Perfect storm has hit this industry in South Africa – and in turn, consumers

 ·24 May 2022

South Africa is staring down the barrel of yet another huge fuel hike in June – as much as R3.50 per litre  – due to stubbornly high oil prices, and a volatile rand.

This has created the perfect storm in the road freight logistics sector, according to Gavin Kelly, chief executive officer of The Road Freight Association. “No one would have thought that we would see such increases in the fuel price as we have experienced over the past six months.

“As we reel from these increases, the possibility of one of the greatest price increases that we have ever seen is looming,” he said.

Oil remains above the $110 per barrel mark, while the rand remains volatile trading in the R16.00 range, “and the effect is a sky-rocketing price for fuel in South Africa,” said Kelly. “It has an impact on every single item that is transported to and across South Africa.”

The Russia-Ukraine conflict and resultant sanctions on Russia have disrupted global energy and food trade, increased logistics costs, and fanned inflationary pressures, creating a challenging environment for businesses and policymakers alike.

The conflict is also seen to be driving macroeconomic shifts and a reorientation of trade and supply chains, notes research & consulting firm, Frost & Sullivan.

The International Monetary Fund (IMF) warned that the war in Ukraine will exacerbate already high shipping costs this year, and could keep them – and their inflationary effects – higher for longer. The cost of shipping a container on the world’s transoceanic trade routes increased seven-fold in the 18 months following March 2020, while the cost of shipping bulk commodities spiked even more.

“Trade with Russia and Ukraine will suffer, adding to already strained global supply chains. Longer-term, sanctions and a reduction in trade with Russia, could result in the redrawing of some supply chains and trade routes, but this all takes time and comes at a cost,” said captain Rahul Khanna, global head of Marine Risk Consulting at AGCS.

Ships need fuel, and those costs are rising, said Kelly. There are still fewer ships at sea due to the pandemic, and there are constraints in the global logistics chains that not only articulate into delays, but into demand, which has an upward price-pressure effect, he said.

“Once goods are landed, they then find their way to either consumers or manufacturers via the dependable road transport network, and that is where the next leg of the logistics journey is impacted by fuel increases. We have all felt, and will continue to feel for some time, the effects of more expensive fuel.”

Now to the “Perfect Storm”:

With the oil price and Rand value vis-à-vis the Dollar being what they are, there are reports that the fuel price for June will see an increase of between R1.70 to R2.00 – depending on the commodity (product).

However, the “relief” offered by the government to reduce the level of taxation on the price of fuel (by around R1.50 per litre) is due to fall away at the end of May – just in time to join the new price increase.

This means a price increase of around R3.20 (a rough estimate, given all that is currently in play) by the first week of June

“We cannot afford that, or any other increases,” said Kelly, adding that the first signs of despair and retreat will be within the road freight logistics sector.

“Already, some transporters closed their doors due to the effects of the Covid pandemic. Financial pressures have remained on the increase, and the unrest that continues to ferment, radically shown by the violent period in July 2021 when the whole logistics chain was attacked, continues to wear down companies and cause more closures.

“Operating costs within the road freight and logistics sector have continued to increase exponentially, with many of these increases coming at a time when the road freight industry can least afford, or withstand, these shocks,” the association lead said.

He said that transport companies cannot afford the continual increase in operating costs and the recent fuel price increases have become the final “nail in the coffin” for many. “Uncontrolled fuel increases are the factor that can cause a collapse in the road freight logistics sector.”

He said that transporters cannot absorb the cost of fuel increases which must be passed on to the client, which is then passed on to the consumer. “Disposable funds are decreasing, consumers are being very careful about what they buy, with so-called essentials such as food, medication, power, water and accommodation now the focus for most consumers.”

There have been calls for the taxes on fuel to be reduced or removed and “collected elsewhere”. Those options will not resolve the underlying issues:

  • The basic price of oil  – determined outside of South Africa through supply and demand, and
  • The rand/dollar exchange rate – determined by international financial view of South Africa

According to Kelly, solutions to the fuel crisis could include:

  • An agreement between African states producing oil (or refined products) for a far lower rate for African countries in the spirit of the Africa Continental Free Trade Agreement (AfCFTA) and to ensure African economies do not collapse
  • Concentration by Sasol to produce far more fuel (was its goal in the 1970s and 1980s not to make South Africa independent of foreign oil supply?)
  • Development and growth of the synthetic fuels industry in South Africa – from all possible sources
  • Development of electric transportation devices and supply

“Not only would we solve our transport energy consumption and demand challenges, we would definitely create employment and would be heading in the right direction in terms of moving ourselves away from the reliance on fossil fuels.”

Read: Reserve Bank hikes rates by 50 basis points

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