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Since May South Africa’s largest gas and welding company, Afrox, has been importing liquefied petroleum gas (LPG).
Imported LPG is considerably more expensive than locally supplied gas. The main reason for the increased LPG imports is that Afrox cannot source enough gas from South African suppliers, certainly not enough to meet growing winter demand from households and business, and more gas is needed than can be supplied for the winter months.
“With erratic supply from the country’s oil refineries, the increased usage often leads to LPG shortages,” says Mark Radford, Afrox’s head of LPG, quoted in a statement issued by Afrox on the increased imports. “We are already battling with shortages in the Western Cape where we have to rely on more expensive imported LPG.”
“The Sunrise Energy LPG terminal in the Western Cape will see a capacity to import increasing up to 210 000 tons annually in the first phase in 2017,” says Tilden Hellyer, energy analyst at Frost & Sullivan. “Locally, South Africa produces up to 300 000 tons of LPG along with 50 000 tons being imported. With these numbers, we are locally still 40 000 tons above importation.”
However, adds Hellyer, the project is designed in a modular way that can expand according to demand, reaching a final throughput capacity of 624 000 kilotons a year.
“How this may affect prices is uncertain at this stage, but if the already costly price of LPG increases through importation, South Africa may see companies switch to the potential natural gas in the Cape provinces, which may take shape after the gas-to-power independent power producer (IPP) programme gains traction.”
Radford says the increase in the use of imported LPG puts the focus on SA’s import storage facilities. “Afrox has no choice but to use the available port facilities. The commissioning of Sunrise Energy’s LPG import and storage facility, due for commissioning in the second quarter of next year, at Saldanha Bay in the Western Cape, will facilitate the importation of large quantities of LPG and alleviate shortages, especially in the Western Cape.”
At R20.84 the Afrox share price is pushing its high for the year of R21. The consensus recommendation on INET BFA is a buy. Since LPG imports started in May the share price has advanced 21.2%, and for the year is up 53.9%.
It comes as little surprise that the share is rated a buy. It sits on an attractive price-to-earnings ratio (P/E) of 13.4 times, and the forward P/E is an even more compelling 11.3. A dividend yield of 3.7% is not bad, and the net asset value (NAV) of R11.10 is nearly half the share price, indicating value for money.
Sasol, on the other hand, one of the expected local suppliers of gas to Afrox, is a sell. Its share price, at R370.74, has declined by 13.3% over the past year and all other share price movements are negative up to and including three years. This would not be a share investors would want look at, at least for a while.
Afrox has also not escaped controversy, being one of five major LPG suppliers subjected to raids by regulators on suspicion of price fixing last October, according to a Reuters report quoting the Competition Commission. But Afrox was able to walk away, the allegations not being proved.
One of Hellyer’s colleagues at Frost & Sullivan, Peter Marais, says SA could build import facilities such as the Richards Bay Coal Terminal, whereby a number of companies invest in the terminal. “Although it is an export- dominated terminal, a similar structure for an import facility by all major LPG players could be set up in provinces with the biggest shortfalls.”
Afrox should warm to an idea like this, offering the company some control over the importation of LPG. Ultimately, though, it would surely rather not have to import the more expensive LPG.
The danger is that as this increases the price it has to charge for gas to customers, they could turn away and seek other, less costly suppliers of gas, or pursue other forms of energy. If only Afrox could find sufficient local suppliers.
This article originally contained a paragraph stating that Sasol is not supplying LPG to Afrox, and inferred that this may partly be due to the impact of strike action at its refinery. However, Sasol was not approached for comment. The petrochemical giant says it continues to supply Afrox with LPG uninterrupted and per contractual terms. The group also said while there has been a petroleum sector fuel strike, its operations, including its refineries, continue as normal with no impact on production. We regret the error.
This article originally appeared in the 11 August edition of finweek. Buy and download the magazine here.
