Industry Trend Analysis - Sinopec Move A Strategic Fit - MAY 2017

BMI View: Sinopec's potential entry into the South African downstream represents a favourable strategic fit for the company whilst also aligning with Chevron's divestment plans. South Africa could benefit if Sinopec moves ahead with proposed refinery upgrade plans.

Sinopec is thought to be in the final stages of negotiation with Chevron, regarding the sale of a 75% stake in its subsidiary Chevron South Africa Proprietary Limited for an estimated sum of USD1.0bn. The deal would see Sinopec acquire the 110,000b/d Cape Town refinery, as well as a lubricants plant in Durban, alongside several storage tanks and a network of Caltex service stations across the country.

We believe the deal makes broad commercial sense for Chevron due underperformance of the downstream sector in South Africa in the company's portfolio. We retain our conservative outlook for the South African downstream sector, both in our outlook for domestic refined fuels consumption and our view on the state of domestic refineries and subsequently production. Disproportionately high domestic fuel prices combined with constrained growth in the South African mining and construction sectors - both key fuel demand drivers (see ' Price Hikes To Exacerbate Fuel Demand Headwinds ' , February 23) - paint a subdued outlook for fuel demand in the country. Subsequently, the profitability of the country's refining sector is under growing pressure. Additionally, operating costs in the sector continue to grow, with ageing refineries, low complexity, a high level of unionisation in the workforce, frequent industrial action and repeated power outages, all raising costs and undercutting profitability in the sector.

Downstream Weakness Prompting Chevron Exit
South Africa Downstream Sector
e/f = BMI estimate/ forecast. Source: BMI/EIA

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