Road Freight Association chief executive Gavin Kelly gave a succinct and stark assessment about the feared spike in the fuel price, warning that the “outlook is not good” and that the impact on operational costs might drive some operators into closing down.
Speaking ahead of the Central Energy Fund’s (CEF) price-hike announcement, expected on March 31, Kelly said it was important to keep in mind that 35 to 55 percent of the daily operational running cost of a transport company was fuel.
“It’s the largest single expenditure on a day, thereafter come wages, then the maintenance of the vehicle – those sorts of things.”
Also important to factor into an industry said to transport up 70% of South Africa’s internal supply chain, were the types of routes taken by transporters, idling time, congestion-related delays, road conditions, inclines and conditions, whether operators were involved in mining or manufacturing environment, the frequent maintenance of older technology, and “how thirsty your trucks are,” Kelly said.
Whilst it wasn’t yet sure what the expected increase in the price of fuel was going to be on Tuesday – some said about R9.50 per litre of diesel, some estimated less, others more – there could be a 47% increase in the price of fuel.
“This is obviously before there are any sort of bulk discounts anyone would get or wholesale prices, so I'm just using it as a retail price reference.”
Ultimately it amounts to “huge increases for your daily operation and most transporters run on a 60- to 90-day invoice, so they're having to fund the diesel purchases to keep their trucks running”.
The increases transporters are going to pay now, on April 1, will only see invoiced payment for loads in about 60 or 90 days, depending on what the agreements are.
“So, it's a big thing,” Kelly said.
Transporters will have to find the cash to buy fuel at 47 percent more.
“They're going to have to find reserves from somewhere and not everyone has that. The guys who have agreements with the major oil companies are going to find that the deposit guarantees are going to increase by being rounded off, whether it's 45% or 50%.
“That's a heck of a lot of money you've suddenly got to find to put down as a deposit to get your fuel.”
Because of the significant impact such an increase in daily operational running cost could have on some operators, “there are going to be guys who are going to close; there's no question about that,” Kelly said.
It could also lead to acts of desperation as some transporters bend the rules to stay in business, he pointed out.
“They might not be able to get their customers to foot the increased fuel bill. You'll probably find that guys are going to do desperate things, like dilute diesel, literally with water or paraffin.”
Although the perception was that it would most likely only be the smaller operators, Kelly said, it was going to be anybody who just didn't have the finances to try and ride this out.
Moreover, there's no guarantee that this is only going to be in April.
Depending on what’s happening in the Strait of Hormuz, where Iran has choked off about 90% of roughly 20% of global crude oil demand, supply chain pressure could escalate and result in more pain at the pumps, the longer the Persian Gulf war drags on.
Adding context, Kelly said it was interesting to keep in mind that a good 64-68% of South Africa’s oil came from Nigeria.
It raises the question: why do we pay such high prices?
“Nigeria still sells its oil in US dollars and of course sells it at the going rate around the world. So, the consumer is going to be faced with price increases. Some of those increases will be immediate, depending on the person who's transported the goods, whether they have any sort of built-in clauses where they are able to subsidise some of this cost.”
Kelly added that there were often accusations of operators profiteering from a crisis, which wasn’t necessarily the case.
He said whatever happened in the wider market, resulting in passed-down prices increases for fuel, road freight operators still needed to make a profit.
“They want a return on investment, they want to be able to buy new vehicles, they want to make sure that they can grow.”
Over the next few months, daily expenses passed on to consumers could be because of fuel increases faced by transporters, Kelly said.
In real terms it could mean finding as much 25c more for every R1 consumers used to spend before the expected April increases, and if the rand continued to underperform against the Greenback, “it’s just bad news from here on out,” Kelly said.
He added that the RFA had deployed various mitigations “to soften the shock”.
These include interacting with the CEF, the Department of Trade Industry and Competition, and the Department of Minerals.
He said a potential strategy would be to phase in a stiff price spike by splitting it up in threes, rolling it our over three months.
“But that's against the backdrop of there being no further increases.”
However you look at the current market tumult rippling out from the conflict in the Middle East, all goods with a fuel leg to them were going to increase, Kelly said.
“There's also the added-on economic impact looking at interest rates and the availability of money.”
Transporters were going to go look for money as short-term loans against business blow-backs, said Kelly.
