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Financial risk management and financial instruments | 12 Months Ended
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Jun. 30, 2019
Financial risk management and financial instruments |
Financial risk management and financial instruments | 40 Financial risk management and financial instruments Financial instruments overview The following table summarises the group’s classification of financial instruments.
|  |  |  | Carrying value |  |  |
|  |  |  | At fair value through profit and loss |  | Designated at fair value through other comprehensive income |  | Amortised cost |  | Fair value |
|  | Note |  | Rm |  | Rm |  | Rm |  | Rm |
2019 |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |
Investments in listed securities |  |  |  | — |  | 830 |  | — |  | 830 |
Investments in unlisted securities |  |  |  | — |  | 393 |  | — |  | 393 |
Other long-term investments |  |  |  | — |  | — |  | 25 |  | 25 |
Long-term receivables |  | 19 |  | — |  | — |  | 5 582 |  | 5 582 |
Long- and short-term financial assets |  |  |  | 645 |  | — |  | — |  | 645 |
Trade and other receivables** |  | 24 |  | — |  | — |  | 25 611 |  | 25 611 | *
Cash and cash equivalents* |  | 27 |  | — |  | — |  | 15 877 |  | 15 877 | *
Financial liabilities |  |  |  |  |  |  |  |  |  |  |
Listed long-term debt (Bonds issued)+ |  | 16 |  | — |  | — |  | 46 060 |  | 49 421 |
Unlisted long-term debt+ |  | 16 |  | — |  | — |  | 91 279 |  | 91 777 |
Short-term debt and bank overdraft |  |  |  | — |  | — |  | 1 297 |  | 1 297 | *
Long- and short-term financial liabilities |  |  |  | 2 205 |  | — |  | — |  | 2 205 |
Trade and other payables+ |  | 25 |  | — |  | — |  | 28 501 |  | 28 501 | *
Measurement principles under IFRS 9 remained the same to those previously applied except for investment in unlisted securities that are measured at fair value through other comprehensive income compared to being measured at cost under IAS 39. The cost under IAS 39 was R244 million at 30 June 2018. Both the listed and unlisted investment in securities were classified as available for sale under IAS 39. Refer to note 1 for transition approach.
|  |  |  | Carrying value |  |  |
|  |  |  | At fair value through profit and loss |  | Available- for-sale |  | Amortised cost |  | Held-to- maturity |  | Fair value |
|  | Note |  | Rm |  | Rm |  | Rm |  | Rm |  | Rm |
2018 |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |
Investments in listed securities |  |  |  | — |  | 682 |  | — |  | — |  | 682 |
Investments in unlisted securities |  |  |  | — |  | 244 |  | — |  | — |  | 244 |
Other long-term investments |  |  |  | — |  | — |  | — |  | 25 |  | 25 |
Long-term receivables |  | 19 |  | — |  | — |  | 3 824 |  | — |  | 3 824 |
Long- and short-term financial assets |  |  |  | 1 827 |  | — |  | — |  | — |  | 1 827 |
Trade and other receivables** |  |  |  | — |  | — |  | 26 648 |  | — |  | 26 648 | *
Cash and cash equivalents |  | 27 |  | — |  | — |  | 17 128 |  | — |  | 17 128 | *
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |
Listed long-term debt (Bonds issued)+ |  | 16 |  | — |  | — |  | 13 704 |  | — |  | 13 345 |
Unlisted long-term debt+ |  | 16 |  | — |  | — |  | 95 750 |  | — |  | 95 984 |
Short-term debt and bank overdraft |  |  |  | — |  | — |  | 2 035 |  | — |  | 2 035 | *
Long- and short-term financial liabilities |  |  |  | 2 059 |  | — |  | — |  | — |  | 2 059 |
Trade and other payables+ |  | 25 |  | — |  | — |  | 26 518 |  | — |  | 26 518 | *
* | The fair value of these instruments approximates carrying value, due to their short-term nature.
** | Trade and other receivables includes employee-related and insurance-related receivables.
+ | Includes unamortised loan costs.
40.1 Financial risk management The group is exposed in varying degrees to a number of financial instrument related risks. The Group Executive Committee (GEC) has the overall responsibility for the establishment and oversight of the group’s risk management framework. The GEC established the risk and safety, health and environment committee, which is responsible for providing the board with the assurance that significant business risks are systematically identified, assessed and reduced to acceptable levels. A comprehensive risk management process has been developed to continuously monitor and assess these risks. Based on the risk management process Sasol refined its hedging policy and the Sasol Limited Board appointed a subcommittee, the Hedging and Digital Committee that meets regularly to review and, if appropriate, approve the implementation of hedging strategies for the effective management of financial market related risks. The group has a central treasury function that manages the financial risks relating to the group’s operations. Capital allocation The group’s objectives when managing capital (which includes share capital, borrowings, working capital and cash and cash equivalents) is to maintain a flexible capital structure that reduces the cost of capital to an acceptable level of risk and to safeguard the group’s ability to continue as a going concern while taking advantage of strategic opportunities in order to grow shareholder value sustainably. The group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, repurchase shares currently issued, issue new shares, issue new debt, issue new debt to replace existing debt with different characteristics and/or sell assets to reduce debt. The group monitors capital utilising a number of measures, including the gearing ratio. The group’s targeted gearing ratio has been lifted to 60% until 2021 and thereafter will be managed down to the long-term target of between 20% and 40%. Gearing takes into account the group’s substantial capital investment and susceptibility to external market factors such as crude oil prices, exchange rates and commodity chemical prices. The group’s gearing level for 2019 is 56,3% (2018 – 42,2%; 2017 – 26,4%). Financing risk Financing risk refers to the risk that financing of the group’s net debt requirements and refinancing of existing borrowings could become more difficult or more costly in the future. This risk can be decreased by managing the group within the targeted gearing ratio, maintaining an appropriate spread of maturity dates, and managing short-term borrowings within acceptable levels. The group’s target for long-term borrowings include an average time to maturity of at least two years, and an even spread of maturities. Credit rating To achieve and keep an optimal capital structure, the group aims to maintain a stable long-term investment grade credit rating, recognising that Sasol, like all South African domiciled entities, is constrained (but not necessarily capped) by the South African sovereign rating. In November 2017 S&P downgraded South Africa’s sovereign credit rating from BB+ investment grade to BB with a stable outlook. In December 2018, S&P affirmed Sasol’s rating at BBB-/A-3 with a stable outlook. In May 2019 Moody’s Investors Service affirmed Sasol Limited’s long-term issuer rating at Baa3, however changed the outlook from stable to negative. The national issuer scale rating changed from Aaa.za to Aa1.za. Risk profile Risk management and measurement relating to each of these risks is discussed under the headings below (sub-categorised into credit risk, liquidity risk, and market risk) which entails an analysis of the types of risk exposure, the way in which such exposure is managed and quantification of the level of exposure in the statement of financial position. Credit risk Credit risk, or the risk of financial loss due to counterparties not meeting their contractual obligations. Credit risk is deemed to be low when based on the forward available information it is highly probably that the customer will service its debt in accordance to the agreement throughout the period. How we manage the risk The risk is managed by the application of credit approvals, limits and monitoring procedures. Where appropriate, the group obtains security in the form of guarantees to mitigate risk. Counterparty credit limits are in place and are reviewed and approved by the respective subsidiary credit management committees. The central treasury function provides credit risk management for the group-wide exposure in respect of a diversified group of banks and other financial institutions. These are evaluated regularly for financial robustness especially in the current global economic environment. Management has evaluated treasury counterparty risk and does not expect any treasury counterparties to fail in meeting their obligations. The group maximum exposure is the outstanding carrying amount of the financial asset. For all financial assets measured at amortised cost, the group calculates the expected credit loss based on contractual payment terms of the asset. The contractual payment terms for receivables vary from 30 days to 120 days. The exposure to credit risk is influenced by the individual characteristics, the industry and geographical area of the counterparty with whom we have transacted. Financial assets at amortised cost are carefully monitored and reviewed on a regular basis for expected credit loss and impairment based on our credit risk policy. Expected credit loss is calculated as a function of probability of default, loss given default and exposure at default. The group allocate probability of default based on the external and internal information. The major portion of the financial assets at amortised cost consist of externally rated customers and the group uses the average of Moody’s, Fitch and S&P Corporate and Sovereign probability of defaults, depending on whether the customer or holder of the financial asset is corporate or government related. For customers or debtors that are not rated by the rating agency, the group allocate internal credit ratings and default rates taking into account forward looking information, based on the, debtors profile and financial status. Loss given default is based on the Basel model. The Basel model assumes 35% loss given default for secured financial assets and 45% for unsecured financial assets. Credit enhancement is only taken into account if it is integral to the asset. Trade receivables expected credit loss is calculated over lifetime. Other financial assets expected credit loss is measured over 12 months when the credit risk is low and over lifetime where the credit risk has increased. Credit risk is deemed to have increases when the payment is 30 days overdue and the customer have defaulted, indicating that their inability to honor the debt. No single customer represents more than 10% of the group’s total turnover or more than 10% of total trade receivables for the years ended 30 June 2019, 2018 and 2017. Approximately 50% (2018 – 49%; 2017 – 48%) of the group’s total turnover is generated from sales within South Africa, while about 22% (2018 – 24%; 2017 – 22%) relates to European sales and 14% (2018 – 13%; 2017 – 13%) relates to sales within the US. The concentration of credit risk within geographic regions is largely aligned with the geographic regions in which the turnover was earned. Detail of allowances for credit losses:
|  |  |  | 2019 |  | 2018 |
|  | Life time |  | 12 months |  | Deductions |  | Expected credit loss |  | Impairment |
|  | Rm |  | Rm |  | Rm |  | Rm |  | Rm |
Long-term receivables |  | 211 |  | — |  | — |  | 211 |  | 38 |
Trade receivables |  | 225 |  | — |  | — |  | 225 |  | 199 |
Other receivables |  | 204 |  | 24 |  | — |  | 228 |  | 228 |
|  | 640 |  | 24 |  | — |  | 664 |  | 465 |
Overview of the credit risk profile of financial assets measured at amortised cost is as follows:
|  | 2019 |
|  | % |
AAA to A- |  | 85 |
BBB to B- |  | 8 |
CCC+ and - below |  | 7 |
An amount of R465 million has been recognised under IAS 39 as at 30 June 2018. During 2019 additional net impairments of R199 million were recognised. The effect of the change was inconsequential on Sasol’s accounting as the expected loss basis is not significantly different from the stringent debtor management policies currently applied by Sasol, and therefore no transition adjustment is presented. Expected credit loss (in both long-term receivables and trade receivables) mainly relate to exposure to Mozambique. Liquidity risk Liquidity risk is the risk that an entity in the group will be unable to meet its obligations as they become due. How we manage the risk The group manages liquidity risk by effectively managing its working capital, capital expenditure and cash flows, making use of a central treasury function to manage pooled business unit cash investments and borrowing requirements. Currently the group is maintaining a positive liquidity position, conserving the group’s cash resources through continued focus on working capital improvement, cost savings and capital reprioritisation. The group meets its financing requirements through a mixture of cash generated from its operations and, short and long-term borrowings and strives to maintain adequate banking facilities and reserve borrowing capacities. The group is in compliance with all of the financial covenants per its loan agreements, none of which is expected to present a material restriction on funding or its investment policy in the near future. The group currently has sufficient undrawn borrowing facilities, which could be utilised to settle obligations and is planning for additional facilities to manage the finalisation of the LCCP. Refer to note 16. Our exposure to and assessment of the risk The maturity profile of the undiscounted contractual cash flows of financial instruments at 30 June were as follows:
|  |  |  | Contractual cash flows* |  | Within one year |  | One to five years |  | More than five years |
|  | Note |  | Rm |  | Rm |  | Rm |  | Rm |
2019 |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |
Non-derivative instruments |  |  |  |  |  |  |  |  |  |  |
Long-term receivables |  | 19 |  | 5 582 |  | — |  | 4 203 |  | 1 379 |
Trade and other receivables |  | 24 |  | 25 611 |  | 25 611 |  | — |  | — |
Cash and cash equivalents (excluding restricted cash) |  |  |  | 13 397 |  | 13 397 |  | — |  | — |
Investments through other comprehensive income |  |  |  | 1 223 |  | 680 |  | 543 |  | — |
Other long-term investments |  |  |  | 25 |  | — |  | 25 |  | — |
|  |  |  | 45 838 |  | 39 688 |  | 4 771 |  | 1 379 |
Derivative instruments |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  |  | 2 161 |  | 2 161 |  | — |  | — |
Interest rate swap |  |  |  | 15 |  | — |  | 8 |  | 7 |
Zero cost collar |  |  |  | 582 |  | 582 |  | — |  | — |
Ethane swaps |  |  |  | 2 |  | 2 |  | — |  | — |
Other commodity derivatives |  |  |  | 31 |  | 31 |  | — |  | — |
|  |  |  | 48 629 |  | 42 464 |  | 4 779 |  | 1 386 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |
Non-derivative instruments |  |  |  |  |  |  |  |  |  |  |
Long-term debt*** |  | 16 |  | (183 445 | ) | (8 232 | ) | (138 453 | ) | (36 760 | )
Short-term debt |  | 16 |  | (1 239 | ) | (1 239 | ) | — |  | — |
Trade and other payables |  | 25 |  | (28 501 | ) | (28 501 | ) | — |  | — |
Bank overdraft |  | 27 |  | (58 | ) | (58 | ) | — |  | — |
Financial guarantees** |  |  |  | (1 326 | ) | (1 326 | ) | — |  | — |
|  |  |  | (214 569 | ) | (39 356 | ) | (138 453 | ) | (36 760 | )
Derivative instruments |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  |  | (2 190 | ) | (2 190 | ) | — |  | — |
Interest rate swap |  |  |  | (1 488 | ) | (213 | ) | (1 029 | ) | (246 | )
Zero cost collar |  |  |  | (3 | ) | (3 | ) | — |  | — |
Ethane swaps |  |  |  | (456 | ) | (456 | ) | — |  | — |
Crude oil futures |  |  |  | (27 | ) | (27 | ) | — |  | — |
Other commodity derivatives |  |  |  | (10 | ) | (10 | ) | — |  | — |
|  |  |  | (218 743 | ) | (42 255 | ) | (139 482 | ) | (37 006 | )
* | Contractual cash flows include interest payments.
** | Issued financial guarantees contracts are all repayable on default, however the likelihood of default is considered remote.
*** | Of the amounts due in one to five years, R131 billion relates to the repayment of the bonds, the revolving credit facility and the term loan.
|  |  |  | Contractual |  | Within |  | One to |  | More than |
|  |  |  | cash flows* |  | one year |  | five years |  | five years |
|  | Note |  | Rm |  | Rm |  | Rm |  | Rm |
2018 |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |
Non-derivative instruments |  |  |  |  |  |  |  |  |  |  |
Long-term receivables |  | 19 |  | 3 786 |  | — |  | 1 586 |  | 2 200 |
Trade and other receivables |  | 24 |  | 26 648 |  | 26 648 |  | — |  | — |
Cash and cash equivalents (excluding restricted cash) |  | 27 |  | 15 148 |  | 15 148 |  | — |  | — |
Investments available-for-sale |  |  |  | 926 |  | 926 |  | — |  | — |
Investments held-to-maturity |  |  |  | 25 |  | — |  | 25 |  | — |
|  |  |  | 46 533 |  | 42 722 |  | 1 611 |  | 2 200 |
Derivative instruments |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  |  | 1 214 |  | 1 214 |  | — |  | — |
Interest rate swap |  |  |  | 246 |  | — |  | — |  | 246 |
Zero cost collar |  |  |  | 979 |  | 979 |  | — |  | — |
Crude oil options |  |  |  | 482 |  | 482 |  | — |  | — |
Ethane swaps |  |  |  | 33 |  | 33 |  | — |  | — |
|  |  |  | 49 487 |  | 45 430 |  | 1 611 |  | 2 446 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |
Non-derivative instruments |  |  |  |  |  |  |  |  |  |  |
Long-term debt |  | 16 |  | (139 294 | ) | (16 612 | ) | (86 415 | ) | (36 267 | )
Short-term debt |  | 16 |  | (1 946 | ) | (1 946 | ) | — |  | — |
Trade and other payables |  | 25 |  | (26 518 | ) | (26 518 | ) | — |  | — |
Bank overdraft |  | 27 |  | (89 | ) | (89 | ) | — |  | — |
Financial guarantees** |  |  |  | (1 539 | ) | (1 539 | ) | — |  | — |
|  |  |  | (169 386 | ) | (46 704 | ) | (86 415 | ) | (36 267 | )
Derivative instruments |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  |  | (1 217 | ) | (1 217 | ) | — |  | — |
Coal swaps |  |  |  | (414 | ) | (414 | ) | — |  | — |
Zero cost collar |  |  |  | (1 317 | ) | (1 317 | ) | — |  | — |
Crude oil futures |  |  |  | (91 | ) | (91 | ) | — |  | — |
|  |  |  | (172 425 | ) | (49 743 | ) | (86 415 | ) | (36 267 | )
* | Contractual cash flows include interest payments.
** | Issued financial guarantees contracts are all repayable on default, however the likelihood of default is considered remote.
Market risk Market risk is the risk arising from possible market price movements and their impact on the future cash flows of the business. The market price movements that the group is exposed to: Foreign currency risk Foreign currency risk is a risk that earnings and cash flows will be affected due to changes in exchange rates. How we manage the risk Our Hedging and Digital Committee sets broad guidelines in terms of tenor and hedge cover ratios specifically to assess future currency exposure, which have the potential to materially affect our financial position. These guidelines and our hedging policy are reviewed from time to time. This hedging strategy enables us to better predict cash flows and thus manage our liquidity and key financial metrics more effectively. Foreign currency risks are managed through the group’s hedging policy and financing policies and the selective use of various derivatives. Our exposure to and assessment of the risk The group’s transactions are predominantly entered into in the respective functional currency of the individual operations. The construction of the LCCP has largely been financed through funds obtained in US dollar, with a small portion of funds obtained from Rand sources. A large portion of our turnover and capital investments are significantly impacted by the rand/US$ and rand/EUR exchange rates. Some of our fuel products are governed by the BFP, of which a significant variable is the rand/US$ exchange rate. Our export chemical products are mostly commodity products whose prices are largely based on global commodity and benchmark prices quoted in US dollars and consequently are exposed to exchange rate fluctuations that have an impact on cash flows. These operations are exposed to foreign currency risk in connection with contracted payments in currencies not in their individual functional currency. The most significant exposure for the group exists in relation to the US dollar and the Euro. The translation of foreign operations to the presentation currency of the group is not taken into account when considering foreign currency risk. Zero-cost collars In line with the risk mitigation strategy, the group hedges a significant portion of its estimated foreign currency exposure in respect of forecast sales and purchases over the following 12 months. The group uses zero-cost collars to hedge its currency risk, most with a maturity of less than one year from the reporting date. Foreign exchange contracts Foreign exchange contracts (FECs) are utilised throughout the group to hedge the risk of currency depreciation on committed and highly probable forecast transactions. Transactions hedged with FECs include capital and goods purchases (imports) and sales (exports). Other transactions hedged include certain intercompany loans which expose the group to foreign currency risk. A number of FECs were entered into during the year and classified as held for trading. FECs are also utilised in the group in cash flow hedge relationships. FECs taken out to hedge exposure to fluctuations in the rand/US$ exchange rate were held over a total notional amount of Rnil million at 30 June 2019 (2018 — R33 million (US$nil; EUR2,1 million)). The following significant exchange rates were applied during the year:
|  | Average rate |  | Closing rate |
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |
|  | Rand |  | Rand |  | Rand |  | Rand |
Rand/Euro |  | 16,19 |  | 15,34 |  | 16,01 |  | 16,04 |
Rand/US dollar |  | 14,20 |  | 12,85 |  | 14,08 |  | 13,73 |
The table below shows the significant currency exposure where entities within the group have monetary assets or liabilities that are not in their functional currency, have exposure to the US dollar or the Euro. The amounts have been presented in rand by converting the foreign currency amount at the closing rate at the reporting date.
|  | 2019 |  | 2018 |
|  | Euro |  | US dollar |  | Euro |  | US dollar |
|  | Rm |  | Rm |  | Rm |  | Rm |
Trade and other receivables |  | 515 |  | 2 375 |  | 586 |  | 2 500 |
Cash and cash equivalents |  | 1 470 |  | 1 256 |  | 2 257 |  | 1 452 |
Net exposure on assets |  | 1 985 |  | 3 631 |  | 2 843 |  | 3 952 |
Long-term debt |  | (122 | ) | (1 851 | ) | (153 | ) | (1 651 | )
Short-term debt |  | — |  | — |  | — |  | (23 | )
Trade and other payables |  | (186 | ) | (1 077 | ) | (128 | ) | (1 248 | )
Net exposure on liabilities |  | (308 | ) | (2 928 | ) | (281 | ) | (2 922 | )
Exposure on external balances |  | 1 677 |  | 703 |  | 2 562 |  | 1 030 |
Net exposure on balances between group companies* |  | (1 135 | ) | (22 132 | ) | (2 391 | ) | 9 584 |
Total net exposure |  | 542 |  | (21 429 | ) | 171 |  | 10 614 |
* | The US$ increase relates to additional funding provided to the LCCP by Sasol Financing International.
Sensitivity analysis The following sensitivity analysis is provided to show the foreign currency exposure of the individual entities at the end of the reporting period. This analysis is prepared based on the statement of financial position balances that exist at year-end, for which there is currency risk, before consideration of currency derivatives, which exist at that point in time. The effect on equity is calculated as the effect on profit and loss. The effect of translation of results into presentation currency of the group is excluded from the information provided. A 10% weakening in the group’s significant exposure to the foreign currency at 30 June would have increased either the equity or the profit by the amounts below, before the effect of tax. This analysis assumes that all other variables, in particular, interest rates, remain constant, and has been performed on the same basis for 2018.
|  | 2019 |  | 2018 |
|  |  |  | Income |  |  |  | Income |
|  | Equity |  | statement |  | Equity |  | statement |
|  | Rm |  | Rm |  | Rm |  | Rm |
Euro |  | 54 |  | 54 |  | 17 |  | 17 |
US dollar |  | (2 143 | ) | (2 143 | ) | 1 053 |  | 1 053 |
A 10% movement in the opposite direction in the group’s exposure to foreign currency would have an equal and opposite effect to the amounts disclosed above. Interest rate risk Interest rate risk is the risk that the value of short term investments and financial activities will change as a result of fluctuations in the interest rates. Fluctuations in interest rates impact on the value of short-term investments and financing activities, giving rise to interest rate risk. The group has significant exposure to interest rate risk due to the volatility in South African, European and US interest rates. How we manage the risk Our debt is comprised of different instrument notes, which by their nature either bear interest at a floating or a fixed rate. We monitor the ratio of floating and fixed interest in our loan portfolio and manage this ratio, by electing to incur either bank loans, bearing a floating interest rate, or bonds, which bear a fixed interest rate. We may also use interest rate swaps, where appropriate, to convert some of our debt into either floating or fixed rate debt to manage the composition of our portfolio. In some cases, we may also use other interest rate derivatives, which enables us to mitigate the risks associated with this exposure. In respect of financial assets, the group’s policy is to invest cash at floating rates of interest and cash reserves are to be maintained in short-term investments (less than one year) in order to maintain liquidity, while achieving a satisfactory return for shareholders. Our exposure to and assessment of the risk The group has exposure to the US dollar London Interbank Overnight Rate (LIBOR) through various instruments, including term loans and revolving credit facilities. In 2015, we entered into an interest rate swap for US$1,95 billion to convert variable LIBOR exposure to a fixed rate. It was designated as the hedging instrument in a cash flow hedge. The swap was novated in June 2019 when the underlying LCCP bank term loan was refinanced. This ended the hedge relationship with hedge accounting discontinued. The swap continues to be an economic hedge that cover a portion of the group’s exposure to the LIBOR and we will redesignate the swap as a hedging instrument in a cash flow hedge in financial year 2020. Developments in respect of the proposed reform of the US dollar LIBOR and the impact thereof on our LIBOR linked debt facilities and interest rate swap are actively monitored. Changes to the interest rate benchmark will be considered in conjunction with the surrounding facts and circumstances at the time and appropriate changes and resetting of rates with counterparties will be negotiated and agreed. At the reporting date, the interest rate profile of the group’s interest-bearing financial instruments, including the effect of the interest rate swap was:
|  | Carrying value |
|  | 2019 |  | 2018 |
|  | Rm |  | Rm |
Variable rate instruments |  |  |  |  |
Financial assets |  | 16 663 |  | 18 657 |
Financial liabilities |  | (54 542 | ) | (58 908 | )
|  | (37 879 | ) | (40 251 | )
Fixed rate instruments |  |  |  |  |
Financial assets |  | 197 |  | 97 |
Financial liabilities |  | (83 151 | ) | (51 144 | )
|  | (82 954 | ) | (51 047 | )
Interest profile (variable: fixed rate as a percentage of total financial assets) |  | 99:1 |  | 99:1 |
Interest profile (variable: fixed rate as a percentage of total financial liabilities) |  | 40:60 |  | 54:46 |
Cash flow sensitivity for variable rate instruments Financial instruments affected by interest rate risk include borrowings, deposits, derivative financial instruments, trade receivables and trade payables. A change of 1% in the prevailing interest rate in a particular currency at the reporting date would have increased/(decreased) earnings by the amounts shown below before the effect of tax. The sensitivity analysis has been prepared on the basis that all other variables, in particular foreign currency rates, remain constant and has been performed on the same basis for 2019. The sensitivity has been calculated including consideration of the effect of existing interest rate swap derivative instruments. Interest is recognised in the income statement using the effective interest rate method. With the swap to be designated as a hedge instrument in financial year 2020, the cash flow hedge reserve will be reclassified to profit and loss on a similar basis. Currently the total notional exposure hedged under the swap is US$1,95 billion (2018 — US$2,00 billion). Income statement – 1% increase
|  |  |  |  |  | United States |  |  |
|  | South Africa |  | Europe |  | of America |  | Other |
|  | Rm |  | Rm |  | Rm |  | Rm |
30 June 2019 |  | 27 |  | 15 |  | (433 | ) | 12 |
30 June 2018 |  | (66 | ) | 6 |  | (362 | ) | 18 |
Income statement – 1% decrease
|  |  |  |  |  | United States |  |  |
|  | South Africa |  | Europe* |  | of America* |  | Other* |
|  | Rm |  | Rm |  | Rm |  | Rm |
30 June 2019 |  | (27 | ) | (15 | ) | 433 |  | (12 | )
30 June 2018 |  | 66 |  | (6 | ) | 362 |  | (18 | )
* | A decrease of 1% in interest rates for the United States of America and Europe will not have an effect on the income statement as it is not considered reasonably possible that the repo interest rates will decrease below 0%.
|  | Average fixed rate % |  | Expiry |  | Fair value loss recognised in other comprehensive income 2019 Rm |  | Fair value loss recognised in other comprehensive income 2018 Rm |  | Recognised in profit and loss 2019 Rm |  | Recognised in profit and loss 2018 Rm |
Interest rate swap derivatives |  |  |  |  |  |  |  |  |  |  |  |  |
US$ — pay fixed rate receive floating rate |  |  |  |  |  |  |  |  |  |  |  |  |
North America** |  | 2,78 |  | December 2026 |  | (285 | ) | (950 | ) | (1 485 | ) | 52 |
Mozambique |  | 2,80 |  | February 2030 |  | — |  | — |  | 10 |  | — |
** | The interest rate swap was novated in June 2019 when the underlying LCCP bank term loan was refinanced. This ended the hedge relationship with hedge accounting discontinued. A loss of R1 400 million was recognised in other comprehensive income on the revaluation of the cash flow hedge that was offset by a gain of R1 115 million on the reclassification of the swap to profit and loss on termination of the hedge relationship. We will redesignate the swap as a hedging instrument in a cash flow hedge in financial year 2020.
Commodity price risk Commodity price risk is the risk of fluctuations in our earnings as a result of fluctuation in the price of commodities. How we manage the risk Crude oil, ethane and coal price The group makes use of derivative instruments, including options and commodity swaps as a means of mitigating price movements and timing risks on crude oil purchases and sales, ethane purchases and export coal sales. The group entered into hedging contracts which provide downside protection against decreases in commodity prices. Our exposure to and assessment of the risk A substantial proportion of our turnover is derived from sales of petroleum and petrochemical products. Market prices for crude oil fluctuate because they are subject to international supply and demand and political factors. Our exposure to the crude oil price centres primarily around the selling price of the fuel marketed by our Energy business which is governed by the Basic Fuel Price (BFP) formula, the crude oil related raw materials used in our Natref refinery and certain of our offshore operations including were chemical prices are linked to the crude oil price. Key factors in the BFP are the Mediterranean and Singapore or Mediterranean and Arab Gulf product prices for petrol and diesel, respectively. Dated Brent Crude prices applied during the year:
|  | Dated Brent Crude |
|  | 2019 |  | 2018 |
|  | US$ |  | US$ |
High |  | 86,16 |  | 80,29 |
Average |  | 68,63 |  | 63,62 |
Low |  | 50,21 |  | 46,53 |
The following futures were in place at 30 June:
|  | Contract amount |  | Fair value |  | Within one year |  | Contract amount |  | Fair value |  | Within one year |
|  | 2019 |  | 2019 |  | 2019 |  | 2018 |  | 2018 |  | 2018 |
|  | Rm |  | Rm |  | Rm |  | Rm |  | Rm |  | Rm |
Crude oil futures |  | 1 521 |  | (27 | ) | (27 | ) | 2 792 |  | (91 | ) | (91 | )
Other commodity derivatives |  | 254 |  | 21 |  | 21 |  | — |  | — |  | — |
Sensitivity analysis A 10% increase of the commodity prices at 30 June would have increased the fair value losses recognised in other operating costs in the income statement by the amounts shown below, before the effect of tax. This analysis assumes that all other variables remain constant and should not be considered predictive of future performances. This calculation has been performed on the same basis for 2018.
|  | 2019 |  | 2018 |
|  | Rm |  | Rm |
Crude oil |  | (193 | ) | (153 | )
Sensitivity analysis A 10% decrease in the commodity prices at 30 June would have the equal but opposite effect on the fair value amounts shown above, on the basis that all other variables remain constant. Summary of our derivatives In the normal course of business, the group enters into various derivative transactions to mitigate our exposure to foreign exchange rates, interest rates, and commodity prices Derivative instruments used by the group in hedging activities include swaps, options, forwards and other similar types of instruments.
|  | 2019 |  | 2018 |  | 2017 |
Income statement impact |  | Rm |  | Rm |  | Rm |
Financial instruments |  |  |  |  |  |  |
Net (loss)/gain on derivative instruments |  |  |  |  |  |  |
Foreign exchange contracts (losses)/gains |  | (794 | ) | 121 |  | (1 107 | )
Put option crude oil derivatives |  | (498 | ) | (3 303 | ) | (237 | )
Zero cost collar foreign exchange derivatives |  | 323 |  | 936 |  | 1 608 |
Crude oil futures |  | 265 |  | (687 | ) | 277 |
Coal swaps |  | 91 |  | (1 024 | ) | 94 |
Ethane swaps |  | (462 | ) | 29 |  | — |
Interest rate swaps |  | (1 475 | ) | 52 |  | 14 |
Other forex derivative |  | 85 |  | — |  | — |
|  | (2 465 | ) | (3 876 | ) | 649 |
Statement of financial position impact
|  | 2019 |  | 2018 |
|  | Rm |  | Rm |
Financial instrument |  |  |  |  |
Derivative financial assets |  |  |  |  |
Foreign exchange contracts |  | 15 |  | 42 |
Zero cost collar |  | 582 |  | 979 |
Crude oil options |  | — |  | 482 |
Interest rate swaps |  | 15 |  | 291 |
Ethane swaps |  | 2 |  | 33 |
Other commodity derivatives |  | 31 |  | — |
|  | 645 |  | 1 827 |
Derivative financial liabilities |  |  |  |  |
Foreign exchange contracts |  | (44 | ) | (45 | )
Coal swaps |  | — |  | (414 | )
Crude oil futures |  | (27 | ) | (91 | )
Zero cost collar |  | (3 | ) | (1 317 | )
Interest rate swaps |  | (1 488 | ) | (45 | )
Ethane swaps |  | (456 | ) | — |
Other commodity derivatives |  | (10 | ) | — |
|  | (2 028 | ) | (1 912 | )
Non-derivative financial liabilities |  |  |  |  |
Financial guarantees |  | (177 | ) | (147 | )
|  | (2 205 | ) | (2 059 | )
Derivatives designated in the hedge relationships The group has exposure to the US dollar LIBOR through various instruments, including term loans and revolving credit facilities. In 2015, we entered into an interest rate swap for US$1,95 billion to convert variable LIBOR exposure to a fixed rate. It was designated as the hedging instrument in a cash flow hedge. The swap was novated in June 2019 when the underlying LCCP bank term loan was refinanced. This ended the hedge relationship with hedge accounting discontinued. The swap continues to cover a portion of the group’s exposure to the LIBOR and we will redesignate the swap as a hedging instrument in a cash flow hedge in financial year 2020. The other derivatives within the group are economic hedges to our exposure to the rand/US$ exchange rates and commodity prices that have not been classified as cash flow hedges.
|  | Fair value of assets/ (liabilities) |  | Fair value of assets/ (liabilities) |
|  | 2019 |  | 2018 |
|  | Rm |  | Rm |
Interest rate swap derivatives — held for trading (2018 — cash flow hedge) |  | (1 473 | ) | 246 |
|  | Fair value |  | Fair value |  | Fair value |  | Fair value |  |  |  | Contract/ |  | Contract/ |
|  | of assets |  | of assets |  | of liabilities |  | of liabilities |  |  |  | Notional |  | Notional |
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |  |  |  | amount* |  | amount* |
|  | Rm |  | Rm |  | Rm |  | Rm |  |  |  | 2019 |  | 2018 |
Derivatives held for trading |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | 15 |  | 42 |  | (44 | ) | (45 | ) | US$m |  | 146 |  | 226 |
Crude oil futures |  | — |  | — |  | (27 | ) | (91 | ) | US$m |  | 92 |  | 194 |
|  | 15 |  | 42 |  | (71 | ) | (136 | ) |  |  |  |  |  |
* The notional amount is the sum of the absolute value of all contracts for both derivative assets and liabilities. In addition to foreign exchange contract utilised in normal operating activities, the following derivatives were entered into to mitigate the risks associated with the crude oil price, the rand/US$ exchange rate, ethane price and the coal price.
|  |  |  | 2019 |  | 2018 |
Brent crude oil — Put options |  |  |  |  |  |  |
Premium paid |  | US$m |  | — |  | 207 |
Number of barrels |  | million |  | 48 |  | 98 |
Open positions |  | million |  | — |  | 48 |
Settled |  | million |  | 48 |  | 50 |
Average Brent crude oil price floor, net of costs (open positions) |  | US$/bbl |  | — |  | 53,36 |
Realised losses recognised in the income statement |  | Rm |  | (1 857 | ) | (1 605 | )
Unrealised (losses)/gains recognised in the income statement |  | Rm |  | 1 359 |  | (1 698 | )
Amount included in the statement of financial position |  | Rm |  | — |  | 482 |
Rand/US$ currency — Zero-cost collar instruments |  |  |  |  |  |  |
US$ exposure — open positions |  | US$bn |  | 4 |  | 4 |
Annual average floor |  | R/US$ |  | 13,84 |  | 13,14 |
Annual average cap |  | R/US$ |  | 16,63 |  | 15,14 |
Realised (losses)/gains recognised in the income statement |  | Rm |  | (610 | ) | 2 772 |
Unrealised gains/(losses) recognised in the income statement |  | Rm |  | 933 |  | (1 836 | )
Amount included in the statement of financial position |  | Rm |  | 579 |  | (338 | )
Export coal — Swap options |  |  |  |  |  |  |
Number of tons |  | million |  | 1,40 |  | 4,20 |
Open positions |  | million |  | — |  | 1,40 |
Settled |  | million |  | 1,40 |  | 2,80 |
Average coal swap price (open positions) |  | US$/ton |  | — |  | 81,82 |
Realised losses recognised in the income statement |  | Rm |  | (337 | ) | (618 | )
Unrealised gains/(losses) recognised in the income statement |  | Rm |  | 428 |  | (406 | )
Amount included in the statement of financial position |  | Rm |  | — |  | (414 | )
Ethane — Swap options |  |  |  |  |  |  |
Number of barrels |  | million |  | 16,00 |  | 5,80 |
Open positions |  | million |  | 12,50 |  | 3,50 |
Settled |  | million |  | 3,50 |  | 2,30 |
Average ethane swap price (open positions) |  | US$ c/gal |  | 28 |  | 27 |
Realised gains/(losses) recognised in the income statement |  | Rm |  | 29 |  | (1 | )
Unrealised (losses)/gains recognised in the income statement |  | Rm |  | (491 | ) | 30 |
Amount included in the statement of financial position |  | Rm |  | (454 | ) | 33 |
Sensitivity analysis The fair value of significant derivatives held for trading is impacted by a number of market observable variables at valuation date. The sensitivities provided below reflect the impact on fair value as a result of movements in the significant input variables utilised for valuation purposes:
|  |  |  | Volatility |  | Commodity price |  | Rand/US$ |  | US$ Libor curve |
|  |  |  |  |  |  |  | +USD 2 |  | -USD 2 |  |  |  |  |  |  |
30 June 2019 |  |  |  | +2% |  | -2% |  | c/gal |  | c/gal |  | -R1/US$* |  | +0,5% |  | -0,5% |
Ethane swap |  | Rm |  | 90 |  | (82 | ) | 146 |  | (146 | ) |  |  |  |  |  |
Zero-cost collar |  | Rm |  | 115 |  | (125 | ) |  |  |  |  | 2 495 |  |  |  |  |
Interest rate swap |  | Rm |  |  |  |  |  |  |  |  |  |  |  | 754 |  | (748 | )
|  |  |  | Volatility |  | Commodity price |  | Rand/US$ |  | US$ Libor curve |
30 June 2018 |  |  |  | +2% |  | -2% |  | +USD 2/bbl |  | -USD 2/bbl |  | -R1/US$* |  | +0,5% |  | -0,5% |
Crude oil options |  | Rm |  | 88 |  | (80 | ) | (68 | ) | 81 |  |  |  |  |  |  |
Zero-cost collar |  | Rm |  | 27 |  | (22 | ) |  |  |  |  | 2 731 |  |  |  |  |
Interest rate swap |  | Rm |  |  |  |  |  |  |  |  |  |  |  | 866 |  | (865 | )
* A weakening of the Rand/US$ spot exchange rate of R2,55, will likely result in the spot price falling within the corridor of the cap and floor rates of the zero-cost collars. No gain or loss will be made if these derivatives are settled at a spot price between the cap and floor. The exchange rate would have to weaken by at least R2,55/US$, up to the cap of R16,63, before losses are incurred on the derivatives. 40.2 Fair value Various valuation techniques and assumptions are utilised for the purpose of calculating fair value. The group does not hold any financial instruments traded in an active market, except for the investment in listed equity instruments. Fair value is determined using valuation techniques as outlined below. Where possible, inputs are based on quoted prices and other market determined variables. Fair value hierarchy The following table is provided representing the assets and liabilities measured at fair value at reporting date, or for which fair value is disclosed at reporting date. The calculation of fair value requires various inputs into the valuation methodologies used. The source of the inputs used affects the reliability and accuracy of the valuations. Significant inputs have been classified into the hierarchical levels in line with IFRS 13, as shown below. There have been no transfers between levels in the current year. Transfers between levels are considered to have occurred at the date of the event or change in circumstances. Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Inputs other than quoted prices that are observable for the asset or liability (directly or indirectly). Level 3 Inputs for the asset or liability that are unobservable.
|  | Fair value |  |  |  |  |  | Fair value |
|  | 30 June |  |  |  |  |  | hierarchy |
Financial instrument |  | 2019 |  | Valuation method |  | Significant inputs |  | of inputs |
Financial assets |  |  |  |  |  |  |  |  |
Investments in listed securities |  | 830 |  | Quoted market price for the same instrument |  | Quoted market price for the same instrument |  | Level 1 |
Investments in unlisted securities |  | 393 |  | Discounted cash flow |  | Forecasted earnings, capital expenditure and debt cash flows of the underlying business, based on the forecasted assumptions of inflation, exchange rates, commodity prices etc. Appropriate WACC for the region. |  | Level 3 |
Other long-term investments |  | 25 |  | Discounted cash flow |  | Market related interest rates. |  | Level 3 |
Long-term receivables |  | 5 582 |  | Discounted cash flow |  | Market related interest rates. |  | Level 3 |
Derivative assets |  | 645 |  | Forward rate interpolator model, appropriate currency specific discount curve, discounted expected cash flows, numerical approximation |  | Forward exchange contracted rates, market foreign exchange rates, forward contract rates, market commodity prices, coal prices, crude oil prices |  | Level 2 |
Trade and other receivables |  | 25 611 |  | Discounted cash flow |  | Market related interest rates. |  | Level 3 | *
Cash and cash equivalents |  | 15 877 |  | ** |  | ** |  | Level 1 | **
Financial liabilities |  |  |  |  |  |  |  |  |
Listed long-term debt |  | 49 421 |  | Quoted market price for the same instrument |  | Quoted market price for the same instrument |  | Level 1 |
Unlisted long-term debt |  | 91 777 |  | Discounted cash flow |  | Market related interest rates |  | Level 3 |
Short-term debt and bank overdraft |  | 1 297 |  | Discounted cash flow |  | Market related interest rates |  | Level 3 | *
Derivative liabilities |  | 2 205 |  | Discounted net cash flows, using a swap curve to infer the future floating cash flows, forward rate interpolator model, discounted expected cash flows, numerical approximation |  | US$Overnight Indexed Swap (OIS) curve, recovery probabilities, forward exchange contracted rates, coal prices, market foreign exchange rates |  | Level 2 |
Trade and other payables |  | 28 501 |  | Discounted cash flow |  | Market related interest rates |  | Level 3 | *
* The fair value of these instruments approximates their carrying value, due to their short-term nature. ** The carrying value of cash is considered to reflect its fair value.

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