Sasol’s self-help strategy needs oiling

Sasol’s latest half-year update paints a picture of modest operational gains offset by stubborn commodity headwinds.

In mining, a new coal-destoning plant at Secunda reached beneficial operation in December, a milestone that immediately improved feedstock quality and permitted previously idled low-quality coal seams to restart production. Processing coal through this destoner is already yielding higher-grade coal, which Sasol notes should cut costly external coal purchases.

In fact, Sasol had to procure 4.9Mt of coal in the interim period to make up for lower on-mine yields, but it expects this need to fall sharply in the second half. Over the period, Sasol recorded a modest overall increase in sales volumes, with Secunda Operations production rising an impressive 10%. However, much of that uplift reflected the absence of last year’s planned phase maintenance shutdown rather than a step change in underlying efficiency or throughput.

On the fuels side, improved reliability also boosted output at its refineries. Refining margins more than doubled year on year thanks to stronger fuel spreads, and Natref’s production improved with full use of its Prax refinery shareholding. As a result, fuel sales volumes were lifted further, especially after optimising the product slate towards higher-margin channels.

Nevertheless, the group’s earnings were hammered by weaker commodity prices. Sasol reported that the average Brent crude price was down 17% year on year, and even its chemicals price basket fell about 3%. The combined effect of lower oil and chemical prices sent headline earnings per share tumbling to between R8.50 and R10 vs R14.13 in the prior year. Meanwhile, free cash flow should improve to being marginally positive, primarily because capital expenditure has been cut sharply.

For investors, the outlook now hinges on the commodity markets. On oil, most forecasters see prices staying in a lower band through 2026. A recent Reuters poll of analysts projected Brent averaging around $61 per barrel in 2026, and Goldman Sachs pegs its Brent forecast at just $56. These forecasts reflect an expected surplus of around 2-million to 3-million barrels per day as Opec+ holds output steady while demand growth stalls.

Though US output dipped in January, the decline was largely weather-related, with freezing conditions disrupting operations. Production is expected to normalise and recover over the rest of the year, reinforcing the view that supply will remain ample. For Sasol this means that fuel income may remain under pressure unless there are fresh policy shocks or supply cuts.

Sasol will have to lean primarily on self-help measures to improve its chemical earnings ... rather than relying on any meaningful recovery in market pricing

Likewise, the global chemicals environment is still sluggish. Industry reports note that a swift ramp-up of ethylene and other base chemicals, especially in China, has created a global supply glut, driving down selling prices and squeezing margins in the US and Europe. End-market demand has been soft in autos, construction and consumer goods, so even Sasol’s speciality chemicals are facing muted pricing.

The outlook for global chemical markets increasingly hinges on China. As HSBC notes, shutdowns in Europe or North America alone are unlikely to tighten conditions, as removing higher-cost capacity merely flattens the cost curve and weighs on prices unless supply is meaningfully reduced. With about 85% of new global capacity coming from China, the balance of the market now rests largely in its hands.

Yet, as a net importer focused on self-sufficiency, China has little incentive to cut output and may even add supply through refinery retrofits and new builds. Without genuine Chinese rationalisation, the market is likely to remain oversupplied, keeping utilisations, pricing and chemical earnings under pressure.

Sasol will have to lean primarily on self-help measures to improve its chemical earnings — tightening costs, lifting plant utilisation, driving operational efficiencies and optimising its sales channels — rather than relying on any meaningful recovery in market pricing.

Sasol’s gas operations in Mozambique also remain under strain, with production down 4% in the first half as natural declines in the mature petroleum production agreement fields outweighed a slower-than-planned ramp-up from the production sharing agreement assets. Project delays and softer demand have forced management to cut 2026 production guidance to flat to 5% below last year, vs earlier expectations of growth, and to recognise a R3.9bn impairment as gas monetisation is pushed out and the stronger rand weighs on valuations.

In summary, Sasol’s operations are gradually improving, with the destoning plant and related upgrades set to enhance coal quality and plant availability, while lower capital expenditure has helped keep free cash flow marginally positive.

However, any meaningful rerating in the share price — with Sasol currently trading on a modest earnings multiple and slightly higher on a cash earnings basis — will likely depend less on operational fixes and more on a stronger, more supportive commodity price environment.

That cautious stance is echoed by the analyst community. Goldman Sachs, for instance, has downgraded the stock from buy to neutral and set a R118 price target, implying only limited upside from current levels.