November 24, 2017

Fuel price is down – but how is the national price determined?

South African motorists are breathing a sigh of relief after all grades of fuel dropped by between 9 c and 22 c per litre on 4 November. This is welcome news in the build-up to the festive season, but how long before the price rises again? Leading fuel distributor Afric Oil provides insight into the fuel pricing model, with a breakdown on the numbers.
South Africa consumes on average more than two-billion litres of fuel per month. The pump price is therefore a contentious issue for the majority of individuals and businesses, whose finances are directly affected by cost fluctuations. The fuel price is also an issue where the vast majority of the diverse population is united in opinion – welcoming price cuts, while resenting price hikes.

This resentment is understandable, especially if the public is not communicated to in a transparent manner. Afric Oil CEO Tseke Nkadimeng states that petrol prices have been regulated since the 1950s to ensure economic viability for the industry. “The national fuel pricing model is, however, defined by industry jargon that leaves the public unsure of where their money is being spent.”

According to Nkadimeng, the two most prominent variables in determining the fuel price are the US$ price of crude oil, and the Rand’s performance against the Dollar. “Naturally, when oil prices rise and fall, so too does the petrol price. Exchange rate performance is also a major contributor, and the Rand’s poor performance in recent months is indicative of the higher fuel prices.”

Nkadimeng indicates that freight costs are also a determining factor. “Most of South Africa’s fuel is imported by ship from the Arab Gulf region. Approximately 20 percent of this amount is already refined, while the balance is refined at coastal and inland depots. The cost of freight is also priced in US$, and exchange rates once again play a central role,” he continues.

These costs can be further compounded by demurrage, which is the penalty costs incurred by ships delayed in foreign ports. What’s more, the cargo must also be insured when in transit. This is calculated at 0,15 percent of the fuel value and freight costs. “This is a reasonably fixed cost and should not fluctuate much month-to-month, however, millions of litres are transported on each ship – making the cost quite substantial, especially with a weaker Rand,” says Nkadimeng.

Once these international costs have been dealt with, Nkadimeng reveals that local costs are enforced too. “Cargo dues are the costs associated with offloading the cargo at the harbour. The fuel is then held in coastal storage facilities, which charge around 2 c/ℓ per day with a maximum of 25 days storage. The cost of financial transactions and credit facilities also needs to be covered through stock financing, which is based on the landed cost values of refined petroleum, 25 days stock holding and prime interest rate minus two percent,” he explains.

Government taxes and levies constitute up to 50 percent of the fuel retail price. Other factors that determine the fuel price are the wholesale margin that distributors are allowed to add to the wholesale price. This currently stands at 64 c/ℓ. The next is the dealer margin, which currently stands at 155 c/ℓ. These margins are adjusted annually and approved by the Minister of Energy.

It may seem unfair, at face value, that wholesalers and retailers are entitled to add a total of R2.19 per litre to the price of fuel for their ‘gain’. Nkadimeng stresses that these margins are in fact extremely low, and there is very little room for negotiations. “It is important to bear in mind that these margins do not go straight into the pockets of wholesalers and retailers.”

Nkadimeng highlights the fact that a large percentage of these funds are redirected to overhead costs, such as staff wages, transportation, infrastructure and rent, to name a few. “Depending on efficiency, wholesalers realistically only make between 15 c and 25 c per litre after costs, while retailers make between 30 c and 35 c per litre after costs.”
Nkadimeng states that there is a perception that oil and gas industry representatives live the life of ‘oil-barons’, and that the industry is making excessively high profits at the expense of the consumer. “In stark contrast, the reality is that it is an extremely low-margin, turnover-based industry. Investment is also onerous, for example, a service station selling 200 000 litres per month requires about R2,5-million in facilities – which is significant for small players.”
Government and industry representatives meet every quarter to discuss supply and demand trends, in order to ensure sufficient stock levels, in addition to providing forecast fuel prices on request. Despite this, Nkadimeng admits that fuel pricing structures should be more transparent, in order to allow the public to better plan their budgets in relation to the costs at the pump.

“Most people learn the newly-adjusted price of petrol a few days before the Department of Energy makes the official announcement. In my opinion, more focus should be placed on the predicted future pump price of petrol from various news outlets – which regularly give the price and gold and crude oil, but the indicative price of petrol is far more important to the average South African.”
The Department of Energy’s most recent announcement on the fuel price for November 2015, based on current local and international factors, is as follows;

• Petrol (93 Octane) will decrease by 22 c/ℓ
• Petrol (95 Octane) will decrease by 22 c/ℓ
• Diesel (0.05% Sulphur) will decrease by 9 c/ℓ
• Diesel (0.005% Sulphur) will decrease by 10 c/ℓ

Looking ahead, Nkadimeng indicates that Afric Oil is moving from its current business-to-business (B2B) model, towards a business-to-consumer (B2C) approach. “We are currently in the process of creating a long-term strategy to enter into the retail side of the fuel business, by establishing up to 20 service stations across South Africa, Zambia and Zimbabwe by 2017,” he concludes.

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