The latest sharp increase in diesel costs will add pressure to an operating environment in which transporters are already battling tight margins and rising costs. In this opinion piece, Road Freight Association CEO Gavin Kelly examines the latest fuel price increase, its potential ripple effect through the logistics chain to the consumer and the growing importance of efficiency and adaptability as operators navigate an increasingly unpredictable cost environment. Here’s Mr Kelly…

Fuel cost on the rise – again
Fuel prices increased sharply on September 2nd at 24h00 – basically due to higher international prices. In addition, a further 4.9c/litre increase due to the wage increase for forecourt employees, as well as 21.9c/litre for the slate levy need to be budgeted for. This takes 93 ULP/LRP at R26.76/litre and 95 ULP/LRP at R26.92/litre.

Diesel climbed to R29.11/litre for 500ppm (wholesale) and R30.05/litre for 50ppm (wholesale).

Every litre of fuel consumed on South Africa’s roads affects the underlying health of the country’s logistics economy. Changes in fuel prices have a far-reaching effect on the country’s supply chain, transport systems, the wider logistics industry as well as the pricing of goods on store shelves.

This increase in the price of fuel is yet another reminder of just how highly susceptible the industry is to the volatility of global oil markets. As fuel prices rise, transport companies, fleet operators and freight customers must brace for the pressure on operational costs.

Depending on the type of operation, routes, vehicles and specific conditions of the transport leg, fuel can be anywhere between 35% and 55% of operating costs. Fuel is one of the three largest operating costs in the transport industry, thus even small price fluctuations can have significant consequences.

South Africa moves more than 80% of its land-based freight via road freight and a large amount of the general freight on rail also uses diesel. One can therefore understand that highly volatile fuel prices have an effect far beyond the road freight industry.

Diesel at the heart of freight costs
In the September fuel price increase, both grades of petrol increased by 5.27%, while diesel increased by 11.23% or 11.71%, depending on the amount of sulphur – resulting in an average 11.35% increase on the cost base of between 35% and 55% as noted above.

Diesel fuels a great majority of freight movement in the country, from line-haul trucks that link ports and distribution centres to small delivery vehicles supplying local markets.

Since almost every sector depends on road freight, the changes in diesel prices have an exponential and expanded effect on the logistics industry and, unfortunately, the impact of fuel costs is inevitable.

As noted earlier, fuel is one of the biggest variable expenses and it impacts both short- and long-distance operations. It affects all legs in a logistics chain, and some transporters will now face severe cash-flow constraints.

Global pressures shaping local fuel prices
Global fuel market dynamics play an enormous role in determining fuel prices. Supply and demand remain very relevant in what the global customer is prepared to pay for a barrel of oil, as well as the perceived shortage that drives a buying spree and thus the price for a barrel.

Secondly, as oil is primarily bought with US dollars, the value of the rand against the dollar plays a further role in more expensive fuel at the pump.

Unfortunately, the majority of the petroleum products – crude oil and refined petroleum products – consumed in South Africa is imported and this directly results in the domestic fuel cost either rising or falling.

Political turmoil in major oil-producing countries has now caused increased volatility in the market, which has led to worries about possible interruptions to major distribution and transportation routes.

Oil markets typically react quickly to geopolitical risks, pushing crude prices higher and driving up the cost of refined fuel products downstream. For an economy like South Africa that imports oil, the outcome is often inevitable: higher domestic energy prices.

The ripple effect across logistics
Again, the fuel price increase does not end at the pump. Once fuel prices increase, the cost of moving goods from production sites to distribution centres and finally to retailers, increases.

Freight companies need to remain financially viable, and thus transport companies must choose whether to increase their rates – by a variety of factors of either the full fuel price increase or a percentage thereof – or whether they have the financial reserves to withstand the increases.

The latter will place pressure on cash flow and reserves. Rate adjustments are often inevitable due to the recurring fuel price strain, even if some transport operators may temporarily withstand the cost to preserve contracts and relationships with clients.

How operators are managing volatility
The transportation sector has grown increasingly defined by the volatility of fuel prices and many transport companies adjust by reducing the volume of fuel used.

Fleet managers leverage telematics technology, fuel choice, optimal routing software, driver training, new engine and vehicle technologies, congestion and standing-time minimisation and avoidance and even load sharing.

Environmentally friendly driving techniques, better vehicle maintenance and more sophisticated logistics planning are now essential resources for controlling operating expenses.

Fuel adjustment methods have been incorporated in several transport contracts, enabling operators to partially compensate for rapid price changes without disrupting long-term commitments. These approaches may reduce the effects of rising fuel prices; however, they are not sufficient to eradicate them.

Navigating an uncertain road ahead
The fuel price increase this September illustrates how vulnerable the country’s transport sector is to international energy trends.

Unfortunately, it is difficult to completely rule out further fuel price increases. Already, the indicators are that tensions in the Middle East will continue to place pressure on fuel prices and it is important to note that the northern hemisphere is now heading towards winter, which will increase demand for fuel.

Thus, the ongoing geopolitical tension, the surge in risk, coupled with the supply and demand factor, will continue to float high fuel prices. Thus, adaptability will continue to be vital for South Africa’s freight sector.

Transport companies’ strategies for navigating this increasingly unstable operating environment will continue to be shaped by limiting fuel use, enhancing operational efficiency and preparing for unpredictability.

One thing is certain: in a country that is heavily dependent on road freight, such as South Africa, every adjustment in the price of diesel has consequences extending past the petrol pump. It goes deep into the transport systems that keep the country running.

Editor’s comment: Fuel price increases are an unavoidable reality for South Africa’s road freight operators but the bigger concern is the cumulative effect of repeated increases on an industry already operating under significant financial pressure. Kelly’s warning is therefore about more than the price of diesel. With road freight carrying the overwhelming majority of South Africa’s land-based goods, sustained fuel-cost volatility ultimately becomes a supply-chain issue – and one that cannot simply be absorbed by transport operators indefinitely.

Has the time finally arrived for the road freight industry to formulate a universally accepted rates-adjustment strategy that buffers operators against fuel price shocks and other supply chain disruptions? Email ‘The Editor’ at fleetwatch@pixie.co.za with your thoughts.

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