Sasol’s valuation may appear attractive on several metrics, but the company faces significant challenges that have dampened investor sentiment in recent years. The silver lining, however, lies in the potential solutions available to address these issues and unlock value.
Sasol’s flagship Secunda facility, which underpins much of its South African operations, has been plagued by poor coal quality feedstock. The declining quality of domestic coal reserves affects operational efficiency and output while increasing costs.
This issue is compounded by the fact that coal-based operations emit a lot of carbon dioxide, leaving Sasol increasingly exposed to rising carbon taxes. Though increased gas feedstock could help lower emissions, this strategy is threatened by the impending depletion of gas supplies from Mozambique, unless new reserves are discovered.
A destoning project, set to be implemented during the second half of calendar year 2025, offers some hope. By removing stone impurities from the coal, this initiative will enhance the quality of the coal feedstock, thereby improving operational performance at Secunda. Additionally, destoning is expected to lower carbon emissions to some extent by increasing the efficiency of coal combustion, meaning less coal would be needed for the same output, reducing the overall carbon footprint.
Even with these improvements, the threat of carbon taxes remains. However, the South African government is unlikely to implement measures that would threaten the existence of a company that provides a material part of South Africa’s fuel and chemical supplies, especially since this sector contributes more than 5% to the country’s GDP. The more likely outcome is a balanced approach where environmental concerns are addressed without jeopardising the economic stability provided by Sasol’s operations, for example by negotiating attractive liquefied natural gas pricing with a country like Qatar so that current gas supplies are supplemented.
Sasol’s international chemical operations have been another drag on the company’s overall performance, contributing just 9% to group profits in 2024. A key issue has been the underperformance of the Lake Charles Chemicals Plant (LCCP) in the US, where setbacks such as the East Cracker outage, where production was offline from March until November last year, disrupted production and increased costs. Coupled with weak global chemical market conditions, the division’s profitability remains a concern for investors.
To address these challenges, Sasol is implementing a range of self-help measures aimed at improving operational efficiency. The company plans to enhance plant reliability at LCCP, reduce production costs, and shift its product mix towards higher-margin speciality chemicals. By stabilising operations and boosting profitability, Sasol aims to position the business for a stronger financial contribution.
Once these improvements take hold and market conditions recover, Sasol has indicated it could explore a listing or sale of its international chemicals business. Such a move has the potential to significantly improve Sasol’s balance sheet, cut interest expenses and free up cash for reinvestment.
Of course, despite these initiatives, Sasol’s financial performance remains heavily influenced by external market conditions. For the interim results of its 2025 financial year (covering the six months ending December 31 2024), low refining margins, subdued chemical market demand and a softer oil price have weighed on the company’s performance, resulting in headline earnings falling roughly 30% to between R13 a share and R15 a share.
Refining margins have been under pressure globally, reflecting weaker demand for refined products amid slower economic growth in key regions. Meanwhile, the chemical market has yet to rebound meaningfully, with oversupply and sluggish demand keeping prices subdued.
Looking ahead, the oil and chemical markets in 2025 present a mixed outlook. On the oil side, prices are expected to remain range-bound as geopolitical uncertainty and Opec production cuts support the market, while fears of a global economic slowdown limit upward momentum. Analysts project Brent crude to average between $75 and $85 a barrel for the year, slightly above 2024 levels but still below the peaks seen in previous years.
In the chemical sector, recovery hinges on improving macroeconomic conditions, particularly in China and other emerging markets. However, structural oversupply in some segments, such as polyethylene and polypropylene, is likely to persist, capping price recovery. Demand growth for speciality chemicals and sustainable products may provide some tailwinds, but a significant upturn in profitability across the broader market remains uncertain.
Another external factor for Sasol is Mozambique, where its gas operations faced significant disruptions due to political unrest in late 2024. However, by early 2025, operations have stabilised, with production returning to full capacity. Despite this recovery, the ongoing political instability in Mozambique poses continuous risks to Sasol’s supply chain. On a positive note, Sasol is making progress with its junction compression project in the country, which is expected to secure gas supplies for South African customers until mid-2028.
In summary, while Sasol faces numerous challenges, its current share price of about R85 at the time of writing reflects most of the downside risk, presenting a potentially compelling investment opportunity should turnaround efforts gain traction.
The writer owns shares in Sasol
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