business review

Sasol Chemical Industries
strategic business unit

Profile    The expanded Sasol Chemical Industries (SCI) business is structured primarily around the three global focus areas of Polymers, Olefins & Surfactants and Solvents, product portfolios that represent about 66% of current sales. The South African-based nitrogenous divisions of Ammonia, SMX and Agri and the Carbo-Tar division complement these international operations. The international Schümann Sasol and Merisol joint ventures supplement these wholly owned core divisions. SCI’s extensive products include surfactants and precursors such as linear alkylbenzene and fatty alcohols; hexene and octene; ethylene and propylene; polyethylene, polypropylene and polyvinyl chloride; ammonia, nitric acid, ammonium nitrate, explosives, fertilisers and phosphoric acid; alcohols, ketones, acetates and other solvents; phenol, cresols and derivatives; waxes and waxy oils; carbon and tar products; industrial and speciality gases; chlor-alkali chemicals; mining chemicals; alkylamines; sulphur; and portfolios of various performance chemicals.

Business review  Maintaining its overall excellent track record of the last few years, SCI achieved a 37% increase in operating profit, up from R1 603 million to R2 199 million.

This achievement is especially gratifying because certain divisions had to endure greater margin pressures than in the previous year due to sustained high oil and other feedstock prices. The affected products included polymers, alpha olefins, fertilisers, commercial explosives, waxes, solvents and phenolics.

Condea accelerates strategic growth  As announced at mid-year, Sasol finalised a substantial asset and share purchase agreement with
RWE-DEA of Germany for that company’s entire chemical business, Condea, with effect from 1 March 2001. The acquisition provides a unique opportunity to achieve growth in the strategically important SCI portfolios of alpha olefins and solvents, as well as geographic diversification for the Sasol group.

More than 80% of Condea’s turnover falls in the surfactant and intermediates value chain, which fits in well with the previously stated strategy of the established Alpha Olefins division.

The acquisition catapults Sasol’s potential to a world-leading status, providing strong global market and manufacturing positions and opening up various synergistic opportunities with the established alpha olefin business. The surfactant part of Condea is being integrated with the Alpha Olefins division (now the Monomers business unit) and is to be renamed Sasol Olefins and Surfactants.

The solvents products of Condea also fit in well with the Sasol Solvents portfolio with the same focus on oxygenated solvents such as methyl ethyl ketone, ethanol and isopropanol. Synergistic benefits have already been achieved due to the close existing product overlap. The SCI structure subsequent to the acquisition is shown in the Sasol group structure on page 28.

This strategic international acquisition will also provide a hedge against movements of the international crude oil price and the rand. The reasonable price paid for Condea, together with the extractable synergy and the competitive financing put in place, will ensure that the internal Sasol hurdle rate is achieved for this acquisition.

Ownership of Condea commenced from 1 March 2001. For the four months of Sasol ownership, the sales amounted to 1864 million (annualised: 12 592 million). The earnings before interest, tax, depreciation and amortisation (EBITDA) amounted to
173 million, with the earnings before interest and tax (EBIT) amounting to 130 million. The net effect on Sasol’s earnings for this period amounted to 26 cents per share. These good results were achieved through the sustained marketing effort and some relief with lower oil prices, which affects most of the raw material input costs.

The Monomers business (formerly Sasol Alpha Olefins) advanced its strong position in key world comonomer markets in spite of the slowdown in many of the key economic regions and lower demand from some polyethylene customers. Before taking interest charges into account, the business, excluding the Condea acquisition, increased its operating profit by 38% from R242 million to R334 million. Consolidated worldwide sales, excluding Sasol Chemie but including sales to other SCI business units, increased by 55% from R840 million to R1 305 million.

The inability to achieve targeted hexene sales volumes was offset by the relative buoyancy of hexene prices. This benefit was increased as a result of the rand’s further depreciation against the US dollar. An oversupply of hexene from the second half, however, led to downward pressure on pricing.

A slight increase in worldwide hexene sales is expected for the year ahead. In the long run, Sasol Olefins and Surfactants envisages the world market for comonomers to return to growth rates of 6% to 8% a year.

The third hexene train at Secunda was commissioned in September 2000 ahead of schedule under the project management expertise of Sasol Technology. This will raise total annual hexene capacity to about 200 000 t. After analysis, Sasol now plans to bring on line a fourth production train at Secunda before the end of 2003. This train will increase total annual capacity to 250 000 t.

The fledgling octene business has posed new challenges for the Monomers business and Sasol Technology. Sales of octene to Dow plants did not meet target of 48 000 t due to reduced production. Output was eased to enable Sasol to increase octene purity to meet customer requirements. Post-shutdown start-up problems were also experienced. These problems have since been resolved and the production of higher-purity octene is being maintained at required levels.

A new 120 000 tpa plant is being built at Secunda for the production of an alcohol that will supplement the detergent-range alcohol supply of the former Condea. Engineering is nearing completion and the plant is likely to be commissioned in June 2002. Detergent alcohol sales of the Secunda production unit are expected to start contributing to operating profits during the 2003 financial year.

Sasol Polymers  Sasol Polymers’ sales of monomers, polymers, chemicals and mining reagents increased by 10% to R4 944 million, including sales to other SCI business units. Its contribution to SCI’s operating profit rose marginally by 1% to R870 million. This contribution is notable in the light of the substantially higher feedstock costs and the weakening in prices in some key markets served by Sasol Polymers’ businesses. This caused severe margin pressures. The typical historical ratio of international polymer prices to crude oil prices of about 35:1 dropped to ratios of around 20:1.

To counter the impact of higher feedstock costs, Sasol Polymers continued to improve productivity and again contained costs within inflationary levels. Productivity, measured as the average tonnage of production per employee, has doubled over the last five years. At year-end, the division’s cash fixed costs, in real terms, were almost 40% lower than five years ago.

The Vinyls business, the producer of polyvinyl chloride (PVC) resins and compounds, experienced relatively flat sales in domestic Southern African markets due to reduced converter demand. Zimbabwean customer demand, in particular, was substantially lower than in the previous year.

The reduced domestic demand was offset by the significant growth in sales to customers in South-East Asia and West Africa. Total PVC resin and compound sales volumes increased by 6%. This advance was facilitated by the record production from the vinyl chloride monomers and PVC plants.

The Polythene business contributed gratifyingly to profit as a result of continued good sales of low-density polyethylene (LDPE) and linear low-density polyethylene (LLDPE). This feat was offset by the persistence of feedstock supply problems to the Poly 2 LLDPE plant, and certain operating problems.

Consequently, the Polythene business opted strategically to withdraw from certain lower-margin sectors in a phased and responsible manner. The business has been helping the affected customers to secure alternative supplies for the polyethylene grades that are being phased out. The business has improved its service to the retained market sectors. Over the last two years, the Polythene business has been producing higher volumes of polyethylene with hexene, instead of butene, as the preferred LLDPE comonomer.

The Polypropylene business was adversely affected by the fire on the Secunda polypropylene plant in February 2000. During September 2000 the first of two extensively repaired production trains was commissioned successfully. The plant was reconstructed in record time in a world-class manner under Sasol Technology’s project management expertise.

Sasol Polymers took advantage of the opportunity to incorporate additional technology improvements into the polypropylene plant. These improvements have increased the plant’s technical capabilities and enhanced its safety features. During reconstruction, Sasol Polymers continued to fulfil all domestic and international supply contracts by procuring alternative supplies from international polypropylene suppliers. Sasol Polymers emerged from its crisis with its reputation as a reliable supplier intact.

Towards year-end, the polypropylene plant was producing at record levels in excess of design capacity.

The mining reagents operations (calcium cyanide and sodium cyanide) of the Chemicals business continued to perform well in a declining market. Mining reagent sales volumes dropped by about 9% as a result of the continuing cost pressures on many South African gold mines.

Sasol Solvents  Sasol Solvents achieved further pleasing growth in competitive international solvents markets. Consolidated operating profit rose by 84% from R273 million to R501 million. Worldwide sales, including sales to other SCI business units, increased by 74% from R1 397 million to R2 429 million. These figures exclude the four-month profit and revenue contribution from the German solvent businesses acquired with Condea. Following the Condea acquisition, Sasol Solvents’ operations and product portfolio were expanded substantially in March 2001.

The division’s restructuring into seven focused business units contributed significantly to the strategy development and business optimisation of each product. Following the Condea acquisition, these units were expanded to eight and the product portfolios refined.

The major South African and German businesses are well supported by the international offices of Sasol Chemicals Europe, Sasol Chemicals Pacific, Sasol Middle East and Sasol North America. The acquired solvents distribution operations of JLM Marketing are being incorporated into Sasol Solvents’ global sales network.

Building on the previous year’s 17% increase, Sasol Solvents increased sales volumes by 21% from 509 500 t to 617 000 t. South African export volumes to customers in almost 90 countries increased by 36% from 319 000 t to 434 000 t. Ethanol, ketones, normal-propanol and mixed C3 and C4 alcohols accounted for the bulk of the South African solvents exported.

The R270 million ethyl acetate plant at Secunda was commissioned towards year-end. The novel technology to produce 50 000 tpa of ethyl acetate from ethanol will add substantial value to the Secunda fuel alcohol. About 90% of the ethyl acetate will be exported, mostly to Europe, the Middle East and Asia-Pacific.

Future growth will be realised once the n-butanol plant is commissioned at Sasolburg at the end of 2002. The Sasol board has approved a US$140 million budget to construct this plant. It will use competitive technology licensed from Mitsubishi Chemical Corporation of Japan to manufacture 150 000 t of n-butanol and 15 000 t a year of iso-butanol. Subject to final board approval, Sasol and Mitsubishi plan to develop a joint-venture complex at Sasolburg to produce acrylic acid, glacial acrylic acid, ethyl acrylate and butyl acrylate.

Nitrogenous businesses  SCI’s nitrogenous divisions had mixed fortunes due to the sharp increase in world ammonia prices and the inability of in-house users to recover this increase in domestic selling prices. Sasol Ammonia posted a much-improved profit on the strength of this price increase, stable operations and record production of
303 804 t. The division increased turnover for the sale of ammonia, speciality gases and inorganic chemicals (mostly sulphur) by 90% to R1 265 million. Ammonia contributed R1 041 million. Gases and inorganics contributed R224 million.

Robust sulphur sales are expected to continue rising in line with Sasol’s environmental initiatives to recover more of the sulphur derived from processing coal and oil. The new Secunda sulphur granulation plant is contributing to improved margins for the inorganics business. Sasol Ammonia will pursue new opportunities to increase high-purity hydrogen sales in the year ahead to achieve further growth.

Assisted by higher volumes and prices, Sasol Agri increased sales by 61% to a record R1 902 million. Despite strong growth, the division’s pre-tax profit did not meet expectations because of intense competition in the Southern African bulk fertiliser markets, among other factors. Only a small percentage of the feedstock increases could be passed on to customers, thereby squeezing margins.

South African farmers, unlike international counterparts, receive virtually no state financial assistance and have amassed debts of R30 billion. Credit management in domestic and other African markets experienced severe pressure. Sasol Agri is launching a counter initiative to minimise credit risk and raise productivity and streamline logistics.

Recent productivity and logistical gains will be advanced in the year ahead. Sasol Agri intends to increase its marketing of value-added products and services to higher-margin niche markets. Strategic expenditure on debottlenecking production capacity and new technology to enhance product quality and range at Secunda are also expected to unlock substantial new value.

The liquid fertiliser business is reaping dividends. The production facilities for liquid fertilisers are concentrated in high-yield agricultural areas, where mechanised farming is preferred over labour-intensive methods. A broader liquid fertilisers portfolio is being reviewed. As the more innovative South African farmers introduce high-tech farming methods, Sasol Agri is well placed to grow its prescription mixing, blending and liquid fertiliser portfolio.

Significant growth in the sales of all Sasol SMX businesses resulted in a 50% increase in sales to R1 175 million. The sharp increases in the ammonia and fuel feedstock prices could not be recovered in higher sales prices, resulting in a disappointing profit performance. Intense competition in local and international markets for explosives and related accessories is constraining margins. South African and international mines remain pressured to contain costs in highly competitive markets.

Ensign Bickford (South Africa), the local joint venture with Ensign Bickford Company of the USA, performed well and ended the year with a pleasing profit.

Sasol SMX is building a new foundation upon which to
re-establish long-term profitability. The division is implementing focused initiatives to improve customer service, raise productivity, contain costs, increase product value and streamline operations. Offshore joint ventures in explosives also suffered severe margin pressure because of high ammonia costs. Sasol DHB Holdings in the USA improved operations and posted a modest profit. The other USA joint venture, Sasol Southwest Energy, also had to contend with a downturn in copper mining, but again posted a profit.

The high-tech electronic initiation systems producer, Sasol Mining Initiators (SMI), approached cash breakeven. Inconsistent product performance resulted in a delay in the introduction of this new product in opencast mines. An improved product was introduced successfully in the opencast market. Sales volumes for the underground mining product have been growing steadily and led to an investment into an automated manufacturing facility.

Other operations  Sasol Carbo-Tar performed well by maintaining its pursuit of higher-value niche markets for carbon, reductants and tar products. Sales increased by 53% to R527 million. More than 55% of black products sales was generated internationally. The division more than doubled profit, contributing R146 million to SCI’s operating profits.

This feat was achieved on the strength of greater sales and improved efficiencies, higher oil prices and a weaker rand. Sales volumes increased by 37% to 487 916 t. The division also reprocessed a greater volume of medium-temperature pitches and tar into higher-value white products for other businesses. Black-product volume increased by 21% to 260 858 t.

Sasol Infrachem, in keeping with its positive trend of recent years, maintained stable operations at Sasolburg for the production and supply of synthesis gas, industrial gas, utilities and on-site services. The division increased sales by 16% to R1 845 million. Several synthesis gas production records were bettered.

Annual syngas volumes have increased by 16% since 1996. Annual productivity, measured as gas production per employee, increased by almost 44% from
23,52 gigajoules to 33,81 gigajoules during the year. The merging of the Sasol Midland site, and the Sasol One site, has enabled annual fixed-cost savings of R20 million.

Schümann Sasol International, the global wax group, increased operating profit by 163%. Sales increased by 10% from 1456 million to 1500 million. Rand sales grew by 17% from R2 893 million to R3 395 million. The group maintained annual sales volumes at 760 000 t. Competition in Europe remained intense. Feedstock prices rose considerably more than the average 8% product price increase achieved. The euro’s weakening against the US dollar exacerbated these factors.

Schümann Sasol South Africa had a successful year. Despite the global economic slowdown, export volumes were maintained. The domestic wax market’s improved conditions enabled a 3% rise in sales volumes and a 13% sales increase. Moore & Munger, the US subsidiary, maintained its strong position, supported by the Pass Christian blending plant’s increased business activities. Market presence was strengthened further in Latin America and Asia.

The international Merisol phenolics joint venture increased sales by 4% from
US$135 million to US$140 million. Rand sales rose by 27% to R1 073 million. Operating profit was even with last year’s results. Sales volumes, however, dropped by 5% from 116 000 t to 110 000 t as a result of three main factors: North America’s economic slowdown; lacklustre demand from computer manufacturers; and lower phenol production. Higher phenol prices and a sales mix consisting of a greater percentage of higher-value products increased sales.

The growth-focused capital programme included the successful completion of the project to increase the recovery of unrefined phenolic material at Secunda. Through the new joint venture with Japan’s Sumitomo Chemical Company, Sumika-Merisol RSA, Merisol commenced construction of the Sasolburg ortho-cresol novolac plant. The facility will be commissioned in October 2001. The group started to build its new synthetic ortho-cresol plant at Houston, Texas.

Despite continuing efforts to optimise production, contain costs, support customers and maintain its reputation as reliable supplier of high-grade alkylamines, African Amines posted a reduced contribution to operating profit. Margins were squeezed as a result of higher ammonia, acetone and other feedstock prices. African Amines continues to build a strong export business in Australia and South America.

Sasol Fibres experienced its most difficult trading year. The price of its main feedstock, acrylonitrile, rose by 233% and then plummeted, throwing this out of sync with fibre prices. This impacted severely on profit margins. A yield increase of almost 95% and sustainable cost-saving projects of R14,5 million were implemented. This was achieved by reducing utility usage and better managing resources.

The company exported 73% of production to more than 25 countries; the South African market contracted by 40%.

Prospects  SCI is set to benefit from the softening of oil prices and therefore increasing margins. This advantage, however, must be seen against the present nervousness about American, European and Japanese growth projections. The continued integration of Condea will remain high on the agenda with particular emphasis on achieving maximum synergy. Everything is well set for Sasol Chemie (the former Condea operations) to achieve the target of being earnings-neutral or better by the end of the 2002 financial year.

Sasol Solvents can, again, look forward to substantial volume increases through the ramp up of the ethyl acetate plant, while Sasol Polymers will be looking forward to the successful launch of the polymer ventures in Malaysia. The outlook for both the fertiliser and explosives industries, however, continues to be uncertain and industry rationalisation seems inevitable.