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Shares of Sasol Surge as South Africa Eases Lockdown Restrictions

By Tyler Crowe - Jun 1, 2020 at 12:33PM

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With the implementation of level three lockdown in South Africa, Sasol will be able to ramp up production.

What happened

Shares of South African chemical supplier Sasol (SSL 1.91%) are up 13.8% as of 12 p.m. EDT today. The rise in shares comes after the South African government announced it was moving to level three of its coronavirus response lockdown protocol.

So what

South Africa's response to the coronavirus pandemic and global demand for petroleum products has hit Sasol's business hard. A little over a month ago, it announced it was suspending operations at its Natref crude oil facility and was reducing the production of synthetic fuel (a gasoline-like product manufactured from coal) by 25%. These moves all came at a time when the company was dealing with an extraordinarily high debt load. 

An oil refinery at sunset.

Image source: Getty Images.

Today, though, the South African government announced it was moving to what it calls level three of its lockdown procedures. Under these guidelines, it will ease several restrictions, one of which allows chemical manufacturing facilities to scale up to 100% capacity. As the nation's largest chemical manufacturer, this was a welcome change for Sasol.

Large manufacturing facilities like those owned by Sasol have lots of fixed costs. For them to be profitable, they need to run at high utilization rates. While no facility is ever able to run at 100% all the time, the closer to full capacity, the better.

Now what

This is good news for Sasol as it allows them the flexibility to run facilities at 100%. That doesn't necessarily mean, though, that there is enough demand such that it needs to run all its facilities at full capacity. There are still a lot of restrictions in place in South Africa and the rest of the world, and petrochemical demand is still well below what it was a few months ago. The most likely outcome of this is that the company will run some facilities at as high of a production rate as possible while keeping other operations suspended. 

SSL Total Return Price Chart

SSL Total Return Price data by YCharts

All that said, returning to normal operations doesn't fix the company's balance sheet issues or make it a good investment. The company's stock has declined 77% on a total return basis over the past decade compared to an S&P 500 total return gain of 244%. Maybe there's a chance things will improve from here, but history isn't on Sasol's side. 

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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