Unpacking the diesel debacle

What does the unforgiving upward march in the price of diesel mean for South African road freight logistics operators and consumers? GAVIN KELLY, chief executive officer of the Road Freight Association, explains…

This month, the cost of diesel for transporters increased by R2.76 for 500ppm and R2.84 for 50ppm, raising inland pump prices to R23.05 and R23.28 respectively. The price of both grades of petrol (93 and 95) increased by R1.71/litre. The Central Energy Fund (CEF) attributed the price hikes to rising international fuel prices and the weakened rand.

These prices were last seen in June 2022 – the first in a four-month climb that saw diesel prices reach R25/litre in July and the lofty heights of R25.74 by November.

While road freight transporters use both petrol and diesel, the latter is the main fuel in most road operations. When fuel prices go up, transporters need to increase their pricing to cover the higher cost of diesel. This may sound like an easy or simple process, but there are transporters who are not able to increase their fees. Some are contractually bound, while others may price themselves out of the market; in either situation, they might not be able to carry on running their business.

One of the biggest challenges faced by transporters is the need to fund operations (particularly the use of fuel) whilst only being paid as long as three months after the work has been done. In the meantime, the next load needs to be moved, and so on. This all needs fuel for the vehicles. There just aren’t limitless reserves of cash to continue the high level of fuel expenditure against the delayed payment for work already done.

The RFA is hearing from more and more of its members that the fuel cost strain is affecting their survival. There are more and more businesses in stress/business rescue, whilst customers reduce transport volumes or even curtail stock movement, depending on their clients’ consumption levels.

Transporters will feel this impact on their businesses, and many will not be able to muster the guarantees required for purchasing fuel on credit while they await payments AFTER the transport has been provided. The transporter has paid for fuel, paid the driver, and covered other costs, yet still needs to operate a business. Many just don’t have adequate funds to carry themselves for up to 90 days.

Whether we like it or not, the continuous increases in the price of diesel inevitably drive up the cost of transport and logistics, step by step. With roughly 85% of all goods moved through and around the country having a road leg at some stage in the journey, there will accordingly be increases to consumers as the cost to transport goods rises.

Fuel breached the 50% mark in daily operating costs during the third quarter of the year. Now, as we head into the final months of 2023, with this latest 3.6% increase the sector is approaching the 60% level seen during the last months of 2022. That’s a huge increase in cost to company for any business that requires goods to be transported to manufacturing, processing, packaging, staging, distribution, or retail operations.

That cost simply cannot be borne by the company, so in most cases it will be borne by the consumer, who will pay more for… well… everything: from food to fuel, from clothing to electronic goods, and everything in between. Prices will rise – some immediately, but more in terms of an ensuing domino effect, the next in a long line of such domino effects that we have seen too often in the last few months.

Transport costs will rise. There is no alternative for transporters, and those that cannot afford to carry loads at the rates or prices customers are prepared to pay will simply close down.

There will be more business closures, more unemployment, less business and revenue driven through the transport sub-sector industries, and inevitably higher prices at the till!

Consumers have for the first time enjoyed a breather in the Reserve Bank Repo Rate cycles, as rates remained the same. However, these fuel price increases could wipe out the gains won by the Reserve Bank in taming inflation. Hopefully the inflation monster will not revive and another reprieve will be afforded to consumers in November.

However, should an interest rate increase occur alongside transportation costs for goods and services, it will grip the consumer in another tight financial squeeze just before the Festive Season, at a time when many retailers have traditionally generated income to carry them through the financial year.

As in 2022 and previous years, this may reduce any chance of a bountiful retail season, and there are many consumers who will stay at home and cut the lavish spending usually associated with the Festive Season.