"Sasol at the same time are adding value. Much of the concerns when it comes to African countries is the exporting of raw materials without adding value and then having to import the finished goods back at a premium. Yes, Sasol may have been reliant on the state in the past but today they are one of the countries biggest assets. In fact they are one of the biggest contributors to our fiscal system. Last year they paid R30.8bn in direct and indirect taxes. Wow! (They can probably just consider this fine an extra tax and feel good about it.) "
To market, to market to buy a fat pig. So one of the big stories yesterday locally was that the market closed at a fraction of a few points higher than 50 thousand exactly. If you are a level watcher then you would have seen that the Dax in Germany broker 10 thousand points for the first time, with the ECB standing by and indicating that they would do more after having cut their deposit rate to negative. And in so doing, become the first MAJOR bank to do this. Or so that is what we were told yesterday, I thought to myself, haven't the Swiss done this before? The Danish did it too, but with all due respect to Lurpak butter and Lego, Denmark and their national bank are not exactly major. Sweden have done this too, most recently in 2009, that is now five years ago.
So what exactly is a negative deposit rate? How would it work? The Central Bank allows commercial banks to "keep" their money in overnight facilities, because they are the most trustworthy of all the banks. It is about as safe as you could possibly get, you eliminate counterpart risk. To use an old adage, you are not going to lose any sleep at night worrying if you will get your money back. But in this case, if the rate goes below zero, you are paying the central bank a little, not much, but a little just to park your money. That is right, for the privilege of having your funds safe with the European Central Bank, you pay them a rate of -0,1 percent. Oh bother. But before you say why and what for, know that in real terms you are basically getting a negative rate. Why? Because the deposit rate is below the inflation rate anyhow, that is normally always the case for funds deposited.
Bob McTeer, an ex central banker with the Federal Reserve has a fabulous piece titled The ECB's Negative Interest Rate, where he points out that "minus 1/10 of a percent isn't all that much lower than zero percent" and that "everyone by now is used to earning negative real interest rates on our deposits at banks since the close to zero nominal rates are negative in real terms even if inflation is very low." The point Bob makes at the end is the one Michael and I were debating yesterday. The key of breaking credit for businesses, is this going to motivate banks in the Eurozone to lend to business? And are businesses going to take the risks at these crazy low rates to expand?
In delivering the announcement yesterday, Mario Draghi, the ECB president once again proved that there are many unconventional methods to be used. Along with the negative interest rate, there was a program called targeted longer-term refinancing operations, or TLTRO's. Huh? This program will end in September 2018 and will be designed to encourage banks to borrow more money, of course to lend it out. The explanation: "Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014." So this is for the industrial sector. And is designed to "make" credit freely available to businesses that want it.
Mario Draghi actually answered how this is all going to work, in the Q&A portion of the press conference. The question was, why not embark on asset purchases, i.e. QE? To which Mario Draghi answered: Let me say that we've done this. We think it's a significant package. Are we finished? The answer is no, we aren't finished here. If need be, within our mandate, we aren't finished here. So we know that the ECB will basically do whatever it takes and continue to do whatever it takes.
Another question which deserves attention, How long do you expect it will take for the full effect of these measures to develop? was answered by the astonishingly cool Draghi, with his Italian accent (that is ultra cool): The package has basically three parts. The first part is to ease the monetary policy stance. The second part is to enhance the transmission to the real economy. And the third part is the reaffirmation that we'll also use unconventional instruments if needed, if further easing is needed. So it is clear. If these measures do not arrest the current deflationary environment across much of Europe, the ECB will be forced to implement more measures, and ultimately asset purchases, if the Germans eventually agreed to that.
Now, the response just needs to come from the real economy and financial institutions possibly have been nudged in the right direction with these programs. And hopefully it has the desired effect, although it is likely to take months. And as such, many in the short term will question this (as usual), if I was the ECB I would provide frequent and many updates on the progress.
The reaction from markets? Germany closed below that mark, after having breached that. The FTSE was lower. The CAC40 was higher. The FTSE, as a result of heavy resource exposure, is trading further away from their 52 week highs than the other European markets. Meanwhile, Europeans are meeting today. Another sort. I was just thinking, the Americans, French, the English and the Dutch and Belgians, as well all the other Allied nations celebrate the D-Day Normandy landings, what do the Germans think when this day comes up every year? The G7, that is sans Russia, is meeting in Brussels. But Putin is "there" for the D-Day stuff, but not the G7. Not welcome. What is welcome is that the tensions in the Ukraine seem to have dissipated somewhat. Somewhat.
Byron beats the streets
Yesterday The Competition Tribunal announced a R534 million penalty on Sasol for overcharging within their chemical division between January 2004 and December 2007. Before we go into the details of the fine lets just put that value into perspective. In the 6 months ended December 2013 Sasol's energy cluster alone made R21bn operating profit. The Chemicals cluster made R3.6bn. When this news was announced the share price barely shrugged. The point I am getting at is that the amount is not significant. But it is important to evaluate for the future of Sasol as well as the kind of rhetoric to expect from influential institutions like the Competitions Tribunal.
From the release, this passage is the crux of the argument.
"Much of the Tribunal's judgment focused on the historical context within which Sasol was established, the significant State support and the protection which Sasol received over the years. These measures, the Tribunal found, contributed to Sasol Synfuels becoming one of the lowest cost producers of feedstock propylene, a by-product of Sasol's fuel production. Because of Sasol Synfuels' low feedstock propylene costs, SCI is a low cost producer of purified propylene and one of the lowest cost polypropylene producers in the world. SCI argued in the hearing that the Tribunal should ignore this cost advantage in arriving at its decision while the Commission argued that the cost advantage should be taken into account.
The Tribunal decided to take the cost advantage into account, finding that SCI's market positions in the markets under scrutiny were not the result of risk taking and innovation on its part since it has not engaged in any significant innovation in the production of either purified propylene or polypropylene, but rather due to past exclusive or special rights, in particular very significant historical state support for a considerable period of time."
So basically the tribunal is stating that Sasol's previous state support has resulted in a monopoly type position which they do not deserve to exploit. I guess that makes sense. Monopolies can be dangerous and do need to be regulated to a certain extent. But on the other side of the coin Sasol have very efficiently taken advantage of a fortunate situation. Just like the cement industry takes advantage of the abundance of limestone available or the Chinese have used their massive labour force to their advantage.
Sasol at the same time are adding value. Much of the concerns when it comes to African countries is the exporting of raw materials without adding value and then having to import the finished goods back at a premium. Yes, Sasol may have been reliant on the state in the past but today they are one of the countries biggest assets. In fact they are one of the biggest contributors to our fiscal system. Last year they paid R30.8bn in direct and indirect taxes. Wow! (They can probably just consider this fine an extra tax and feel good about it.)
But that is not all, they provide around 40% of South Africa's petrol requirements. That means that we need to import a whole lot less oil which is great for our trade figures. Sasol is not just important for shareholders (which includes the PIC) but for the whole country.
As you know, capital has choices and Sasol are currently spending billions of Dollars in the US. I wouldn't say it is purely because they are negative about South Africa, there is certainly a potential gap in the US gas to liquids market that only Sasol can fill. But these kind of findings is not helping the cause.
Home again, home again, jiggety-jog Jobs Friday today. It is going to be an amazing spectacle, an octobox fest! If you do not know what that is, please check out your favourite business news sources at and around 14:25 JHB time, all the way through to the market opening. You will see what I mean about the overhyped and most pumped up number the market sees once a month. But all fun, provided of course that you are not at that end of the market.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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