#204 Did the coronavirus cushion SA fuel prices for March?

Is the corona virus’ impact on the oil price a cushion for the South African fuel consumer? It seems so for now. 

The last couple of years, between 2018 and 2019, the South African fuel price market has experienced important market related and structural changes. In 2018, we saw an upsurge in fuel prices as the Rand weakened against the dollar and OPEC worked to implement their overarching ‘Declaration of Cooperation’ strategy. This peaked when the inland petrol price reached R17/l, and the  Department of Energy implemented the Self-Adjusting Slate Levy mechanism to contain fuel price volatility, an action which continued toward the end of 2018. Within the same year, the call for reforming the Basic Fuel Price structure to reflect technological changes in the fuel price value chain was published and the resulting BFP structure, to my knowledge, remains to be published. 

Focus of this piece. Coming closer to 2020, 2019 was a stable year due to the US market, and the normalisation of the petrol price at relatively high levels around R16/l after April 2019. Diesel prices also stabilised around R14/l and R15/l from April to December in 2019. How did we shoot up from R14/l to the R16/l? How do the global developments influence our domestic fuel prices? Is the corona virus impacting the SA fuel price and market? In this piece we take a dive into these questions.

March-May were crucial month for the transport industry in 2019

March is an important month for transport prices because the combined effect of changes in transport tariffs (i.e toll prices); transport costs (i.e. pipeline transport costs) and the Budget Speech tend to place upward pressure on the fuel price. March 2019 reflected these changes in transportation costs with a 10.96% increase in primary transport tariffs, and 10.95% increase in pipeline transport costs announced by the National Energy Regulator. 

The 2019 Budget Speech also required an increase in the Fuel Levy by 15c/l a 4.4% rise to R3.52 for Petrol, and a 4.6% to R3.37 for diesel. The Road Accident Fund Levy up by 5c/l a 2.5% increase to R 1.98 per litre, against the backdrop of the RABS Bill debates around the new policy which aims to reduce the short-term cost allocations to compensate for road accidents. Furthermore, with the promulgation of the Carbon Tax Act No. 15 of 2019, with effect from 5 June 2019, National Treasury made adjustments to the general Fuel Levy in their statement in May

“The carbon tax on fuel will be decreased by 2 c/l to 7 c/l for petrol and to 8 c/l for diesel, and the general fuel levy will correspondingly be increased by 2 c/l”.

This resulted in a 9c/l and 10c/l increase in petrol and diesel respectively as a base change in the fuel price, pushing it up to R3.61 and R3.47, respectively. It is quite clear that the March, April and May months were crucial indicators of the year for the transportation of goods as input costs rose. It was also important for the passenger transport industry, as both their input costs and consumer sensitivity to price changes may rose commensurately. These ingredients set the scene for the year’s living adjustment negotiations for labour against the expected dynamics in the producer and consumer price inflation trends. 

CASE STUDY: Second regulatory cycle: While stability continues throughout the year upon these fundamental decisions, November-December periods set the scene for the following year. Two Retail Margin on Petrol (RMP) were implemented toward the year end. Against a stronger Rand-to-Dollar exchange rate in November, RMP change first was a 11c/l increase comprised of wholesale (0.9c), secondary storage and distribution (2.7c) and pump rounding (0.4c) with effect from 4 December 2019. The 2019 year ended with an increase in the Retail Margin on Petrol by 5.6c/l, in effect from 1 January 2020.

The role of global developments and structural issues

Globally, the interaction between oil prices and exchange rates describe the global side of fuel pricing in SA. The domestic side accounts for the value chain, regulatory and externality costs in the market from the DPE. Internationally, China as a leading importer of oil of 14 million barrels per day has reduced their demand by 20%, and refineries are expected to slow their orders as stocks pile. This is as travel demand and oil demand in China contracts due to the coronavirus outbreak. Nasdaq reports that marine fuel demand has dropped by nearly 50%, this is rippling down the value chain as storage demand also contracted and port congestion relief is expected, although workers’ supply is limited. The issue has scaled severely, but OPEC seems to argue that they need to continue with current adjustments up to the end of 2020— which is a mild reaction. It is only natural to anticipate that OPEC may want to place upward pressure on oil prices by reducing supply in the short-term to buffer the risk of continued over supply as China’s demand contracts.

From an exchange rate perspective, Bloomberg data reports that Rand-to-Dollar Exchange rate is rising, from R14 to nearly R16 between January and March.  This comes after Moody’s reduced the growth forecasts from 1.5% to 0.7% viewed as a “thumbs down” on the country’s trajectory after the 2020 Budget Speech, much is anticipated in March as the rating agency is going to announce its position this month. However, the worst case scenario Chris Turner told Daily Maverick that the exchange rate could go up as far as R16.50 to R16.75 and Morgan Stanley added that the virus might be contained by March; the virus spreads to new areas; and the risk of a recession rises. Here’s their position, according to Ryan Brothwell’s article:

“The authorities have yet to negotiate any moderation in wages with the country’s unions, which will likely be challenging given South Africa’s socioeconomic realities and would represent a significant departure from the outcome of previous negotiations”— Moody’s according to Brothwell.

This is Moody’s position.  Both the changes in fuel demand and our structural financial position as a country are putting a complex of pressures on the transport economy. 

March-May 2020: what to expect

The weak Rand appears to off-set the over recovery we expected from the crude oil price dips. This is where the domestic side from the DPE has to interact with these dynamics. The 2020 Budget Speech presented a rise in the Fuel Levy and the RAF Levy. This is expected to push the levy to about R 3.77 for petrol, and R3. 63 for diesel. The RAF Levy should go up to R 2.07 and overall increase the underlying price of fuel in SA. While NERCSA’s release of pipeline prices may come this month, the toll tariff increase in the road transport sector has already kicked in. These factors need to be included in this year’s fuel price cycle. 

“To adjust for inflation, the fuel levy goes up by 25 cents per litre, of which 16 cents is for the general fuel levy and 9 cents is for the Road Accident Fund levy.”— Minster Tito Mboweni

Source: This data was sourced from the Central Energy Fund, I did the presentation and the subsequent calculation.

Looking at the data, global prices of fuel it is quite evident that the lower price of Oil is off-set by the weak Rand. In other words, without the drop in the oil prices, SA would largely experience a rise in petrol prices as in March 2019. Usually, movement in international prices place upward pressure on the fuel price and this is countered by the movement in the exchange rate. For March 2020 (February really), the CEF revealed that the opposite is happening: international prices for crude oil are to our advantage but the movement of the exchange rate is eating these benefits out.

This month fuel prices are decreasing, but not as much as they should. The Rand’s weakness takes up 61% of the dip we should experience in fuel prices for petrol; while it only takes up 35% of diesel prices. Once markets stabilise, expect upward pressure in the fuel price. But consider the dip in oil prices as a blessing in disguise, because it cushions the SA fuel price from the weakening Rand. To speculate now: the fundamentals are not good for SA’s fuel and diesel prices especially given the weakening Rand. If OPEC contracts supply, transport input costs rise, and Moody’s rating is not favourable the situation might be bleak. Fortunately the Slate Levy Mechanism, mentioned earlier may help contain an unfavourable volatility, but this comes at a cost.

Thank you for reading, and big up to the PowerFM team for the discussion with Ntokozo Mazibuko.

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