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Sasol - Weathering the rand storm

Release Date: 15/09/2004 14:16:01      Code(s): SOL
Sasol - Weathering the rand storm                                               
Sasol Limited                                                                   
(Incorporated in the Republic of South Africa)                                  
(Registration number 1979/003231/06)                                            
ISIN: ZAE000006896                                                              
Share codes:   JSE -  SOL                                                       
               NYSE - SSL                                                       
Weathering the rand storm                                                       
Chairman"s statement for the year ended 30 June 2004                            
"This is a momentous year for South Africa. As we celebrate our country"s 10    
years of democracy, we congratulate the South African Government on its wide-   
ranging and notable achievements. We compliment President Mbeki on entering his 
second term of office, and reiterate our admiration and support for many of his 
initiatives which collectively are resulting in growing international confidence
in our country. We wish him and his cabinet much success in the years ahead."   
Paul du P Kruger                                                                
Sasol prides itself on its robust performance with regards to safety. We        
therefore deeply regret the loss of life in some industrial accidents recently, 
the most notable of which was the explosion at the ethylene plant at Secunda on 
1 September 2004. We again offer our sincere condolences to the loved ones of   
the deceased and to those who were injured.                                     
Positive interventions soften fiscal and market impacts                         
In my chairman"s statement of 2003, I informed Sasol stakeholders that if the   
prevailing strength of the rand was to persist, it would be unlikely that rand  
earnings in the forthcoming financial year (2004) would match those of the      
previous year.                                                                  
In this financial year, high international oil prices and the improvement of    
some US dollar-based chemical product margins somewhat reduced the serious      
unfavourable impact that the further strengthening of the rand had on earnings  
and cash flow. The average rand-to-US$ exchange rate strengthened by about 24%  
and resulted in net adverse currency effects amounting to R6 billion relative to
the previous financial year.                                                    
Productivity improvement and cost reduction initiatives have advanced           
successfully in most businesses in recent years. In these tough business        
conditions, however, the initiative by management to intervene and call for     
further cost reductions in all businesses was timely and necessary. The benefit 
of this intervention contributed meaningfully to earnings and much of it will be
sustained into the future.                                                      
Attributable earnings of R5,9 billion was 24% lower than in the previous year.  
It is note-worthy that earnings in the second half of the year was 39% higher   
than in the first half, mainly because of the benefit of higher oil prices, cost
reductions and improved margins in some chemical businesses. Earnings per share 
dropped by 24% from 1 283 cents to 974 cents. The total dividend declared for   
the year of 450 cents is equal to the dividend of the previous year. Gearing at 
30 June 2004 was 41% and within the group"s target range.                       
Last year we reported that various businesses in the chemical portfolio were    
being scrutinised and reviewed to ensure strategic fit and the ability to meet  
financial targets on a sustainable basis. Consequently, a number of businesses  
were closed or sold as this process of optimisation and increasing focus on core
activities advanced. The review process continues.                              
The acrylates complex at Sasolburg was commissioned and is expected to be an    
important contributor to future group earnings. The Mozambique Natural Gas      
Project was completed by year-end when the autothermal reformers at Sasolburg   
were commissioned.                                                              
The feedstock requirements of our chemical plants at Sasolburg provide the      
anchor demand for this project. Bringing this stranded gas to Southern African  
markets is a major contribution to the development of the region. Monetising the
gas will have a material positive impact on Mozambique"s economy and is a       
welcome addition to the group"s commercial gas activities.                      
Notable projects authorised by the board during the year included Project Turbo 
- the fuel enhancement and polymer expansion project in South Africa, as well as
a world-scale ethylene and polymer project in Iran (Arya Sasol Polymers) in     
partnership with the National Petrochemical Company of that country.            
Unity among business associations                                               
Last year, I encouraged South African business leaders to pursue unification of 
our many business chambers, associations and related entities so that business  
collectively could play its rightful role in influencing the economic           
transformation and growth of our great country. It is therefore pleasing that   
business organisations are being unified under Business South Africa (BUSA). All
role players are now obliged to ensure that this new association of business    
leadership grows into an effective force in order to serve the interests of the 
country"s business community and thereby the economy at large. Business has such
a key role to play and much to contribute as the transformation processes of our
country advance. It is therefore imperative that strategic views and a long-term
vision prevail over short-term cost-driven approaches and that businesses       
throughout the country take heed of the need to promote and protect business    
interests and offer the required financial support to ensure the success of the 
Black economic empowerment (BEE)                                                
During the year, important announcements were made about two major BEE          
initiatives in our liquid fuels and mining businesses. These are high-performing
and core businesses at Sasol.                                                   
Our Main Supply Agreements with other leading fuel companies expired at the end 
of 2003, thereby enabling Sasol to accelerate plans to introduce BEE ownership  
into our liquid fuels business. This will be a substantial transaction and we   
wish to achieve a suitable combination of capacity building - with the          
associated need in our technically oriented businesses for competence,          
experience and skills - and broad-based BEE equity participation.               
We are advancing discussions with a high-profile consortium of black business   
leaders who will both provide the necessary skills and arrange the required     
broad-based owners" representation. The latter is essential as far as we are    
concerned and we are determined to achieve it. It is envisaged that any         
resultant ownership structure will probably migrate into the merged liquid fuels
entity of Sasol Oil and Engen, assuming this exciting planned merger            
materialises and is approved by South Africa"s competition authorities. This    
will result in this BEE venture becoming one of the most substantial and        
sustainable empowerment partnerships in the South African oil and fuels         
The highly successful BEE liquid fuels retailing venture, Exel, was integrated  
into Sasol Oil. Exel shareholders enjoyed substantial capital growth from their 
investment in this Sasol initiated enterprise and some shareholders have been   
offered a position in the larger liquid fuels business mentioned above.         
We also announced the signing of an MOU with Eyesizwe Coal in terms of this     
empowerment company"s expected equity participation in Sasol Mining. Likewise,  
this will be a substantial transaction and a meaningful partnership between two 
competent and successful mining companies. An equity empowerment opportunity in 
our chemicals portfolio is also being evaluated.                                
Our Mozambique Natural Gas Project, which has been successfully completed, also 
presents potentially significant empowerment opportunities. The South African   
and Mozambican governments together have an option on a 50% equity position in  
the gas pipeline which, if not retained by them, can contractually be sold to   
BEE enterprises.                                                                
This could result in the entire natural gas value-chain having significant BEE  
ownership in the future.                                                        
We have made pleasing progress and have significantly increased the quantum and 
value of goods and services procured from empowered suppliers. In various       
instances, our businesses have coached and nurtured suppliers in order to ensure
both their sustainability and ability to meet our stringent quality standards.  
We run complex and potentially hazardous plants and it is essential that at all 
times our quality standards are maintained in the interests of our employees,   
contractors, customers and surrounding communities.                             
Our commitment to these transformation processes is high and we fully understand
the crucial role we play in them from a national perspective. We appreciate that
the future stability of South Africa is dependent, inter alia, on historically  
disadvantaged South Africans participating on a widely representative basis in  
the economy. Succeeding with these transformation processes is clearly a        
strategic imperative and, as a patriotic South African company, we promote their
merits both locally and internationally. We at Sasol believe firmly in the      
future of Southern Africa and, from an investment perspective, have given ample 
tangible expression of our confidence by spending R21 billion on capital        
projects in the region over the last three years.                               
It is noteworthy that the foreign shareholding in Sasol increased by 20% during 
the year, to 30%. This underscores the strong foreign interest in Sasol and the 
confidence held internationally in our management, technologies, operating      
skills and strategic intent.                                                    
It also confirms the fine efforts made by management to convince foreigners of  
the merits of investing in South Africa.                                        
I offered the view last year that changes in ownership are profound events in   
business, especially when they are directed by legislation, rather than being a 
consequence of market forces. In addition to investments being made by ourselves
and other South African-based companies, our country needs direct foreign       
investment to boost job creation. While we South Africans understand and support
the sense and motive for our transformation processes, we should appreciate that
from a foreign investor"s perspective it is important that certainty prevails   
and these processes are finalised expeditiously if major investments are to be  
When offering views on empowerment matters it is also necessary to comment on   
progress relating to employment equity. Sasol is a technology-oriented and      
complex business and it relies on substantial technical skills for its success. 
Window dressing, when it comes to employment equity, does not work in our       
environment. As a result, we have established specific plans to ensure we       
succeed and play a responsible and sustainable role in advancing historically   
disadvantaged South Africans.                                                   
A few years ago, our investment in black bursary holders and leadership         
development programmes was increased significantly with a longer-term view to   
meeting our obligations. We set ourselves a target of having 40% of our         
leadership positions filled by people from the designated groups by mid-2005,   
and I am pleased to say we should meet that target.                             
We are conscious that this target can only be seen as an interim one and that   
this journey will continue. We also aspire to improving our position at the more
senior levels of leadership. Recent interventions in this regard have had       
positive results and, generally, were well received by our employees throughout 
the group.                                                                      
Currency and growth                                                             
We congratulate Tito Mboweni on his reappointment as the Governor of the South  
African Reserve Bank and compliment him on his achievements during his first    
term, particularly with respect to inflation control. We fully agree that       
inflation must be kept under control and managed between a lower and an upper   
limit. In this regard I would like to repeat the view expressed last year that  
the lower end (3%) of the targeted inflation range is probably too low and that 
the target should rather be toward the upper end (6%) of the range. Moreover, we
emphasise again the importance of pursuing this target in a holistic manner that
takes cognisance of other important priorities, notably the overriding need we  
have in South Africa to fight poverty and crime through job creation.           
Not many currency experts forecast last year that the rand would strengthen from
R7,50 : US$1,00 on 30 June 2003 to R6,21 : US$1,00 a year later on 30 June 2004.
Some economists feel that the rand is overvalued at these levels, although its  
current strength can probably be attributed to many factors, including our      
continuing high real interest rates, relative to our trading partners.          
A significant volume of South African exports cannot be sustained at the current
levels of the rand, notably - for example - in our mining and agricultural      
industries, and grave economic consequences and social hardships may transpire  
should it strengthen even further. We know within Sasol the extent to which we  
have had to reduce costs and, in some instances also jobs, in our response to   
the strong currency and in our endeavours to reduce its punishing impact on our 
earnings. Our cost reduction efforts have also resulted in job losses at some of
our suppliers.                                                                  
South Africa"s relatively high interest rates make investing in production      
assets costly and also make our money market an overly attractive destination   
for surplus short-term overseas funds. In order to stimulate investment and     
regain some of the competitiveness of the South African export industry, it is  
essential that the interest rate differential between South Africa and the      
developed world is reduced. In this regard, we welcome the recent 0,5% reduction
in the interest rate. This was a bold move and we encourage the Reserve Bank to 
consider further easing of the rate in the near future should inflation remain  
at acceptable levels and the rand remains strong. Any temptation to follow the  
global interest rate cycle, which is currently on the rise, should be avoided at
this stage.                                                                     
It is important to stress that we are proposing a weaker and stable rand, and   
not a weak rand, and we appeal accordingly for a policy approach that will      
better take other key needs of our economy into account.                        
A sustainable business philosophy                                               
Increasingly, and correctly, businesses worldwide are embracing the attitudes,  
principles and operating practices of sustainability and, commendably, leading  
South African companies are at the forefront of this new-millennium shift. The  
introduction earlier this year of the JSE Securities Exchange Socially          
Responsible Investment (SRI) Index is welcomed and I am pleased that Sasol      
featured successfully in it. I am satisfied with the progress of wide-ranging   
initiatives by the board and management in the areas of people development,     
governance and compliance, environmental management, empowerment and social     
investment. The independent nature of audits and reviews such as the JSE        
Securities Exchange SRI Index and the Dow-Jones Sustainability Index, in which  
the group also participates and has achieved pleasing progress, have an         
important role in the measurement of enterprise performance in these key aspects
of business.                                                                    
Profit outlook                                                                  
We now have a few years of history to confirm that oil prices have repositioned 
and moved from the average range of US$18,00 - US$20,00 a barrel that prevailed 
in the 1990s to a long-term level closer to US$25,00 a barrel. Overall, this is 
obviously beneficial to Sasol, although detrimental to the margins of some of   
our chemical products. In the year ahead it is expected that oil prices will    
remain relatively high, although their vulnerability to sociopolitical events   
makes forecasting risky. Likewise, it is not easy to forecast currency movements
because even leading currencies have shown how susceptible they are to major    
institutional interventions. Nevertheless, it will be prudent to plan and run   
the company on the basis that rand strength will continue.                      
The substantial improvement in earnings during the second half of the year under
review should maintain momentum, thereby probably resulting in a material       
increase in earnings in the new financial year. This outlook should be viewed,  
however, in the context of the views expressed above with respect to oil prices 
and currencies. This profit outlook has not been reviewed by our auditors.      
In pursuit of our growth ambitions, the group is expected to reach a peak of    
investment spending over the next three years, especially because of the capital
cost of Project Turbo and the initial rollout of our GTL plans. Our stakeholders
know that we have a self-imposed gearing limit of 50%, which was authorised last
year by the board after careful deliberation. In reviewing the capital          
expenditure forecast the board is satisfied that, while the funding capability  
of the group may be stretched to this limit, the balance sheet itself will not  
be stressed and its integrity and strength will be maintained.                  
During the past year we have again enjoyed strong support from our various      
business partners, including our customers, suppliers, contractors and bankers. 
I thank them all.                                                               
I also thank the South African and other governments and regulatory bodies for  
the constructive engagements we have had with them.                             
Our employees at all our operations and offices around the world have again     
added much meaning to our company creed of "reaching new frontiers" during a    
year of significant challenge. I am grateful to all of them and compliment them 
on what they have achieved.                                                     
Our board has a powerful mixture of skills and experience and I again express my
appreciation to all members for their continuing sound counsel and advice.      
Finally, I thank chief executive, Pieter Cox and his executive team for         
successfully leading the company through yet another challenging year from a    
trading perspective. The year has also been characterised by much consolidation 
that they have undertaken within our various businesses and it is clear that    
Sasol has emerged stronger and well positioned to embark on a further growth    
Paul du P Kruger                                                                
Registered office:                                                              
Sasol Limited, 1 Sturdee Avenue, Rosebank, Johannesburg 2196                    
PO Box 5486, Johannesburg 2000                                                  
Transfer secretaries:                                                           
Computershare Investor Services 2004 (Pty) Limited, 70 Marshall Street,         

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