Increase in fuel price will hit hard
by Denys Hobson. Economists believe fuel prices will continue to rise if SA cannot get a handle on weak economic policy.
by Denys Hobson. Earlier this month, South African fuel prices were hiked once again, causing motorists to pay very close to R20 a litre of fuel throughout the country – not only impacting consumers and businesses, but also placing importers under increased pressure in an already challenging market.
With several economists being of the opinion that the price of petrol and the fuel levy will continue to rise, if SA cannot get a handle on weak economic policy and reliance on additional tax revenue through the fuel levy, the knock-on impact this will have in the South African market will be significant. The transport and supply chain industry are already operating under incredibly low margins so any additional increases could be quite damaging.
We are also expected to see a further increase in transport costs as the industry attempts to mitigate and navigate the biggest challenges the industry is currently faced with – shipment delays, port congestion and erratic schedules. While on the sea freight side, we have seen some positive changes regarding an improvement in equipment availability across China; as well as freight rate reductions, airfreight demand and rate levels have increased as anticipated.
We expect the airfreight market to remain under pressure for the coming weeks as we approach the final stretch of the peak season. The increased fuel prices have also driven airfreight and road haul rate levels up. Retailers and importers will therefore need to find more innovative ways of offsetting costs and pro-actively plan around this given their reliance on the transport industry for the distribution of goods from the ports of arrival, as well as last mile distribution.
Additionally, as we approach the end of 2021, focus will start shifting to the Chinese New Year period. There are reports of suppliers and manufacturers increasing their pricing, having had orders placed on them earlier than usual to be ready for shipping pre-Chinese New Year (February 1, 2022). We anticipate that it will be common practice for importers to pull orders forward to ensure they secure stock and mitigate shipping delays that are common before and after the Chinese New Year period. This will place significant pressure on container equipment and capacity on both air and sea modes leading up to the Chinese New Year.
In a price-conscious market, retailers and importers will need to be incredibly aware of all the related increases that the changes to the fuel price will have on their margins. Even though the impact on inflation might not be as bad as anticipated, importers need to be even more savvy in terms of how they position their products in a cash-strapped market.
Unfortunately, there is no silver bullet to addressing higher fuel prices. Despite importers doing future-forward planning around these increases, the reality sees consumers ultimately paying the price. Profitability is already under the spotlight so decision-makers at importers and transport companies are feeling the pressure to do more than simply raising prices. Some of these initiatives could include enhancing collaboration between importers and transport and logistics companies to find innovative solutions, achieve a more streamlined supply chain and drive greater efficiencies. Consolidating volumes to maximise utilisation on both containerised and truck loads; and implementing new technology on the back-end to manage the supply chain more efficiently, could also assist in cutting costs.
Additionally, leveraging off the expertise of supply chain and working capital specialists can go a long way in freeing up capital that is traditionally tied in with stock and imports. For a business limited by cash flow, this is a game changer as businesses can offset costs with additional benefits where debt can actually help them grow.
Despite the negative sentiment around the fuel increase and the economic challenges it creates, there are also opportunities for importers and retailers to find even more innovative ways of using available technologies and other smart solutions to improve margins. And while the risk to the collective pockets of South Africans is real, it should not be all doom and gloom as importers and retailers identify other ways of delivering value.
Denys Hobson is a logistics and pricing analyst at Investec for Business.
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