The oil market is gradually coming to terms with the reality that disruption in the Strait of Hormuz is becoming a prolonged problem rather than a passing crisis. For Sasol, which published its September quarter operating update last week, that shift could prove as important as its efforts to improve its operational efficiency.
In the early stages of the Iran conflict, almost every suggestion of a ceasefire or fresh escalation sent crude prices swinging sharply in one direction or the other. Such headlines still matter, but eight months into the conflict, markets have become less responsive to the daily news flow. Damaged infrastructure, disrupted shipping routes and depleted inventories mean that even a peace agreement would not necessarily bring a quick return to normality.
Sasol’s experience at its 49%-owned Oryx gas-to-liquids (GTL) plant in Qatar illustrates the problem. In the understated language of its quarterly update, Oryx restarted in August after a shutdown caused by the “ME conflict”, with products redirected to local markets because of “export constraints”.
The reality behind those rather benign comments is considerably more dramatic. Oryx converts natural gas into synthetic diesel, naphtha and liquefied petroleum gas at Ras Laffan Industrial City, where Iranian missiles damaged liquefied natural gas infrastructure and Shell’s neighbouring Pearl GTL plant. Oryx itself escaped physical damage, having already shut down after QatarEnergy curtailed its gas supply. Though production has since resumed, continued threats and attacks on shipping through Hormuz are restricting access to export markets.
A more enduring tailwind
Oil markets are increasingly pricing in a longer-lasting crisis. By mid-October, Brent futures for delivery late in 2027 had risen more than 13% since early September, potentially providing Sasol with a more enduring tailwind than the short-lived spikes in spot prices that characterised the early stages of the conflict.
One factor supporting oil prices is the prospect of rebuilding depleted inventories. The International Energy Agency estimates that global observed oil stocks fell by 509-million barrels between the end of February and September. Oil cartel Opec and investment bank Goldman Sachs have identified inventory replenishment as a potentially significant source of additional demand.
Against this backdrop, Sasol’s latest operating figures provide further grounds for optimism. The standout was coal mining, where saleable production jumped 18% year on year to 8.5Mt, its highest quarterly level in six years. This enabled the group to slash external coal purchases by 48%, from 2.7Mt to 1.4Mt.
The reduction in purchased coal is arguably more important than the production record itself. Sasol has long relied on expensive external supplies to supplement its own mines. Replacing these purchases with internally produced coal, alongside improvements in coal quality through initiatives such as destoning, should deliver more lasting savings at Secunda. Management has maintained its full-year mining production guidance of 30Mt–32Mt.
Less encouraging was Secunda’s combined fuel and chemicals production, which fell 6% year on year and 10% from the preceding quarter to 1.67Mt. However, the decline was largely foreseen. Secunda’s western factory underwent a planned phase shutdown, whereas the previous financial year benefited from this maintenance having been skipped. Sasol has maintained its full-year production guidance of 7.2Mt–7.4Mt, implying a recovery over the remaining three quarters.
Natref’s refinery output also fell sharply, declining 30% from the preceding quarter because of planned maintenance and an unplanned outage. One unit remained offline following a safety incident. Nevertheless, production was 29% higher than a year earlier, partly because Sasol is operating the entire refinery while its partner, Prax South Africa, is in business rescue.
The arrangement introduces some uncertainty, with Sasol warning that the outcome of the rescue process could affect full-year fuel sales. Despite the operational disruptions, group liquid fuel sales rose 21% to 14.9-million barrels, supported by inventory drawdowns and increased sales through higher-margin channels.
Sasol’s chemicals business is also benefiting from the changed market conditions. Total chemicals revenue rose 11% in dollar terms despite sales volumes declining 3%, as average selling prices increased 15%. The Middle East conflict has helped lift prices, though demand remains subdued, particularly in Eurasia.
Importantly, Sasol has not hedged away the potential benefits of higher oil prices. Its crude oil hedging programmes for FY2027 and FY2028 are complete, providing an effective hedge cover ratio of 35%–50%. Much of the protection comes through put options and put spreads, generally with protection at about $59 a barrel. While some arrangements limit gains over specified price ranges, the overall strategy provides downside protection while retaining considerable upside if crude prices remain elevated.
Veteran value investor and Merchant West Investments nonexecutive director Piet Viljoen is among those encouraged by Sasol’s changing fortunes. In his October 8 newsletter he notes that the shares have more than doubled in dollar terms this year, despite the company’s long history of destroying shareholder value. He regards Sasol as an attractive portfolio diversifier, offering exposure to the energy value chain and a hedge against rand weakness.
Viljoen is also more optimistic about the group’s leadership, believing that CEO Simon Baloyi may finally provide the “steady hand on the tiller” Sasol needs. His conviction is reflected in the MWI Value Fund, which has more than 6% of its portfolio invested in the company.
