Fuel Retailers Face Collapse

Fuel retailers in Zimbabwe face collapse due to unsustainably high duty and very expensive fuel sourced from international oil cartels delivering products from high seas.sSAKUNDA FUEL WEBThis emerged even as Finance Minister Patrick Chinamasa insisted he would not budge to calls for a softening of duty on fuel, saying he had to balance the interests  of Treasury against those of other economic stakeholders.

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The development could potentially undermine the industry, a key sector in an economy struggling to get out of the woods.

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Players said duty was undermining efforts by industry players to deliver an inexpensive product to local consumers.

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The high duty was conspiring with high wholesale prices given to the retailers who buy fuel from Harare’s Msasa depot from international oil firms who have the financial wherewithal to move huge quantities into the country.

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International oil traders have control over the importation of fuel from high seas into bond into the Msasa depot.

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Information gathered by the Financial Gazette indicates that local traders are not able to import fuel in good volumes and are therefore forced to pay high prices ex-Msasa depot despite a sharp decline in fuel prices on the global market.

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The “handover” price charged by international traders and the excise duty to government is not making it easy for local fuel traders to make profit, sources in the industry said.

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As a result, they said, local oil prices were far higher than those obtaining in regional countries, including those whose fuel transits through Zimbabwe.

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Masimba Kambarami, an executive director at DEK Fuels, said the ability to drive sustained growth in the sector was constrained by the high cost of handover price and duty on fuel.

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“Retailers are price takers,” said Kambarami. “We are very much concerned because the handover price is too high compared to players in other countries in the region. The price charged by these international traders should mirror what’s happening on the international markets. This is not the case — we should query the handover price.”

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Sakunda Holdings’ chief executive officer, Kudakwashe Tagwirei, said costs were too high for fuel retailers to operate viably. “We have cost build ups but the major problem is the determination of FOB (Free on Board) prices. This has been a major issue resulting in a lot of misconception. About 50 percent of our costs are localised. In the last six month, we have not been making money,” said Tagwirei.

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Simply put FOB is the amount which does not contain any freight costs etc. It is the actual price of the goods.

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Tagwirei indicated that for the industry to make money, petrol prices should go up to US$1,60 per litre, bucking international trends.

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Cross Country Containers managing director, Bernard Lunga, who is also a representative of the Transporters Association of Zimbabwe, said government should share the burden by reducing the import duty on fuel.

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“The recent reduction in fuel prices, though welcome, does not do much more than offset price increases in other costs which we have to absorb, particularly charges imposed by government. The overall profitability of the industry is hovering around break-even and losing money due to higher operating costs,” said Lunga.

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Chinamasa last week ruled out prospects of reducing excise duty on fuel, advising industry players to adjust their cost structures to be profitable.
\nThis has prompted small industry players to get concerned about their chances of survival.

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This year, after demanding that petroleum companies reduce prices in line with international trends, government went on to increase duty on fuel, a move Chinamasa said was part of gTreasury’s efforts to improve revenue inflows into the fiscus.

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Government has been desperate to increase revenue inflows against the background of a shrinking economy.

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The benefits of a reduction in excise duty could have been passed on to long suffering consumers, who have endured punitive fuel prices for years  despite a drastic  fall in oil prices on international markets.

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“I am not going to reduce the implied duties and taxes (of fuel) anytime soon,” Chinamasa said last week.

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“I had to put those extra duties because I need to balance my books. If I don’t, we won’t get to where I need to get to. It’s not a one day wonder; we need money for the State,” he said.

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Chinamasa added: “We need to survive in the present but we need to adjust. Let us take this opportunity to rebalance our books. Let’s deploy the associated cost-savings (from fuel price fall) into production rather than recurrent expenditure.”

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“When I increased (fuel) duties, I was very conscious to maintain the profitability of the (fuel) industry. I allowed for profit margin so we don’t want you (fuel dealers) to take the consumers to the cleaners.

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“My intervention tried to look after both the State, industry and the people.”

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Government adjusted excise duty on petrol and diesel from US$0,35 to US$0,45 per litre and from US$0,30 to US$0,40 per litre respectively when it brought pressure to bear on fuel retailers to reduce prices in line with international trends.

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The move was meant to ensure that government revenue from duty on fuel did not fall in line with the fall in fuel prices.

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Consequently, the decline in fuel prices became marginal and failed to benefit industry and commerce, which are also under pressure to reduce prices to help grow the economy by increasing demand for local products.

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Global oil prices have been declining since June last year, from around US$115 per barrel to a low of US$48 per barrel by January.

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The effect of lower cost of fuel was expected to reverberate through multiple production and distribution systems of a wide array of goods and services, leading to significant savings for consumers and businesses.

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Zimbabwe has battled high prices at a time there is an acute scarcity of cash.
\nThe economy was expected to get relief through lower prices of fuel but this has not been the case.

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Investigations by this newspaper recently established that at least four global oil players have established significant presence on the domestic market and were colluding to keep prices high despite global oil prices weakening.

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The four global players have direct control or influence over at least 350 retail sites across the country.

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This has allowed them to dictate prices and undermine competition.

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This collusion by the big fuel movers had enabled them to exploit the market unfairly to achieve super profits at the expense of the consumers.

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To ensure fair play in the market, Energy and Power Development Minister, Samuel Undenge, has instructed the Zimbabwe Energy Regulatory Authority (ZERA) to stop the cartel behaviour in the industry.

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“It’s a deregulated market and allows the players to engage in competition but not to create monopolies. It’s unfortunate that we have monopolies,” Undenge said.

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He added: “However, to ensure that we have fair play, there is the regulatory authority to try and stop the cartel-like behaviour in the industry.

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“Our pricing formula should be a win-win one. We should act responsibly, behaving in an ethical manner.”

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He said there were now “fortnightly reviews (to) ensure a quick response to movements in international oil prices”.

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“When prices are going down, consumers will quickly benefit from lower prices. When prices are going up, the oil companies will not be disadvantages since they will be able to benefit from stocks bought at a lower price and quickly adjust their prices resulting in a win-win situation.”

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South Africa reviews fuel prices on a monthly basis while Zambia does so on a cargo-by-cargo basis.

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Fuel prices in Zimbabwe are now determined through a fuel pricing model which sets the permissible maximum pump price.

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This came after ZERA, a government agency with regulatory oversight over the fuel industry, carried out an audit in December last year and found out that there were discrepancies in pricing, where  different FOB prices at the port of Beira were being charged by different operators.

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ZERA was then forced to issue a directive to all firms for a drastic reduction in FOB prices at the port of Beira, which it said should be pegged at US$0,49 per litre for diesel and US$0,45 per litre for petrol.

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FOB prices at the port of Beira were hovering at US$0,57 per litre for diesel and US$0,52 per litre for petrol, a drastic fall from June FOB prices of US$0,88 per litre for diesel and US$0,86 per litre for petrol.

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This resulted in the pump price of petrol retailing at US$1,40 per litre and diesel at US$1,25 per litre.

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This contrasts with prices of US$1,44 per litre for petrol and US$1,32 per litre for diesel that were ruling before the directive.

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ZERA chief executive officer, Gloria Magombo, said while operators needed to recover costs, consumers needed to pay fair prices.

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Zimbabwe is projected to spend US$1,22 billion on fuel imports this year from US$1,37 billion last year.

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“My expectation is that consumers and businesses will spend a reasonable portion of the savings from lower prices on production,” said Chinamasa.

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“I would be uncomfortable with a situation where the potential savings are spent on none-essential imports. Such leakage will only transfer our wealth to other nations.”