Sasol, the Rand and the oil price

On Thursday Sasol slumped over 4% then on Friday it was down again, nearly 2%. One of the reasons for the drop was a forced clearance of the Sasolburg plant after spilled sulphur set off alarms. It doesn't sound like the spill was serious but of course there are very strict safety standards and anything remotely threatening will result in stoppages. According to this Bloomberg article a statement from Sasol suggests that production was in no way affected.

Sasol is a tough share to analyze because it is so heavily swayed by the Rand and the oil price. You would probably find that these variables were why the share price dropped at the end of last week. You see, Sasol's sales are dependent on the petrol price which is completely out of their hands. The petrol price is determined by the oil price and the South African Rand. When the Rand weakens South Africa's buying power decreases and the petrol price will have to increase. When the oil price increases inevitably the petrol price will also have to increase.

Therefore when we complain about petrol prices increasing, Sasol shareholders are rewarded. To get a perspective, analysts reckon that a 10% change in the Rand could affect Sasol's earnings by 25%. Historically the oil price has less of an affect but this is growing. A 10% change in the oil price would affect earnings by around 18%. Of late the Rand and the oil price have been positively correlated. When risk is on, the oil price increases and the Rand strengthens. When the world is about to end the Rand weakens and so does the oil price. This is a good thing for Sasol because it mitigates what could be a very volatile situation.

Another variable which impacts earnings is the gas vs oil price. This is not a big part of Sasol's earnings yet but Sasol's future plans are heavily weighted toward Gas to Liquids expansion. In the last few years improved technologies and massive deposit discoveries have caused the gas price to consistently fall. Lack of big discoveries and unrest in many oil producing nations have caused oil prices to increase. This is a very good situation for Sasol as their input price decreases while there finished goods price increases.

Over the last few weeks however gas has increased while the oil price has decreased, a double negative for Sasol. The gap is still huge historically and still very economically sufficient. We continue to like Sasol. The long term global demand as far as energy is concerned will remain strong. Although these moving parts have a big impact, if markets pick up, like we foresee, the natural stabiliser of the Rand strengthening along with the oil price will help mitigate the volatility while Sasol use their unique technology to carry on supplying oil.