Sasol share price falls even further after business update

Key Takeaways:

1. Volatile macro-economic environment: The H1 FY24 performance was impacted by a volatile macro-economic environment, including weaker oil and petrochemical prices, unstable product demand, and continued inflationary pressure. This suggests that market conditions were challenging during this period.
2. Pricing pressure and sales impact: Pricing pressure continued to impact sales volumes, margins, and profitability. This indicates that the company faced challenges in maintaining competitive pricing and generating sufficient sales.
3. Operational improvements in Energy Business: The Energy Business showed improved performance compared to the previous year, mainly due to higher production and productivity. However, the segment was still affected by factors such as the rand oil price and inflationary pressure.
4. Mining productivity challenges: The mining operations experienced a reduction in productivity in Q2 FY24 compared to Q1 FY24. This was mainly attributed to safety-related incidents and unplanned engineering downtime. Despite this, the coal stockpile remained above the minimum safety threshold.
5. Challenging market conditions in Chemicals business: The Chemicals business faced challenging market conditions, particularly in China and Europe, with macro-economic weakness and customer destocking. The average sales basket price for H1 FY24 was significantly lower than the previous year, impacting margins and profitability. However, sales volumes for chemicals were higher in H1 FY24 compared to the previous year, driven by higher ethylene and polyethylene sales in America.

In the first half of the fiscal year 2024, Sasol Limited, faced a challenging economic landscape marked by fluctuating oil and petrochemical prices, unstable product demand, and persistent inflationary pressures. These difficulties are compounded by the underperformance of state-owned enterprises in South Africa and concerns about slower global growth.

Business update in brief

Despite these headwinds, Sasol's Energy Business experienced an uptick in performance compared to the same period last year. This improvement is attributed to increased production and productivity following the operational mitigation plans set in place. The company saw a surge in production volume at their Secunda Operations (SO), largely due to a strategic shift from a total shutdown to a phased shutdown approach, enhanced equipment availability, and operational stability. However, Sasol continues to grapple with the challenges posed by the fluctuating rand oil price and inflation, which have a significant impact on the liquid fuels segment.
Sasol has also initiated a full potential program at the Shondoni and Thubelisha collieries, aiming for sustainable productivity gains in their mining operations. However, a dip in productivity was noted in the second quarter, primarily due to safety incidents and unplanned engineering downtime. Fortunately, coal stockpile levels have been maintained above safety thresholds, ensuring consistent coal blending and supply.

In Mozambique, Sasol's drilling program is progressing well and maintaining a strong safety record. Additionally, the National Energy Regulator of South Africa (NERSA) approved Sasol's application for the maximum gas price for the fiscal year 2024, which marks a positive regulatory milestone for the company.

The Chemicals business, however, continues to navigate a challenging market, particularly in China and Europe, where macroeconomic softness and customer destocking have dampened global demand. Sasol's chemicals sales volumes for the first half of the fiscal year 2024 were 4% higher than the previous year, driven by increased ethylene and polyethylene sales in America and improved production and supply chain performance in Africa. Yet, sales volumes for the second quarter decreased by 2%, reflecting reduced production in Africa and lower demand in Eurasia.

The outlook

Looking ahead, Sasol anticipates ongoing volatility in pricing and demand through the second half of the fiscal year 2024. The global market sentiment and petrochemical markets are expected to remain uncertain, with muted demand and a challenging margin outlook for chemicals. Sasol is actively engaging with the South African government to address energy and supply chain constraints, particularly those affecting Eskom and Transnet.

Sasol – technical view

The share price of Sasol remains in a long-term downtrend, although in the near term the price has started to form a falling wedge pattern. The pattern suggests the downward momentum to be slowing and that a short-term rebound is possible.

In the event of a rebound from oversold territory as the pattern suggests, 16600 would become the initial upside resistance target from the move. However in lieu of the longer-term downtrend still firmly in place, traders might prefer to wait out strength before looking for short entry once again. Only on a move back above the 19700 level would we start to consider a longer-term trend reversal and renewed long bias to trades.