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Sasol has written down the value of its American chemicals business, particularly its ethane value chain, by R45.5 billion.
This marks a culmination of a decade of poor capital allocation and execution at its US business, with Sasol sinking over R120 billion into its American business so far.
Sasol’s American venture began with a $8.1 billion investment in an ethane cracker and derivatives complex at Lake Charles in Louisiana.
At historic foreign exchange rates, this was an R85 billion investment in creating Sasol’s Lake Charles Chemical Project (LCCP).
Sasol had long been trying to diversify its income away from coal and oil as investors pressured the company to meet environmental targets.
“The LCCP consists of a world-scale 1.5 million ton per year ethane cracker and six downstream chemical units and is currently under construction near Lake Charles, Louisiana in the USA, adjacent to Sasol’s existing chemical operations,” the company said at the time.
“Once commissioned, this world-scale petrochemicals complex will roughly triple Sasol’s chemical production capacity in the United States, enabling Sasol to further strengthen its position in a growing global chemicals market.”
The company projects billions of dollars in EBITDA to come from the project and for it to be its flagship in reducing Sasol’s reliance on coal and oil for revenue.
This was not to be, as the project failed to reach these lofty heights and forced Sasol to commit billions more without a meaningful return.
Over a period of six years, Sasol pumped an additional $5 billion into the project, bringing its total investment to R181 billion – over double what it initially planned.
The company then began to feel the real pain of this misadventure, taking an R99.4 billion hit from asset write-downs related to the Lake Charles project.
At the 2020 year-end, Sasol reported, instead of a $1 billion improvement in EBITDA, a R2.6 billion loss from the LCCP.
In 2020, Sasol sold 50% of the LCCP for only R30 billion, valuing the entire project at only R60 billion. This means that Sasol lost R120 billion from the Lake Charles project.
Former Sasol CEO Fleetwood Grobler was committed to this project and reiterated his belief in the Lake Charles complex’s ability to generate significant value for the company.
However, in its most recent trading update, the company said it would take a further R45.5 billion hit from its American ethane business.
Sasol said it would write down the value of its ethane value chain due primarily to external conditions, including prolonged weaker prices and a cloudy outlook.
The company also took an impairment on the value of its African chemicals business, particularly relating to its polyethene, chloralkali, polyvinyl chloride, and wax value chain. This impairment was valued at R3.9 billion.
Sasol said it would report a loss for the full financial year after the fuels company booked a total of R55.1 billion of impairments.
The basic loss per share for the year to June 30 will be in the range of R68.82 and R71.48 compared with a profit of R14 a year earlier.
This marks a tough start to new CEO Simon Baloyi’s stint at the helm of the petrochemicals giant after replacing Fleetwood Grobler in April.
Baloyi has been tasked with making the company’s capital allocation more efficient and ensuring its transition away from coal and oil is profitable.
Investors have placed immense pressure on Sasol to meet its environmental targets, with some of South Africa’s largest asset managers voting against its climate plans.
Ninety One and Old Mutual voted against Sasol’s climate plans at last year’s AGM, saying the company’s stated goals did not go far enough.
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