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Retailers threaten to take DMRE to court over fuel relief plan

RETAILERS cannot reduce all the other elements on the margin like taxes, basic fuel price, etc, as the wholesale price they will be paying would have already built in all those elements into the cost, says the FRA. Picture: Armand Hough, Ana.

RETAILERS cannot reduce all the other elements on the margin like taxes, basic fuel price, etc, as the wholesale price they will be paying would have already built in all those elements into the cost, says the FRA. Picture: Armand Hough, Ana.

Published Apr 7, 2022

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THE FUEL Retailers’ Association (FRA) yesterday threatened to take legal action against the Department of Mineral Resources and Energy (DMRE) should some of the Phase 2 proposals contained in the government’s short-term relief measures to address fuel price increases be implemented without a proper regulatory process.

While South African motorists are desperate for relief at the fuel pumps, with oil prices elevated in the wake of Russia’s invasion of Ukraine, the FRA argues that the proposal is problematic.

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This, as most of South Africa’s fuel price is bloated at the pump by government taxes.

Minister of Mineral Resources and Energy Gwede Mantashe last week proposed additional measures to be introduced after the expiry of the temporary measures from June 1, including a reduction in the Basic Fuel Price of 3 cents a litre, the termination of the Demand Side Management Levy of 10c/l on 95 unleaded petrol sold inland, and the introduction of a price cap on 93 octane petrol.

FRA chief executive Reggie Sibiya said the two proposals that kept fuel retailers awake at night were the capping of ULP93 Maximum price and the review of the current RAS margins.

RAS, the regulatory accounting system in petroleum, in the South African fuel retail industry is a break-down of costs to operate a benchmark service station. It includes all activities to establish and operate a service station and breaks it down into a cost per litre.

“FRA really hopes that all industry associations will work together to oppose this disastrous move by the DMRE. If we don’t do it now, we will leave behind a legacy of failed businesses and failed transformation and jobs,” Sibiya said.

The DMRE has repeatedly failed to respond to Business Report’s request for comment.

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Sibiya said to date there had been no word from the Department of Minerals and Energy to industry stakeholders, and they believed that the proposed less than two months consultation was unrealistic.

He said a 2016 KPMG study commissioned by the DMRE revealed the retail margin was under recovering by 12 cents per litre (cpl). South Africa retailers in 2022 have had no change in this situation, despite the findings of the study, with the sector’s margins worse now.

“With that kind of under-recovery it makes option one the worst form of regulation. It basically means that whilst the current retailer operating margin of R1.33cpl is currently under recovering by 12 cpl, fuel retailers will be expected to compete on price. The only way retailers can compete on price is to reduce their current operating fixed margin of R1.33 by let's say R1.00, leaving them with only 33cpl.

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“The 33 cpl will not even be enough to cover wages or employment costs. The only other allocated profit margin, which is 31cpl, is for profit, and is also not fully realised, as part of it is shared with oil companies,” Sibiya said.

Sibiya said to call retailers to compete on price using their margins was a catastrophic call to kill their businesses.

“Retailers cannot reduce all the other elements on the margin like taxes, basic fuel price, etc, as the wholesale price they will be paying would have already built in all those elements into the wholesale price,” he said.

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The FRA said the maximum pricing would promote unfair competition with “illegal wholesalers”, who were getting the product at wholesale price and selling directly to the public, a phenomenon which the DMRE has dismally failed to control.

Sibiya said retailers would not be at all be able to compete with each other, but would be drawn to compete with these “illegal wholesalers” promoted by the DMRE at their own peril.

The association said that the call for a RAS margin review had one motivation, and that was to drive the R1.33 cpl operating margin even lower, and then expose it to further unfair competition.

Sibiya said it has a pending court case against the DMRE already in relation to the RAS Pricing methodology, which was due to be reviewed in court in three months’ time.

This case would have a bearing on Mantashe’s recent fuel relief proposal.

The FRA said that it was again unfortunate that they would be fighting in court with a minister who should be protecting SMME sustainability, transformation and job creation in this sector. Instead, Mantashe’s proposals would effectively marginalise all these elements.

Sibiya said: “If regulation fails us, we have the courts as our last resort to save businesses and jobs. Our presentation to the Parliamentary Portfolio Committee of Minerals and Energy on March 25 sought to make our government understand how current retailer margins are already squeezed and bleeding. They now know the under-recovery stated above and surely, if logic prevailed, one would hope that an urgent and different intervention to what is proposed on phase 2 is needed for fuel retailers,” Sibiya said.

FRA said that it was unthinkable that the DMRE could first refuse to regulate properly the expenses making up the retail margin, but also went further to regulate the maximum price, thereby deliberately squeezing retailers out of business.

Sibiya said the DMRE price regulations did not talk to the reality on the ground. Black entrants were currently battling to make ends meet, because the margin did not fully allocate for all operational expenses, and the 31cpl, which should have been ring-fenced and allocated to retailers for paying back loans and making little profit from it.

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diesel fuel

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