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‘Capping fuel price could sink industry transformation’

No room for discounts in fuel retail – PetroConnect.

Capping the price of 93 octane unleaded petrol (ULP93) will kill new entrants in the fuel retail sector and has little potential to benefit consumers.

If government really wants to make a difference, it should rather target the margin of oil companies or the fat chunk of taxes and levies government itself has piled onto fuel prices.

This is the warning issued by Sbonelo Mbatha and Mark Harper, co-founders of PetroConnect, a company that assists new entrants to purchase and run filling stations through among other things their PetroConnect Academy.

Read: From petrol attendant to co-owner

Mbatha and Harper were responding to a Department of Energy proposal that the price of 93 octane be deregulated and capped to allow for price competition, as is already the case with diesel.

That would mean that of the three main products sold at filling stations only the price of 95 octane would still be completely regulated.

The proposal is aimed at alleviating the plight of consumers who have been struggling to keep up with rising fuel prices. Government used funds in the Slate Levy Trust Fund to absorb some of the increase in August, but that was unsustainable and was recovered from consumers in October, gobbling up the price decrease that was expected.

The Fuel Retailers Association, representing more than 2 500 fuel retailers, also expressed its concern about the impact of the proposed deregulation and capping of ULP93 on its members.

Mbatha explains that in the current ULP93 price structure, 61% goes to the oil companies, 32% to government in the form of levies and taxes, and only 7% is allocated to the retailer.

Source: PetroConnect

Mbatha questions why government’s proposal is only targeting the 7% retail margin and ignoring any possibility of adjustments to the rest of the fuel price.

He points out that the 7% retail margin is, in fact, the retailer’s gross revenue. After covering operational expenses, the real margin upon which discounts could be considered is only about 0.8% or, at current pricing levels, 14c.

“It would be ludicrous to think that consumers will feel any difference in their pockets whatsoever if what retailers have to play with is 0.8% of the total price per litre,” he says.

From the retailer’s point of view there is no room to manoeuvre to give discounts, he says. “We agree that the government should consider means to offer relief to consumers. However, to put that onus on small business owners who are critical to economic sustainability in our country is counter-intuitive to stimulating small business growth.”

Mbatha adds that fuel retailers have traditionally been well established businesses with owners who have been in the industry for years.

New entrants vulnerable

With a new transformation charter being imminent this is changing, and inexperienced and highly geared new entrants will be extremely vulnerable if the department’s proposal is implemented.

Mbatha points out that the deregulated diesel price has led to big truck stops completely undercutting small entrepreneurs. The entrepreneurs cannot compete with the large players on price and merely sell diesel as a service to their customers.

The same will happen with ULP93 if that price is also deregulated and retailers will be unable to make any profit on 50% of their volumes (diesel and ULP93).

Mbatha says new entrants must be given assurance that there will be a return on their investment. Most of them are not sophisticated with regard to costing and financial management. He fears that many might, with the gross margin in mind, decide to grant discounts on ULP93 in an effort to grow sales volumes.

This will backfire and the highly geared new entrants, in particular, would be unlikely to survive.

This will favour those retailers without debt and undermine the transformation of the industry, Mbatha says.

“If capping comes into effect, the first thing most fuel retailers would probably need to do to ready themselves for a price war is cut jobs. There are no other areas when looking at reducing operational expenditure, where retailers can cut their prices to accommodate the competition that government is hoping will ensue,” Mbatha says.

“If every one of the approximately 5 000 service stations in South Africa had to cut an average of four jobs, then the industry is looking at a potential loss of 20 000 critical employment opportunities,” he adds.”Existing small business owners, which constitute the majority of fuel retailers in South Africa, will start considering closing shop. It will become unsustainable for them to continue operating a profitable service station in what is already a highly challenging sector.”

Read: How the fuel price has been politicised

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It is a basic law of supply and demand but we cannot expect these socialist clowns of low ability to understand it. If they cap the price, they automatically cap the supply. It is quite normal for politicians to blame the market and “profiteers” for the results of the actions of politicians. The fuel price is 50% the dollar price of oil and 50% the USD/ZAR exchange rate. The actions of local socialist politicians play a major part in the weakening of the rand. The voters directly pay for their mistakes every time they use transport.

If the nation want affordable fuel they should actually cap the power of the ANC. Vote DA, IFP, UDM, Cope, FF+ and the fuel price will stabilize.

Using the same logic all prices should be set by the state. Perfect communist thinking.

The whole fuel business and even the SOE’s that are obliged to procure fuel in a BEE way (note: not the BBBEE way) is all false transformation built on short-term thinking and unsustainable methods.

The retail price maintenance mechanism (which is so thoroughly against competition law) is only upheld in the pretence of ‘jobs’. But these jobs are not multiplier effect jobs – just short-term job creation paid for by you and I. Like a job’s tax.

The premium that Eskom and SAA pay for ‘black owned’ fuel to be supplied to them for their and many other operations is just valued intercept helping make our economy uncompetitive.

So none of this is lasting and transformative. Its just value intercept, acting like taxes against all South Africans.

While I agree that price control is essentially centralist control and communist concepts, let us not forget that we haven’t had a free market fuel price in SA for the last fifty years at least. After everything is said and argued, phased de-regulation is preferable to no de-regulation. Driving a diesel vehicle, I make it my business to know where the cheapest diesel is to be found. On a recent trip back to Cape Town from the Cape south coast, I found diesel at 89c a litre cheaper than at my suburban filling station. And no, it was not in cans next to the road, it was at a well-known brand filling station in the main street of a town. If this can be replicated with petrol, what a pleasure.

I also went “cheaper” diesel at truck stop route until my bakkie’s tank &fuel lines were clogged by the cheap but dirty diesel. To clean the tank and lines cost much more than any perceived savings. Never again.

Obviously, you did not read what I wrote properly.

And to add to the price we are now virtually obliged to “pay” the petrol “attendant” to fill the car , clean the windscreen etc , which I would happily do myself , as I have overseas.I guess it cuts down on unemployment and thus fewer claims on the State , but effectively its yet another South African Tax , albeit discretionary.!

I have stopped all tips. If you are in a salaried job you have no right to tips.

If those in government are no longer going to steal the cash in the different kitties, does the government really need R5,44 for every litre of fuel we buy?

Hopefully the fuel sector won’t be ‘transformed’ like the country’s SOEs!

Government tax and levies are excessive and thereby increases the cost of fuel for business , which reduces their income and profitability .
If government would reduce the tax and levy by 50% , every business in SA would be more profitable , resulting in more income tax for government , and employment figures will improve .
So, de regulating will help , but as the article points out , it will result in a very small price improvement , whilst government tax and levies is the elephant in the room .

If the oil majors want to play the Transformation card they should first let five analysts into a review of their ACTUAL basic fuel price versus the 799c that the formula deems their cost to be. That formula is nonsense : loaded with deemed transport, evaporation, demurrage, coastal storage, spillage, transport, cost of capital and pipeline fees that the half our petrol that comes from our coal via Sasol is NOT exposed to. It is an import parity price that screws us just like import parity pricing by Arcellor Mittal screws our steel industry. The other half of the fuel that does not come from Sasol does not come from the countries that the formula assumes. Who here thinks Shell’s / BP’s cost of crude approximates the spot price in singapore, med and gulf? Nobody of significance in fuel buys at spot. Who thinks perhaps the fuel is purchased at cost on very longterm futures from their own sources and on-sold via a tax haven?

Anyway, I’ve gone electric : 20c/km…

As one commentator said, the service provided by petrol jockies is another tax to bolster employment at the tax payers expense. Introduce self service pumps and drop the price. I avoid going to my usual filling station/s during December because one is pressured for an Xmas handout. In my business I don’t expect my customers to pay my staff a Xmas bonus, thats my responsibility. Garage owners are taking advantage of their own customers by transfering their responsibilty. That should be stamped out. Meanwhile I go elsewhere until January

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