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Consumer and investor considerations to fuel piece increases

02 November 2022 Chantal Marx, Head of Investments Research at FNB Wealth and Investments

South Africans will be paying more for diesel and petrol from Wednesday the 2nd of November 2022. The latest price increases are because of higher prices for international petroleum products as well as a weaker Rand.

Diesel vehicle drivers will be the hardest hit, with the price of diesel set to increase by R1.40/litre. 93 and 95 octane petroleum will increase by 51c/litre. This means the average logistics vehicle with an 80-litre diesel tank will cost R115.00 more to fill up, and petrol tanks an additional R40.00.

The sharp increase in the cost of diesel is a major concern, due to its widespread use in the transport and freight industry. Higher diesel prices will put logistics companies under pressure, or may ultimately be passed onto the South African consumer. Diesel is currently in shorter supply on account of the Russia Ukraine war and a diesel shortage is rapidly spreading across the USA.

The Truck Association of South Africa, AgriSA, and the Road Freight Association have all warned that constrained supply and higher fuel prices will all impact the average South African consumer and supply chain. We have already seen government step in at times to help shelter consumers from rapidly rising costs, but an ailing commodity price tax windfall will make a similar intervention less likely.

How fuel prices are calculated:

• Basic Fuel Price: The basic fuel price makes up roughly 42% of the total price of fuel. The Basic Fuel Price is made up of the purchase price of fuel (in US dollars) as well as freight costs, insurance, storage, and financing. In South Africa the fuel price is adjusted on the first Wednesday of every month and is determined by two main factors: The Rand/US Dollar exchange rate (how fuel is purchased), and international petroleum prices (how much the fuel costs to purchase).
• The GFL: The general fuel levy makes up roughly 23% of the total price of fuel. The GFL goes to National Treasury. Government is free to utilise this levy in any manner it deems fit.
• RAF Levy: The road accident fund levy makes up roughly 13% of the fuel price. These funds can only be utilised for road accident claims.
• Wholesale and retail margins as well as distribution and transport costs: The final contributors to the gross petrol price are those costs associated with transport and storage, custom and excise duties and retail margins for fuel station owners and makes up roughly 22% of the total fuel price.

SA consumer considerations:

• Motor vehicle running costs: Vehicle owners will immediately feel the impact and will be paying more to fill up with an average 45 litre tank. It will now cost R1015.65 (+R22.95) for 93, R1029.15 (+R22.95) for 95, R1147.05 (+R64.35) for diesel 0.05% and R1158.75 (+R64.80) for diesel 0.005%.
• Transport costs: An increase in fuel prices, means higher costs for companies to operate bus and taxi services. These costs are passed onto the consumer, so South Africans should expect an increase in transport fees.
• Consumer goods: An increase in the fuel price impacts the cost of consumer products and ultimately what a product will cost on shelf. Higher fuel prices, means a higher transport cost, to get products to the consumer for purchase. Higher fuel and diesel costs, result in the average basket of goods costing South Africans more. This means South African consumers can afford less, decreasing consumer spending capacity. Although the price of diesel has been impacted by factors outside of South Africa, transporters and/or retailers will pass the additional cost onto the South African consumer. Unfortunately, the fact that diesel is increasing at a rate higher than fuel will impact food prices more, due to most trucks utilising diesel.

Investment considerations:

• Consumer stocks: Consumer stocks will be impacted negatively on account of higher fuel prices. Higher fuel prices mean higher costs for consumer companies and a decrease in consumer spending capacity, both of which negatively impact company profitability. Higher transport costs, mean products will be sold at a higher price naturally decreasing the volume of sales due to consumer affordability.
• Industrial stocks: Will also be impacted depending on how much of the increase can be passed onto end-users. Any costs incurred by the company itself and not passed on to end-users will result in margin pressure.
• Inflation: Higher fuel prices may lead to higher inflation and increases in interest rates. Higher interest rates are negative for equities, particularly consumer stocks, except for the banking sector that benefit from the endowment impact. Higher interest rates are also generally negative for the bond market but positive for cash (although higher inflation may still see negative real returns on cash instruments). Equity exposure remains investors best bet against inflation; however, this will vary greatly by sector and even at a stock level.
• Oil stocks: The increase in fuel prices is positive for oil stocks such as Sasol. To offset the impact of rising fuel prices on one’s own pocket as well as your investment portfolio (which may have considerable consumer exposure), investments in the oil space may have an offsetting or hedging impact.

Types of oil exposure available to SA investors:

Direct shares: Investing in oil company shares is one of the simplest methods to obtain exposure to oil prices. The change in the oil price will affect the profitability of the company and in turn, its share price. There are, however, other factors that must be considered like hedging strategies put in place and the underlying fundamentals of the company invested in. There are many oil companies globally to invest in to gain oil price exposure. Locally, the only direct oil play listed on the JSE is Sasol. Internationally – our preferred exposures are BP, Shell, Vermilion Energy, and oil and gas services specialists Schlumberger and Halliburton.
International oil company ETFs: Oil company ETFs track the price of a basket of global large cap oil company shares. For example, the iShares Global Energy ETF or SPDR S&P Oil & Gas Exploration & Production ETF. iShares or SPDR will physically own the shares that are being tracked by the index. The price of the ETF will track the price of the basket of oil stocks. The share prices of the underlying stocks will be driven by the fundamentals of the companies, including profitability which will be determined by the oil price (among other things). Owning an oil company ETF has the advantage of adding leverage (within underlying companies) and diversifying exposure.
A local oil ETN: An ETN provides exposure to the movements in the price of a commodity or other instrument without ever outright owning the commodity. Instead, an ETN uses derivative contracts to gain exposure to the asset price it wishes to track. In South Africa we only have one JSE listed oil ETN, namely the Standard Bank oil ETN. This ETN tracks the Brent crude oil price in rands.
An international oil ETN: International ETNs work the same as locally listed ETNs however they are not listed on the JSE and are quoted in another currency. The United States Oil Fund ETN is the world’s largest oil ETN and tracks the West Texas Intermediate crude oil price. The United States Brent Oil Fund ETN tracks the Brent crude oil price.
• Finally, investors can consider using derivatives or buying futures contracts directly, however, we would caution against taking this course of action, due to the risks associated in managing these exposures.

In closing:

Although at lower levels than a few months ago, constrained global supply of oil and gas on account of the Russia Ukraine war has seen international fuel price remain elevated. Although far from home, the results of these increases have an impact on every South African. Managing your cashflow is essential at times like this, as well as looking to include investments within your portfolio that benefit from fuel price increases.

Near term, because of global supply constraints and a weaker exchange rate, South African may have to brace themselves for more fuel price increases. Looking a little further ahead, however, the expectation is that oil prices could remain at these levels and may even come under pressure due to deteriorating global economic growth fundamentals. The rand is also expected to strengthen at some point – particularly as developed market interest rate increases subside, and the global growth outlook begins to improve.

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