Sasol’s CEOs on Davos, Lake Charles and a firmer oil price

DAVOS — Two and a half years ago when the Sasol directorate appointed joint chief executives, there was a fair amount of discomfort among investment analysts. Having two captains has proven challenging for many similarly sized businesses. But Bongani Nqwababa and Steve Cornell have proved to be sparkling exceptions to that apparent rule. How so? I’ve watched them here in Davos. They are genuinely good friends, which surely helps. But it looks to me that the true catalyst is their humility. They seem to have conquered the ego expansion which too often accompanies those promoted to elevated positions. – Alec Hogg

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This is The Rational Perspective, I’m Alec Hogg. In this episode Sasol’s CEOs on Davos and an update on the SA Champion Corporation. Two-and-a-half years ago, when the Sasol directorate appointed joint chief executives there was a fair amount of discomfort amongst investment analysts. Having two captains on any ship has proven challenging for many similarly sized international businesses. But Bongani Nqwababa and Steve Cornell, have proved to be sparkling exceptions to that apparent rule. How so? Well, I’ve watched them here, in Davos, they’re genuinely good friends, which surely does help but it looks to me like the true catalyst is their humility.

They seem to have conquered that ego expansion, which too often accompanies those promoted to elevated positions. But you be the judge. We had a good conversation about Davos, about Sasol, about its investment into the US of $11bn, and how the company might be a catalyst in helping to transform SA. Let’s join the conversation.

Well, it’s become a little bit of a tradition now, to capture the two joint CEOs of Sasol, Bongani and Steve. Lovely to see you again this year. How many times have you been to the event now?

A pleasure to meet you again, Alec. It’s our third time.

So, by now, you’re starting to feel veteran like. You know what clothes to bring and what sessions to get to.

Well, you always think that but you always learn something each time, and I find it stimulating – the sessions and the discussions, it’s always a pleasure.

You guys seem to work well together. What’s the magic?

The magic is the clarity of purpose that we are focussed on what’s best for the company, what’s best for our teams next, and lastly, what’s best for individuals?

Do you allocate resources here as well, i.e., split the responsibilities?

It depends. We are largely together but some sessions, if we are meeting stakeholders, depending on who it is, sometimes we are together and sometimes we are separate but we prefer to work together.

Now, without putting any words in your mouth, it does appear that Team SA has done quite well this year.

Yes, from my perspective they have. I think everyone is looking for positive movement in SA, and the reception continues to be more and more positive here in Davos. I think that reflects what’s going on back home and that they see good movement and, what we look for as business leaders is, clarity and certainty and we’re starting to see more and more of that. So, I think that’s what you’re seeing here as well.

Often, when one wants to get to the truth you invert and it doesn’t happen too often. When you have a look at what’s been going on in SA lately, but from the inversion scale, you haven’t been mentioned in dispatches anywhere with all this bad news that’s been going around. Is that because of governance issues? What do you put that down to?

Yes, it’s down to governance, although the latest gentleman who was on the State Capture Commission last week, Agrizzi, or whatever his name is. He mentioned that they tried to get into a contract with us way back in 2002, via one of our union leaders. We told them to go away and they went away.

It seems, with hindsight, the obvious to have done but it wasn’t so. Did you have much pressure from the ‘dark forces’ at the time, those nine-years now, that everyone is talking about?

No, not really. Although in my previous life in mining I had an attempt but because maybe we were a private company, if you tell people to go away and set the rules very clear, then they go away.

Steve, it might be unfair, given that you are American but we are seeing that multinationals from the West have been caught out a number of times now in abusing their privileges. In Malaysia we saw with Goldman Sachs. We’ve seen the Credit Suisse issue on SA’s border, in Mozambique as well. This exposure must be good in the longer term for developing countries.

I think we’ve said that as well. What you’re looking for is good governance and if it fails, that you find it, you bring it forward, you take the right actions against those who maybe caused it to fail, and then you put in systems to try to make it better. It’s a continual process that all countries and all companies go through. I think Bongani and I are pleased with where we think Sasol Limited is. You can imagine we’ve tried to test that over and over in the last couple of years but no, it’s not limited to any one spot on the globe, that’s for sure, or any one company.

Let’s start in America. How’s Lake Charles doing?

Yes, so this is the year of delivery. It’s such a massive project. It’s not just one unit, as we call it but it’s really 7, or 8, or even 9 units, each of those units being 100’s of millions of USDs of investment. So, the first unit is in the process of coming online, it’s starting to make product so, we’ll hopefully be able to announce that officially in the very-very near term, and then we’ll go to the next one, and the next one but it will consume most of 2019. So, this is the year that we bring it on and stop spending money, hopefully, and start making some money.

You’ve been quite aggressive early on in cutting the costs there at Lake Charles. Have you lost any capacity as a result?

In terms of the cost cutting – it was largely to do with the rest of the organisation at Lake Charles because we are growing, we’re actually growing in terms of headcount. If  the combined complex will have around a thousand permanent people although at the peak of construction it’s 9,000 people so, we are growing there and it will diversify our earnings from 70% South African, and 30% to the rest of the world, to 50:50, and we’ll rely less on crude oil because there’ll be more ether in feedstock, which will be important for us.

What do international investors think about that change from 70:30 to 50:50?

They are quite positive because our growth will become more of a chemical company. Actually, both on the MSI Index and on the Johannesburg Stock Exchange (JSE) we are listed as a chemical company. But although that is the case, the mindset is still otherwise and even the analysts, when they do an evaluation on us, they are looking largely at the crude oil price, but it will be more intricate going forward.

Are there any particular advantages being a multinational, in your field, based in SA?

There certainly are because we are proud of our home-base because for us, there is free capital flow because we built this project for over $11bn and not a single Rand (ZAR) was transferred from SA to America to build the plant. But because close 68% of our shareholders are South African, it means that when the dividends are declared this money will eventually flow back to SA, if the share register remains the same.

Without getting too complicated, how did you do that? How did you manage to get a $11bn project and not have to fund it from SA?

So, we have operations, currently, in Europe and in the US, not as big as what we’re building. So, we had offshore reserves from those operations and then we fund project finance going to the US, going as USD loans that were backed by the project itself. So, basically, we were able to sort of ring-fence that offshore and use offshore funds and offshore financing and be able to keep it away from having to go after our ZAR reserves. So, it’s worked out really well.

As one of the major companies in SA it brings other responsibilities, particularly now that the president has been saying business needs to play its part and needs to be more involved with government in turning things around. How’s your arm being twisted to say, ‘come on,’ is it through bring on more interns? Is it through expanding employment? It appears as though there’s a massive drive now for business to get involved and help rebuild the country after the bad nine-years.

We were one of the first people who signed up for the YES Program and what we said is that we’ll bring on a thousand interns over a four-year period. The first large percentage of that, for the first year, is already in progress so, we’re feeling good about that. I think what we can do is just continue to be a very profitable company and look at, can we continue to invest? We’ve said it before, and we were one of the few companies that invested in new mines over the last four-years. We brought on two new mines in order for us to be able to sustain our mining and Secunda operation until 2050. So, those sorts of things. We’re going to look at where are the opportunities to add value and where is the opportunity to add jobs?

Just as a, perhaps from a left field there, with Eskom struggling so much to source decent coal are you able to step into that breach?

Bongani maybe able to answer better on that, but the coal that we use isn’t the same quality coal that they need for thermal for their uses. We take it and gasify it and turn it into chemicals, which doesn’t meet quite the same thermal content, if you want and without getting too technical. So, we sell a little but the majority of it probably wouldn’t fit their needs.

Yes, because most of the coal we produce is for our internal needs, which is 40m tons, and then we export 3m tons but that’s higher calorific value, which is not for our quality coal and not for Eskom’s quality coal. So, no, we do not supply them with coal. However, we do supply them with lots of diesel when things are rather difficult.

What about electricity?

In terms of electricity it might be not widely known that we are the second biggest generator of electricity in the country, but largely for internal purpose. But it’s a structure, which will look forward to depending on whether the feedstock changes. Should there be more access to gas we can change the energy landscape in SA so that there’s a lower carbon generation of electricity.

I just mentioned electricity because there are big things happening at Eskom – we know that. We heard this morning from the president that he got a phone call at 5:30am from NUM. They want to talk to him urgently about the developments, big things in the next little while. Hypothetically, if Eskom were to be unbundled, would that be something appealing to you? Would there be parts of it that Sasol would like to bid for?

I wouldn’t say so, because although you might be aware that I used to be the CFO there some time ago. So, personally, I believe the answer lays in unbundling and privatisation but others might see it differently. But it’s not in the core of we are focussed on because should we want to grow our electricity centre it will largely be lower carbon intensity rather than high carbon intensity.

Maybe we should just have a look at one of the huge potentials that SA is sitting on that we’ve stopped talking about, which is shale gas. Is there any unlocking or potential unlocking of that? We saw how government worked aggressively on solar and wind, but sitting on an apparent shale gas treasure chest?

I think more work needs to be done, Alec, on how good is the geology and can we, economically develop it? Of course, the environmental issues that have always been out there that you need to be sensitive to and determine if you can develop it and do it in a way that meets all the stakeholders needs. They’ve been obviously, extremely successful in the US, at developing shale oil and shale gas. They’re starting to try to do that in other areas around the world. No one yet has been anywhere close to being as successful, and I think there’s a lot of reasons for that. But Bongani and I believe that it could be something that would be extremely positive for SA, and that we’d love to see if we can help evaluate it and if it doesn’t work it doesn’t work. But if it does work then how can we help in terms of bringing that resource to fruition?

Because you were involved at one stage, if memory serves me correctly?

Shell was actually the lead in that. We were a little bit behind. We looked at all the data but we’d have to do a lot more work before we’d move forward but it’s there. What we’ve also said is, given the whole issue around climate – you’ve got to look at other sources being renewable but gas is a bridge. Renewable cannot do it today right so, the bridge between coal, one of the highest carbon feedstocks, and renewables – gas plays an obvious role. So, for us either developing it in SA or developing it in Mozambique for Mozambicans but if there’s enough then also bringing it down to SA so, that’s another area we’re looking at as well.

Okay, let’s get back to Davos itself. You meet a lot of your counterparts, your peers, from other multinational companies. What’s the feeling been about the energy scene, and specifically the oil price?

Okay, if I can split it between energy fuels and then Steve can talk about the chemicals. On the crude oil side there’s a view that although there’s growth in terms of shale production, which we’ll get to about 11 million barrels per day. If you consider that the world demand is just over 100 million barrels a day, and it comes, the consumption is about 3 to 4 per year, and it grows by 1.3. So, what that means is that you need to be growing the supply by between 4.3 and 5.3 per year, and that’s not happening. So, as a result, although there is an oversupply at the moment, because there’s no conventional supply being grown it’s very likely that we might have a spike in the crude oil price in the next five-years or so. Even with all the electric cars, with all the energy efficiency the fundamentals are the fundamentals.

So, if we can switch to the chemical side. Chemical demand tends to follow world GDP, right so, what chemicals are there to meet the needs of consumers and as the GDP increases the consumption increases. So, there’s some talk around what’s the real growth rates in Asia, some concern on softness. I’d say most people are kind of moderately optimistic so, we always look at what can we control? We control our own production, our own cost, and we’ll continue to do that. And of course, we’re bringing on a new chemical production facility to meet that demand so, we think we’re well positioned. We think we are really, well positioned on the chemical side.

Being in the US, helps as well, given the way that the economic policies are being crafted there.

There are two reasons why we’re very happy we made the decision in the US, there’s probably more than that but the two biggest ones are the driver for profitability in the chemicals is a low feedstock cost, and the US has one of the lowest feedstock costs in the world – and we see that continuing for quite some time. So, that was one of the real drivers and that hasn’t changed. The thing that has changed when we made the decision Mr Trump wasn’t in the White House. Now he’s in the White House and the only major thing that he’s passed that has affected us directly is lower taxes in the US. So, that’s actually been positive for us. You can say all sorts of things about pros and cons of the current US Administration but in terms of our business it hasn’t really been a negative at all. There’ve been some positives for us.

So, looking ahead, when you go back to SA and you talk to the people of Sasol, what are you going to be taking from Davos 2019?

It’s a message that there is, although the economy might slow down in the next year, and some people are talking that there’s a 30% chance of a recession this year but maybe 50% next year. The long-term vision companies of our kind look in the very long-term so, things might come down and go up but growth is our friend and we’ll grow into the population growth. There’s a great future for us.

Thank you, Alec, SA is our home. The majority of our employees are there, and the majority of our assets are there so, we’re going to continue to optimise it and, like Bongani said, we look out at the 2040/2050 period and we see continued growth and we’re going to be a part of it.

When you talk to your global peers, if they think about SA at all, are they noticing that things are changing?

I’d say, most of the people we meet and one of their first questions they ask us is, ‘so, tell us really, what’s happening in SA?’ Because it’s hard from afar to read the tea leaves so, always probably spend the first 10-minutes of our conversation giving our view, which is on balance a very positive view, and of course, they have to make up their own minds but I’d say, that’s one of the things we carry with us to Davos.

What exactly do you tell them?

We tell them that although, we had an aberration for nine-years, the fact of the matter is that institutions of democracy do work. So, there’s an independent media, probably more independent than in other big Western governments I’ve been to. Then also, the judiciary is very independent. Issues are being dealt with. The Mining Legislation, which was problematic for a long time, is being dealt with. Then we now have a minister of police who is highly energetic and decisively dealing with crime, which is a big issue in our country. Then the president is committed, together with his ministers, to create an enabling environment to make sure that there’s growth because every business person wants an environment where they can find growth and make money. It’s not more complicated than that.

That was Bongani Nqwababa and Steve Cornell, the joint CEOs of Sasol.

This has been The Rational Perspective, until the next time, cheerio.