The making of a huge corporate scandal: Is Sasol’s imminent fall engineered?
PRETORIA – News came out that Sasol was in trouble after its stock crashed. Sasol's crash has been considered a “biggest crash across all emerging markets”.
The fall started on Monday, March 9, when the company’s share price plummeted by almost 47 percent after news broke that the oil price had plunged over 30 percent after OPEC, the oil producers’ cartel, failed to reach an agreement on production levels.
In September 2019, according to reports, Sasol shares were trading at R311.38 and thus gave the company a market cap of about R200 billion. This week the company is now at just R30bn.
In a game of financial gimmicks, a local daily carried a headline: “Sasol jumps as much as 50%, oil price recovers a little”. But this story is misleading. The temporary jump comes from the announcement that the company was “working on measures to address pressure on its balance sheet” which includes disposal of assets. But what doesn’t change is that Sasol is a company in trouble, which will go down with public monies.
Bloomberg also confirms that Sasol, which is South Africa’s biggest company by revenue, could sell assets or stock “to ease its financial woes after an oil-price collapse exacerbated a debt burden swelled by a troubled expansion in the US”. This could be an indication that one of the few remaining large corporations in South Africa could be facing a bleak future. Sasol maintained its listing on the JSE after many companies relocated their primary listings to overseas markets in the early 2000s. The last company to leave in 2019 was Naspers.
Alongside the problematic oil price, Sasol’s investment in a chemicals plant in the US was mentioned as another source for the company’s woes. The Lake Charles Chemicals Project in Southwest Louisiana was estimated to cost anything between $11bn and $14bn in 2012. The then Louisiana Governor Bobby Jindal declared: “This project will be the largest single manufacturing investment in the history of Louisiana and it also represents one of the largest foreign direct investment manufacturing projects.”
The plunge in the oil price had an effect on the company but what is not told in detail is how Sasol created fertile ground for the present crisis via its chemicals plant in Louisiana. According to available data, the company is struggling to repay its huge debt of about R138 billion, which was probably taken to finance the white elephant in the US. Bloomberg claims the cost of the US plant jumped by as much as 50 percent to about R211.14.
If this debt is held in US dollars it means even more problems.
This background suggests that the US project has been at the heart of all Sasol’s problems in recent years. The drop in the oil price is a sideshow to paper-coat what has been a brewing problem for a number of years. In 2014, Sasol’s acting chief financial officer, Paul Victor, confessed that the US move was to minimise risk, which means Sasol had ideas of following on the footpath of other South African grown conglomerates that turned their back on their country of birth.
The Sasol crisis could, therefore, be engineered to take the company out of South Africa, its assets abroad could have been long sold or earmarked to be sold to pre-identified individuals. Thanks to the fall in oil prices, the company was waiting for an opportune moment to arrive and will soon apply for bankruptcy.
The plans to entrench the company in the US market were not always going to proceed as planned. Journalist Sasha Planting suggested in 2019 that costs for the Lake Charles Chemical Project started to go bad as overrun began to emerge as early as January last year. A local daily also reported that Sasol’s share price recorded “its biggest one-day drop in nearly three years after the group announced yet another delay and cost increase at its chemicals project in Louisiana.”
In 2017, the company already sensed that things were going to get difficult. It toyed with the idea of pulling the plug on the Louisiana plant and to divest from its Canadian shale gas assets.
Looking at the way things played out, the company engineered all its problems around the Louisiana investment, which it allegedly used to strip its value through illicit flows. In October 2017, to pretend that it was attempting to contain this downward spiral Sasol sacrificed joint chief executives Bongani Nqwababa and Stephen Cornell as a result of the problematic Lake Charles Facility in Louisiana. This followed an internal probe that suggested that the management team “acted inappropriately, lacked experience and was overly focused on maintaining cost and schedule estimates instead of providing accurate information”.
Notwithstanding this, the company has not been transparent on the exact nature of the problems. It later named Fleetwood Grobler as the new CEO, who has to oversee a great decline of Sasol.
But do we seriously understand why Sasol suddenly hit a sudden halt after what analysts and commentators touted as an excellent protracted run over the last two years which turned it into a large multinational corporation? There could be many reasons. Sasol dug its own grave for wanting to force its divorce from SA through whatever means possible. But this situation could not have happened the way it did had rentier economics been not such a big problem in the corporate world, including private companies and state-owned entities (SOEs).
Sasol’s shenanigans in global markets first came to public attention around 2007-08. A report surfaced in 2017 when a Mozambican non-governmental organisation Centro de Integridade Pública (CIP) in a report titled “Sasol Will Continue to Milk Mozambique” accused Sasol for “selling gas extracted in Mozambique for seven times the price it pays the Mozambican government, that its pricing methodology is flawed, and that the benefit to the communities surrounding the project is minimal”. Of course, Sasol would deny involvement in illegal financial dealings.
A gentleman who worked as a senior financial manager at Sasol once spoke about this US project. In a conversation that was essentially about money laundering and illicit financial flows, this gentleman told a horror story of bogus transactions and shelve companies that had been created to siphon money out of SA. This scam worked well for a number of years but I guess someone had to justify why the project wasn’t getting off the ground. In a haste to present something tangible on the table, costs ballooned. This essentially amounted to a very bad investment decision. The motivation for the US expansion project was morally wrong.
Personally and having interacted with Sasol officers in Alberta, Canada and Lagos, Nigeria, I always sensed that the company no longer carried any pride in being a South African company. Someone in Randburg wished that Sasol could have moved overseas like Anglo-American, Naspers et al. However, government involvement in the company could have complicated Sasol’s exit from South Africa. Although Sasol is not classified as an SOE, the government still holds a minority stake of 8.5 percent in the company. Furthermore, state entities the Public Investment Corporation (PIC), which manages funds on behalf of the Government Employees Pension Fund (GEPF) and the Industrial Development Corporation (IDC) respectively own 13.5 percent and 8.5 percent, bringing the government’s exposure to 30.5 percent.
What this says is that some “genius” decided to split the government stake to facilitate the kind of problems that also surfaced at SAA and Eskom. The meltdown at Sasol is yet another case of Steinhoff as well as other SOEs. Using a combined shareholding of 30 percent, the price drop from R200bn to R30bn indicate an erosion of government share of around R50bn, in just six months.
The report titled ‘Report of the Judicial Commission of Inquiry into allegations of impropriety at the Public Investment Corporation’ released on Thursday opens the lid on what is happening in the corridors of the PIC but the focus is on the obvious.
In terms of the report, the PIC is a piggybank always under pressure from politicians, bankers, financials, and business people. But it failed to report on the shenanigans at Sasol. A Sasol decline and loss of billions in public monies, as a result, could make the report stillborn.
The problem with the Inquiry is that it is the same as many others related to it, there is a general assumption that corruption in the public sector occurs in a vacuum and that it does not involve large private companies. These large companies appear to have a hold on a number of people, including the National Treasury and prosecutors. Based on how things are done in South Africa, the happenings at Sasol are just a storm in a teacup because no one is really concerned for as long as they make money.
What is of serious concern though is that in 2014 Sasol had a market cap of over R400bn at R652.99 per share. Today its market cap stands around R28bn at R55.84 per share. This decline occurred over time. Analysts estimate that the company’s value has fallen more than 85 percent since 2014. As a result, the estimated losses by the trio of the state, PIC/GEPF and IDC amount to an equivalent of R110bn in this period. However, the focus has been on Eskom and SAA. A company that is now worth R28bn but owing over R120bn. Surely, someone long knew about this but kept quiet.
With the new proposal to dispose of assets and stock, the state as equity owner will be seriously bruised. Sasol could declare insolvency in the near future, and even before SAA. It is a great pity that austerity measures tend to look solely at the public wage bill and ignores fiscal leakages as a result of wasteful investments in mainly white-owned private companies that are really bothered when pensions of black workers go to waste.
We have been duped.
Sasol could be yet another corporate scandal in South Africa that could easily go unpunished like many others before it as the attention is on public sector corruption, and the private sector is treated like saints.
The truth is corruption is rife in the private sector and it is unfortunately financed through the public purse. And monies of the public and public servants, in particular, will go down the drain without anyone being held responsible. As with every crisis, somebody stands to benefit from the Sasol problems, and money is somewhere in Europe and like a phoenix these funds will fund a new venture from South Africa’s former national champion.
Again the wealth of South Africa is gone.
As the Zulu people say: “Ifa leziwula lidliwa yizihlakaniphi!” meaning the inheritance of the fools is enjoyed by the wise!
Siya yi banga le economy.
Based in Pretoria, Siyabonga Hadebe is an independent commentator on socio-economics, politics and global matters.