Sasol(US:SSL)2022-08-31 15:13Financial Risks and Currency Fluctuations - The company uses derivative financial instruments to partially protect against fluctuations in US dollar prices for oil, export coal, and ethane, but this does not shield against long-term price changes [86]. - The rand/US dollar exchange rate averaged R15.21/US$ in 2022, with fluctuations between R16.31 and R14.16, compared to an average of R15.40 in 2021 [93]. - The company’s borrowings are significantly US dollar-denominated, impacting financial leverage and capital expenditure due to exchange rate fluctuations [90]. - The rand has weakened against the US dollar, closing at R16.84 on 29 August 2022, which could positively affect operating results but negatively impact gearing due to foreign currency-denominated debt [94]. - Ongoing geopolitical tensions and global inflation trends contribute to significant currency volatility, impacting the company's financial condition [265]. Operational and Investment Risks - The COVID-19 pandemic continues to pose risks to the company’s workforce and business continuity, potentially affecting operating results and cash flows [96]. - The company faces risks related to capital investments, including potential schedule delays and cost overruns due to global supply chain disruptions [104]. - The company is exposed to risks from investments in associates and joint arrangements, which may affect its reputation and financial condition [112]. - The company is actively monitoring the impact of COVID-19 and related uncertainties on its operations in Mozambique and other regions [231]. - The company faces ongoing tax disputes, particularly regarding assessments from 2002 to 2012, which may lead to substantial increases in tax payments [276]. Climate Change and Environmental Regulations - The company’s strategy to respond to climate change may face challenges, impacting growth and operational costs [116]. - Sasol's carbon tax liability increased operational costs, with R611 million paid in July 2021 after offsets and electricity levies [118]. - The carbon tax rate was R134 per ton of CO2e in 2021, projected to rise to US$20 per ton by 2026 and US$30 per ton by 2030 [118]. - Sasol aims for a 30% reduction in scope 1 and 2 greenhouse gas emissions by 2030, based on a 2017 baseline [125]. - The company targets a 20% reduction in scope 3 emissions (Category 11) by 2030, off a 2019 baseline, with a net zero ambition by 2050 [125]. - An energy efficiency improvement target of 30% by 2030, based on a 2005 baseline, supports overall emission reduction efforts [125]. - Risks include the unavailability and unaffordability of gas as feedstock, and potential prohibitive costs of green hydrogen [126]. - The imminent Carbon Border Adjustment Mechanism from the EU may impose additional burdens on Sasol's imported products [126]. - Climate change-related laws may increase operational costs and threaten the company's license to operate [130]. - Sasol's international operations face escalating global carbon prices, posing risks particularly in the EU [133]. - The company is subject to increased scrutiny regarding climate change disclosures, with potential regulatory claims for insufficient compliance [132]. - Compliance with evolving environmental regulations poses significant challenges and could adversely impact Sasol's operations and financial results [195]. - Changes in South African waste management legislation are prompting the company to seek alternative waste disposal solutions due to stricter regulations and potential waste levies [200]. - The South African Department of Water and Sanitation is issuing water use licenses with stringent wastewater discharge limits, which may be challenging to comply with [201]. - The company is ensuring compliance with various international chemical regulations, including EU REACH, and has begun filing new registrations for chemicals in the UK post-Brexit [202]. - The EU Green Deal and related regulations may impose additional requirements, potentially limiting market access for products from emerging economies [203]. - South Africa's Hazardous Chemical Agent Regulations require compliance with stricter occupational exposure limits, necessitating significant capital investment for retrofitting plants [204]. Compliance and Regulatory Challenges - The company identified a material weakness in internal controls over financial reporting in 2020, which is still being remediated [146]. - As of June 30, 2022, the company's disclosure controls and procedures remained ineffective due to the identified material weakness [147]. - The company is implementing remedial measures, but there is no assurance of their success, which could lead to further material weaknesses [148]. - Non-compliance with regulatory requirements could result in significant penalties and adversely affect the company's reputation and operations [151]. - The company has been granted postponements until April 1, 2025, to meet stricter air quality emissions standards, but compliance remains a challenge [158]. - The company aims for a 30% reduction in SO2 emissions by 2030 through an integrated reduction roadmap [160]. - The company is subject to various laws and regulations regarding safety, health, and environmental protection, which may impact its financial condition [164]. - Non-compliance with competition and consumer protection laws could expose the company to significant penalties and damage its reputation [165]. - The company operates under data protection laws, and non-compliance could result in fines and adversely affect its reputation [168]. - The Upstream Petroleum Resources Development Bill (UPRDB) is under consideration, which may impact the company's mineral rights once promulgated [169]. - The 2018 Mining Charter increased the Broad-based Black Economic Empowerment (B-BBEE) shareholding requirement from 26% to 30% for new mining right applications [170]. - Sasol Mining may face higher production costs and compliance risks due to the stringent criteria of the 2018 Mining Charter, potentially leading to suspension or cancellation of mining rights [170]. - The Mine Health and Safety Amendment Bill proposes fines of up to 10% of annual turnover for non-compliance with the Mine Health and Safety Act [174]. - Sasol Oil has received approval for its wholesale and manufacturing licenses, but the Natref refinery manufacturing license is still pending [175][176]. - The Clean Fuels II Regulations require substantial capital investments for compliance, with an expected implementation date of 1 July 2027 [178]. - New biofuel blending regulations mandate blending between 2% and 10% of bio-ethanol with petrol and a minimum of 5% bio-diesel with diesel, which may challenge compliance with Clean Fuels II specifications [181]. - The Gas Act allows NERSA to regulate gas pipeline activities and impose fines for non-compliance, which could adversely affect Sasol's operations [182]. - Sasol Gas is facing potential retrospective liabilities due to lower maximum gas prices approved by NERSA compared to historical prices charged [186]. - International gas price volatility may impact the 2023 Maximum Gas Price determination, affecting Sasol's financial condition [191]. - The company is exposed to legal and regulatory uncertainties in various countries, which may disrupt operations and development plans [278]. - The company is subject to complex and changing tax laws across multiple jurisdictions, leading to potential unexpected tax liabilities [273]. - The company may face significant fines and penalties from tax assessments, impacting cash flows and financial position [275]. Market and Economic Conditions - South African consumer price inflation averaged 5.7% in 2022, up from 3.5% in 2021, while US inflation rose to 7.2% in 2022 from 2.3% in the previous year [263]. - The South African Reserve Bank increased the policy interest rate to 5.50% by July 2022, up from 3.50% in July 2021, indicating aggressive monetary policy normalization [263]. - The 2018 Mining Charter requires compliance for mining rights, with potential risks including inability to obtain licenses and loss of customers if transformation regulations are not met [236]. - In Mozambique, local content plans are agreed with the government, and failure to meet key performance indicators may impact operating licenses [235]. - The lack of specific local content laws in Mozambique poses risks for operators due to potential misinterpretation of local content requirements [242]. - The revised Codes of Good Practice for B-BBEE came into effect on May 1, 2015, and were amended on May 31, 2019, providing a standard framework for B-BBEE measurement across sectors [245]. - Sasol Mining's inability to fully comply with the 2018 Mining Charter ownership requirements may affect new mining rights applications [251]. - The South African labour market remains volatile, with major industrial actions possible during wage negotiations, although Sasol's employee relations landscape is currently stable [255]. - The company faces risks from macroeconomic factors such as inflation and interest rates, which could significantly increase operational costs [262]. - Unplanned power outages from Eskom could negatively impact production volumes, costs, and profitability, despite the company's capacity to generate half of its electricity needs [283]. - Transportation infrastructure challenges, including reliance on Transnet for exports, may adversely affect sales volumes and profitability [287]. - Infrastructure challenges, including electricity and water supply, could materially affect the company's business and future growth [282]. - Geopolitical events, such as the conflict between Russia and Ukraine, may negatively impact costs, currency exchange rates, and overall business conditions [227]. - Economic and political instability in regions where the company operates could adversely affect its financial condition and operational results [230]. - The CEMAC Central Bank (BEAC) has implemented Foreign Exchange Regulation No. 02/18, which includes severe penalties for non-compliance, potentially up to 50% of a company's assets [270]. - Sasol Gabon S.A. remains active in Gabon, engaging with BEAC to improve operational efficiency in the oil and gas industry [271].