Following on my recent article on the various components that are combined to determine the regulated wholesale list price (WSLP) for diesel in any particular fuel zone within South Africa, this communication will explain how pricing changes to diesel are tracked on a daily basis and how the new month’s price adjustment is ultimately determined.

The fundamental building block of diesel pricing in South Africa is the Basic Fuel Price (BFP) which essentially is what it would cost to import a litre of diesel into RSA. The first cost component in determining the BFP is the international open-market spot (non-contract) price of refined 50ppm diesel, purchased on a free-on-board (FOB) basis from the Mediterranean (50% weighting) and the Arabian Gulf (50% weighting). These prices are quoted in US dollar denomination.

These weighed spot prices are tracked daily and adjusted by the ruling exchange rate to get the cost per litre in ZAR denomination.

It, therefore, stands to reason that the international spot prices for refined diesel, combined with the US$/ZAR exchange rate, are the two key drivers of any fuel price adjustments in South Africa.

It is important to understand that the fuel price set for diesel in a particular month is based on the market price for diesel in the preceding month. We, therefore, operate on what is termed an M-1 pricing mechanism.

This means that the BFP value determined for a particular month (based on the previous month’s figures) is applied on the first Wednesday of that month and remains in force until amended on the first Wednesday of the following month. During that month, diesel is imported on a daily basis against the spot prices. Those spot prices may exceed the set BFP for the month, which means that the importer is paying more for the fuel than they are recovering against the set BFP determined for the month. They are, therefore, trading at a loss and are then deemed to be “under recovering” against the BFP set for the month.

Conversely, should the importer be landing the diesel at a spot price below the set BFP price for the month, they are making a profit and are deemed to the “over-recovering” against the set BFP price for the month.

These “over/under-recoveries” are measured and tracked on a daily basis by the regulating authorities. Changes can be volatile and can swing significantly on a daily basis, as will be illustrated further on in the communication. In order to smooth the volatility, these daily figures are averaged out as the month progresses. This results in the impact of the daily swings becoming less significant as one moves towards month end due to an increasing number of days contributing to the average figure. The average over/under-recovery for a month is used to determine the BFP price for the following month.

An average ”under-recovery” against the ruling BFP will mean that the price will increase the following month. An average “over-recovery” against the ruling BFP will mean that the price will decrease the following month.

The actual daily figures for various days within March 2022 are reflected below in order to illustrate the principle. Please note that up to 5 decimal places in the ZAR are used in the petroleum industry due to the vast quantities of product moved.

The BFP, which became effective at price change on Wednesday 2nd March, was R11.1403 per litre. On 14th March 2022, the price of importing diesel was R13.0801 per litre. This means a loss (or under-recovery) of R1.9398 per litre on all diesel imported on that day, as the market price was set at R11.1403 for the March period. During the period 2nd -14th March, the daily under-recovery figures were exceptionally high (in excess of R4.00 per litre), resulting in an extremely high average under-recovery figure for that period i.e. R3.25801 per litre. However, as the daily under-recovery figures are tracking below the average for the period, should they continue to track lower than average, it will result in the average under-recovery figure decreasing over the remaining period to month-end.

On 28th March 2022, the average under-recovery has fallen to R3.14892 per litre (a decrease from R3.25801 on 14th March). This was due to the daily figures being lower than the calculated average for the month to date. However, on 28th March, the daily figure had again moved to a point where it was in excess of the average.

On 29th March, the daily figure had fallen by over R0.37 per litre from the previous day, but this significant decrease only translated into the downward movement of less than 0.9 cents per litre due to the change being applied to the average for the month.

The norm is for the latest average “over/under-recovery” figure, available on the Friday preceding the first Wednesday of the month, to be used to set the BFP for the following month.

The regulatory pricing mechanism for petroleum products allows for an additional slate levy to be added to the fuel price, should the accumulated under-recovery on all product grades exceed R250 million within any given month. The unprecedented fuel price increases being experienced over the last few months as resulted in the slate levy being increased to R0.4606 per litre for March 2022, with industry sources putting the accumulated negative slate balance at more than R7 billion at February 2022 month end.

Conclusion

As South Africa’s petroleum products pricing mechanism is based on an “import parity” principle, the balance between the US$/ZAR exchange rate and the international spot prices for refined 50ppm diesel will be the two factors that ultimately determine the adjustment to the country’s fuel prices on the first Wednesday of each month.

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