- Product prices flying: Polymer prices have increased significantly in recent weeks and US spot prices for polyethylene are more than 80% higher than average prices achieved in Sasol’s previous financial year. Prices are supported by higher oil prices, higher freight rates as well as temporary shortages of product in certain regions.
- US advantage firmly in place: Higher oil and naphtha prices have steepened the cost curve, cementing the US cost advantage. US integrated margins are almost 30% higher than Asian margins.
- Ethane production downgraded: The EIA has recently released its Annual Energy Outlook and downgraded its expectations for NGL production by 6-10% over the next ten years. Ethane rejection should be significantly lower which could contribute to higher prices. More ethane will be required from the north, increasing logistics costs.
- LCCP upside: At current prices Sasol could earn EBITDA of more than $200mn at the LCCP in FY21, depending on the ramp-up of the recently started LDPE unit. At high utilisation rates at the Base Chemicals units in FY22, the EBITDA could exceed $700mn at current prices.
- The medium term remains uncertain: Current high prices appear to result from temporary bottlenecks and in the longer term, lifting of these constraints should see prices retreat. Margins could also be impacted negatively by increasing ethane prices.
- A timely reprieve for Sasol: The current pricing environment and commensurate profitability will assist Sasol in strengthening the balance sheet which is the immediate focus for the company and its investors. It does however highlight the unfortunate timing and selling price of the disposal of the LCCP Base Chemical units.
- What to do? Reflation is the buzzword of the day as oil and other commodity prices continue to increase. This will support the Sasol share price in the near term. We maintain our Outperform rating.
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