Our external operating context
The external market environment continues to have an impact on our ability to create stakeholder value. Sasol's challenging operating environment persisted in 2018, with financial market volatility, geopolitical tensions and operational challenges all influencing activity. Geopolitical tensions, which included escalating trade tensions between the US and its trading partners - particularly China, as well as Middle East conflicts, contributed to uncertainties in the oil and financial markets. Emerging market sentiment, domestic political developments and weak business and consumer confidence continued to weigh on South Africa's economic performance in 2018.
Improved economic growth and volatile currencies
The global economy grew by about 3,8% in calendar 2017, a marked improvement on the 3,2% in 2016. US economic growth accelerated to 2,2% from 1,6%. In the Eurozone, growth was 2,5% from 1,8% previously. Among emerging markets, China and India expanded by 6,9% and 6,3% respectively. South Africa’s economic growth recovered to 1,3% from 0,6% in 2016 as agricultural conditions improved. During 2018, the rand/US dollar exchange rate averaged R12,85/US$ compared to R13,61/US$ in 2017. The rand/US dollar was volatile, impacted mainly by domestic political developments. Markets reacted positively to a South African leadership change, contributing to a significant strengthening of the rand from December 2017.
How we responded
Despite the improvement in demand conditions, operating challenges and rand/US dollar exchange rate strength, there were limited gains in our revenue, margins and earnings. Sasol remains focused on delivering on our Continuous Improvement objectives, and prudently managed our balance sheet and cash flows and increased our hedging activities to create headroom on the balance sheet.
The global outlook remains favourable, with strong growth expected in calendar 2018 and into 2019, but a number of uncertainties remain. These include an escalation in trade tensions and the return of financial market turbulence, the extent, timing and pace of US interest rate normalisation, the durability of US tax and expenditure measures, the sustainability of the global commodity cycle upturn and challenged bank balance sheets in some countries.
Real GDP growth
Structural shifts in global commodity prices
The average oil price was $13,85/bbl higher than the US$49,77/bbl average in the 2017 financial year, benefiting from the OPEC and non-OPEC production cut agreement and the resultant move of OECD inventory levels closer to the targeted 5-year average level. In-May the price rally to a high of US$80bbl following the US decision to withdraw from the Iranian nuclear deal and concerns about further reductions in Venezuela’s crude oil production. At the 23 June meeting OPEC and Russia decided to return to output targets set in November 2016 agreement with a focus to achieve 100% compliance compared to 152% compliance seen in May. Since December 2017, spot prices have averaged closer to the US$70/bbl mark which positively impacted our results. The crude oil price averaged US$63,62 per barrel (/bbl) for the 2018 financial year, touching a high of US$80,29/bbl, a low of US$46,53/bbl, and closing at US$77,90/bbl on 30 June 2018. This compares to an average of US$49,77/bbl for 2017.
How we responded
Our Base Chemicals businesses benefited from stronger commodity chemicals prices, the result of both stronger crude oil prices and regional market dynamics across the portfolio. Our business benefited from higher chemical US dollar prices, which improved by 12% due to higher crude oil prices and favourable conditions prevailing in certain of our Solvents markets. The market demand remained strong for most of our products, however, the impact of the stronger exchange rate offset this benefit in earnings. Our Performance Chemicals business benefited from resilient margins in our differentiated businesses. We continued to take advantage of the strong demand for our organics and inorganics products and expand our footprint in differentiated markets. Margins in our South African businesses were impacted by a stronger Rand whilst margins for our European and US specialty businesses remained strong, benefiting from robust demand and favourable market conditions.
Crude oil price volatility is expected to continue in the short term with geopolitical supply risks providing support. Increase in supply from non-OPEC, mainly US tight oil, and OPEC with the production cut agreement drawing to an end, is expected to lead to a softening of the oil price in the last part of the 2019 financial year. Significant natural gas production is expected from North American dry and associated gas plays. Infrastructure build will play a critical role in allowing gas to flow and may impact pricing in the near term. Demand for US ethane is expected to rise in the next few years as crackers come on line. In the foreseeable future, prices for oil and commodity chemicals will be driven by supply, demand, inventory fundamentals and industry improvements. Longer term, commodity chemicals will be driven mainly by oil prices.
Increasing environmental regulatory requirements
The World Business Council for Sustainable Development and United Nations Conventions are putting pressure on companies to do business differently. Stakeholders are demanding greater transparency of business sustainability risk management, particularly on climate change, water and human rights. Stricter legal regulation requires an improved environmental footprint, as do consumers demanding products that use energy more efficiently.
How we responded
We focused on improving our disclosure of sustainable and resilient business practices by aligning our reports with the United Nations Sustainable Development Goals (SDGs). We continued to acknowledge the need for reductions in global GHG emissions to avoid the severe impacts of climate change. Coupled with increased demand for secure, affordable energy, this creates significant challenges which are best met when companies, governments and society work together.
We are moving towards lower-carbon energy alternatives, building on our gas successes in Southern Africa by leveraging off our expertise to find gas, build the downstream gas economy, secure a cleaner feedstock to grow our integrated value chain, enhance regional energy security and diversify the energy mix. To inform decision-making, we take a short-, medium- and long-term view of our risks and opportunities, with the use of scenario analysis. Across our portfolio, we assess the impact of shifts in demand, changes in productivity, water availability, extreme weather events and advances in technology. Commodity price forecasts, including carbon, reflect our best view of price ranges given uncertainties in our world.
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|Macroeconomic environment||Delivering value-based growth||Environmental sustainability||Human capital management||Safety|