The Basics of How Fuel Pricing Works
In South Africa, fuel pricing is tightly controlled by the Department of Mineral Resources and Energy (DMRE). For diesel, the price is regulated at the wholesale level. To set a price, the DMRE calculates what’s called the Basic Fuel Price (BFP), which reflects the cost of importing fuel. Then, taxes, levies, and distribution costs are added to determine the final benchmark wholesale list price (WSLP) in a given area.
Fuel suppliers compete by offering rebates or discounts off the WSLP, making it easy for businesses to evaluate between different offers.
A Shift in the Supply Chain
Not too long ago, South Africa’s fuel needs were met by six local refineries, owned by big international oil companies. Rebates were relatively stable, with only minor fluctuations between oil companies. However, the closure of four of these refineries changed the game.
Now, South Africa imports much of its fuel. This shift has opened the door for independent importers, who now import fuel via new independent storage facilities like Vopak and Burgan Terminals. This has increased competition in the market, which has been good for consumers, but it also brings challenges, particularly when it comes to price stability.
The Challenge of Price Regulation
In South Africa, diesel prices change once a month, on the first Wednesday, based on the previous month’s average international fuel prices and ZAR/US$ exchange rate. This creates a lag for fuel importers who buy fuel at current prices, wait approximately a month for the shipment to arrive, but then need to sell based on the previous month’s pricing.
To manage this risk, importers will “hedge” their imports, so as to ensure that the pricing they can offer to the market when the product lands is aligned to the ruling regulated WSLP at that time. But the trick is that once the fuel is available to market, it needs to be sold within the same pricing window. If they don’t sell it in time, things can get tricky.
Why Timing Matters
If the price of diesel is expected to drop, sellers will rush to sell their stock before the decrease. This leads to what’s called a “long” market, where there’s more supply than demand, pushing prices even lower. On the flip side, when prices are set to rise, sellers will hold onto their stock, hoping to sell it at the new higher price. This creates a “short” market, where demand outpaces supply, driving prices up.
This back-and-forth creates opportunities for buyers and sellers, depending on the timing. It’s all about playing the market smartly.
Recent Price Trends
Here’s a quick look at how prices have changed over the few months:
Sept ‘23 | +276 cpl |
Oct ‘23 | +193.7 cpl |
Nov ‘23 | -82.08 cpl |
Dec ‘23 | – 241.42 cpl |
Jan ‘24 | -126.32 cpl |
Feb ‘24 | +70.00 cpl |
Mar ‘24 | +118.7 cpl |
Apr ‘24 | -9.08 cpl |
May ‘24 | -36.00 cpl |
Jun ‘24 | -108.54 cpl |
Jul ‘24 | -24.38 cpl |
Aug ‘24 | -17.00 cpl |
Sept ‘24 | -105.00 cpl |
Oct ‘24 | -112.00cpl |
As you can see, the regulated pricing decreased for extended periods over the past year, creating a long market, thus giving an opportunity for businesses to buy fuel at great prices. But the tide has turned during October 2024, with the market being short, creating a sharp rise in prices. With the pending price increase in November, competitively priced diesel is becoming harder to find.
Strategies for Smart Fuel Buying
So, how do businesses navigate these ups and downs? There are a few approaches, depending on how much risk you’re willing to take:
- Conservative Strategy: Focuses on a consistent fuel supply at competitive prices by committing all volume to a supplier.
- High Risk/High Reward Strategy: Aims for maximum profit by buying on the spot market with no commitments. Profitable in long markets but risky in short markets due to supply shortages and price hikes.
- Balanced Strategy: Combines steady committed supply and spot deals. Businesses commit a portion of their fuel volume to a supplier, while purchasing the balance at spot prices. The ratio of committed to spot can be adjusted over time to suit the businesses requirements.
The balance of committed to spot can also be managed within the month. For example, if you expect prices to rise, you buy your spot fuel early in the month before prices go up, and rely on your committed supply later in the month to carry you through. . If prices are set to fall, you use your committed stock first, then buy on the spot market when prices drop towards the latter part of the month.
Tools to Help You Stay Ahead
TFN’s FuelDesk offers a helpful service that allows buyers to share import margins with TFN Group suppliers on committed volumes, giving you even more ways to save. It’s a smart tool for businesses that want to take a balanced approach to fuel buying.
By understanding the dynamics of the diesel market and using strategies that match your business needs, you can turn the challenges of price fluctuations into opportunities. Whether you play it safe or take a more aggressive approach, the key is being informed and staying flexible as the market shifts.
Ready to save money and be more efficient? Get started with TFN today.