in shipping, in transportation generally. So it is usually just a case of ships not being in the right place at the right time, due to various issues, ranging from the hangover of Covid, to excess demand, to restrictions on exports from certain countries, Russian oil not being able to flow in the normal trade route that it usually did. So a whole variety of issues are causing  disruption in  global trade of amongst other things, oil. And that’s now hitting home in South Africa.

FIFI PETERS: So the Ukraine war in there as well?

WILHELM HERTZOG: Correct.

FIFI PETERS: And remind us again, why aren’t the rest of our refineries up and running in South Africa right now?

WILHELM HERTZOG: It’s a whole host of reasons. So [we’ll] go from the largest to the smallest. Sapref was historically the largest. Sapref effectively came to the end of its useful life, call it late last year. And, Sapref’s owners decided to shut it down, and in the face of having to invest in the refinery for clean fuels II too. And [as to] whether that investment will be viable … if you judge it in commercial terms, there’s a question mark around that. And then it was also damaged in the KZN flooding – keep in mind, Sapref is in Durban…

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Secunda is the second-largest producer of refined product in South Africa, that’s up and running. So that’s, that’s going on as usual.

[The] Engen facility in Durban was converted to a storage terminal also because Engen, I guess, could not make the math work in terms of investing in the facility to keep it up and running and to upgrade it for clean fuels II, which will become mandatory in South Africa in the not too distant future.

Then Natref is the fourth largest that the topic of discussion.

The Astron refinery in Cape Town has also been shut for the better part of two years now, same issue. It’s an old facility that had an explosion and also faces the prospect of having to invest.

Glencore, which is the owner of the Astron facility, has in fact come out … earlier this year saying they will reopen Astron in the second half of this year. So we’re, I guess, holding thumbs that that happens, but currently it’s closed.

And then PetroSA near Mossel Bay has run out of gas feedstock. So that’s why PetroSA is not running. So that’s really in a nutshell, the issues facing all of these facilities. PetroSA may well, get back up and running in the future if the gas fields discovered off the coast of the Southern Cape come into production, but that’ll be a year or two. So [there are] clouds hanging over many of them. Some clouds have a silver lining, but some have a thunderhead, I guess…

FIFI PETERS: Certainly, but as you said, not a big deal for shareholders of Sasol, not a big deal for us as motorists. We are not going to be paying more as a result of this. It could be problematic for our balance of payments further down the track and potentially the rand, if the situation does worsen. But Wilhelm thanks so much for the update and the details. Wilhelm Hertzog is a portfolio manager at Rozendal Partners.

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Oops – no more jet fuel !!

Force majeure: “unforeseeable circumstances that prevent someone from fulfilling a contract.” Generally understood as: a declaration of war, a disease epidemic, or a hurricane, earthquake, or other natural disaster events that fall under the legal term, “act of God.”

Explosions, floods, lack of stocks, needing maintenance, war in Europe … how strange that with all these similar conditions, if we include riots for explosions, Clicks, Shoprite and Spar are up and running all over the country. I wonder what the difference is?

In this case the force majeure is the ANC.

End of comments.

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