Home Uncategorized Fuel increases can cause a collapse in the road freight logistics sector

Fuel increases can cause a collapse in the road freight logistics sector

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Fuel price increases are steering the trucking sector into a ‘perfect storm’ which could have huge adverse impacts on the viability of many trucking companies.
Fuel price increases are steering the trucking sector into a ‘perfect storm’ which could have huge adverse impacts on the viability of many trucking companies.

Opinion Piece

By Gavin Kelly, CEO: Road Freight Association

No-one would have thought that we would see such increases in the fuel price as we have experienced over the past six months. As we reel from these increases, the possibility of one of the greatest price increases in South Africa that we have ever seen, is looming.

Oil has risen to the $114 (around) per barrel mark, the Rand is trading in the R16 range (or so) and the effect is a sky-rocketing price for fuel in South Africa. It has an impact on every single item that is transported to and across South Africa.

Oh yes, those ships also use fuel, and those tariffs are rising. Thanks to Covid, there are still fewer ships plying the seas and there are constraints in the global logistics chains that not only articulate into delays but into demand, which has an upward price-pressure effect.

Once goods are landed, they then find their way to either consumers or manufacturers via the dependable road transport network – and that is where the next leg of the logistics journey is impacted by fuel (oil) increases. We have all felt – and will continue to feel for some time – the effects of more expensive fuel. 

Now to the “Perfect Storm”: With the oil price and Rand value vis-à-vis the Dollar being what they are, there are reports that the fuel price for June will see an increase of between R1.70 to R2.00 – depending on the commodity (product). However, the “relief” offered by the government to reduce the level of taxation on the price of fuel by around R1.50 per litre is due to fall away at the end of May – just in time to join the new price increase.

This means a price increase of around R3.20 (a rough estimate, given all that is currently in play) by the first week of June. We cannot afford that. Or any other increases. We? Well, South Africa – but the first signs of despair and retreat will be within the road freight logistics sector.

Gavin Kelly, CEO, Road Freight Association: “There are many transport companies that cannot keep facing the continual increase in operating costs and the recent diesel price increases have become the final “nail in the coffin” for many of our transporters.”
Gavin Kelly, CEO, Road Freight Association: “There are many transport companies that cannot keep facing the continual increase in operating costs and the recent diesel price increases have become the final “nail in the coffin” for many of our transporters.”

Already, some transporters have closed their doors due to the effects of the Covid pandemic. Financial pressures have remained on the increase and the unrest that continues to ferment, radically shown by the violent period in July 2021 when the whole logistics chain was attacked (trucks, depots, distribution centres, warehouses and retails stores), continues to wear down companies and cause more closures. Operating costs within the road freight and logistics sector have continued to increase exponentially, with many of these increases coming at a time when the road freight industry can least afford, or withstand, these shocks.

There are many transport companies that cannot keep facing the continual increase in operating costs and the recent diesel price increases have become the final “nail in the coffin” for many of our transporters. Uncontrolled fuel increases are the factor that can cause a collapse in the road freight logistics sector. 

Whether we like it or not, transporters cannot absorb the cost of fuel increases. This puts them out of business very quickly, so the fuel increase must be passed on to the client (who pays for goods to be transported), which is then passed on to the consumer. Disposable funds are decreasing, consumers are being careful about what they buy, with so-called essentials such as food, medication, power, water and accommodation now the focus for most consumers.

There have been calls for the taxes on fuel to be reduced or removed and “collected elsewhere”. Those options will not resolve the underlying issues:

  • The basic price of oil  – determined outside of South Africa through supply and demand, and
  • The Rand/Dollar exchange rate – determined by international financial view of South Africa.
The Road Freight Association suggests as one of the solutions to the fuel crisis being a concentration by Sasol on producing far more fuel given that its goal back in the 1970s and 1980s was to make South Africa independent of foreign oil supply.
The Road Freight Association suggests as one of the solutions to the fuel crisis being a concentration by Sasol on producing far more fuel given that its goal back in the 1970s and 1980s was to make South Africa independent of foreign oil supply.

Solutions to the (expensive) fuel crisis could possibly be:

  • An agreement between African states producing oil (or refined products) for a far lower rate for African countries in the spirit of the Africa Continental Free Trade Agreement (AfCFTA) and to ensure African economies do not collapse.
  • Concentration by SASOL to produce far more fuel (was its goal in the 1970s and 1980s not to make South Africa independent of foreign oil supply?).
  • Development and growth of the synthetic fuels industry in South Africa – from all possible sources.
  • Development of electric transportation devices and supply.

Not only would we solve our transport energy consumption and demand challenges, we would definitely create employment (more importantly in a long-term and sustainable context) and would be heading in the right direction in terms of moving ourselves away from the reliance on fossil fuels.

Until then, our sole dependable form of goods distribution – from producers to manufacturers to market – will be under dire pressure and could collapse when many of our transporters close down their operations, solely due to the unbearable cost of fuel. This will affect all transporters – big and small.

EDITOR’S FOOTNOTE: To give an idea of the reality of what transporters are facing in terms of the fuel price increases, one transporter FleetWatch editor Patrick O’Leary spoke says that for every 50c increase in the price of diesel, an additional R160 000 is added to the monthly fuel bill of his 80-strong truck fleet. This particular fleet uses around 325 00 litres of diesel per month. This has a massive impact on the company’s cash flow with the problem being that it only gets paid by its clients after 60 days. As a result, it has had to apply for an extra R5-m credit limit on its fuel bill from its fuel supplier. There are many transport companies which will have to do the same but many will not be granted increased credit limits from their fuel suppliers. They will therefore have to pay the extra from their own pockets – an unsustainable situation given the strain on cash flows. Another transporter involved in long-haul operations tells FleetWatch that with the new expected diesel increase, fuel will now constitute some 68% of operational costs. That is brain-damaged.

As the fuel price goes up, one can expect to see transport companies either closing – as Gavin Kelly points out above – or cutting back on other essential cost areas such as vehicle maintenance so as to keep the wheels rolling. Money earmarked for maintenance will now be diverted to the fuel tank. This, in turn, will have an adverse impact on road safety as the lack of maintenance will lead to many more unroadworthy vehicles plying our roads. Whichever way you look at it, the fuel price increase is a killer – of companies, of consumers and possibly, of other road users.

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