Fuel Pricing Mechanism in South Africa

The recent few months regulated fuel price adjustments on diesel have been the most significant fluctuations in history.

This has naturally generated intense discussions and debates around the topic of fuel pricing and, more specifically, who is benefitting from price increases. What has become evident is the widespread lack of understanding and knowledge of how regulated fuel prices are determined and what factors have an influence on the adjustment of the regulated fuel price during any given month.?

In this article, we will explain the various pricing components that, when combined, determine the regulated wholesale list price (WSLP) for diesel in a particular fuel zone. This regulated WSLP is used as the benchmark against which all rebates/discounts are applied to order to determine a nett selling price to the end-user.?

The first building block of the diesel price is the Basic Fuel Price (BFP). The determination of the BFP is based on the principle of import parity i.e. what it would cost a South African importer to source, transport, and ultimately land refined 50ppm diesel in South Africa.?

The BFP is determined by various cost components, including:

• The international open-market spot (non-contract) price of refined 50ppm diesel, purchased on a free-on-board (FOB) basis from the Mediterranean (50% weighting) and the Arabian Gulf (50% weighting).
• Freight costs to move diesel from source to our shores (again a 50/50 weighting).
• Insurance cost on shipment.
• Allowable losses in transit.?
• Demurrage costs should tanker be unable to offload due to adverse weather and/or any other causes.
• Cargo dues for the management, quality control, and handling of the shipment.
• Coastal storage costs.
• Stock financing costs.

The above cost components are quoted in US$/ton, so the ZAR/US$ exchange rate has a significant impact on the eventual ZAR value of the BFP.

Once the BFP (deemed landed cost) of diesel has been determined, the local duties, levies, and other imposts are added to the BFP. These include:

• Petroleum Products Levy: which is to reimburse the pipeline users at the applicable NERSA tariff for transporting diesel inland from the coast, through the national fuel pipelines. This cost is determined by the National Energy Regulator of South Africa (NERSA).
• IP Tracer Dye Levy: to reimburse the oil industry for the application of the IP Tracer Dye into Illuminating Paraffin/Kerosine to identify and curtail the blending of IP with diesel (commonly known as spiking).
• Fuel Levy: which is a tax levied by government that is applied to the general fiscus.
• Customs and Excise duty: which is a duty collected in terms of the Customs Union Agreement.
• Road Accident Fund (RAF) levy: which is used to compensate people injured in motor vehicle accidents.
• Slate Levy: which is used to finance the cumulative under-recovery of the industry. This levy is only imposed should the cumulative under-recovery exceed R250 million.

Further to the above government-imposed taxes and levies, there are additional industry related costs that applied to the cost build-up. These include:

• Wholesale Margin afforded to the oil companies: from which they are required to operate, cover costs, and generate their income.
• Zone Differential: which is deemed the cost of distributing the imported diesel from the coast to inland regions, based on pipeline, rail or road transport cost from source to the appropriate fuel zone.
• Secondary storage: which covers the costs of storage and handling of diesel at depots other than the primary infrastructure into which the diesel was initially imported.
• Secondary distribution: which covers the cost to distributing the diesel from the secondary storage to the end user.

Pricing components are reviewed and adjusted on a pre-determined basis. Important price review dates are:

• Every month: BFP is reviewed and adjusted according to international prices and exchange rate.
• December: Petroleum industry costs, including wholesale margins, secondary storage, and secondary distribution.
• April: Government imposts including zone differentials, fuel Levy and RAF contribution.?

What is evident from the pricing formula is that there is no additional margin made available to anyone when the prices are adjusted, irrespective of whether it be up or down. While there is an opportunity to make stock profits by purchasing and storing additional stock before a price increase. The converse applies, where a loss will be made on any stock carried over into a price decrease period.?

By Greg Salzwedel - New Business development for the Renati Group