Mining industry can least afford ongoing fuel increases

The need to mitigate the impact of higher fuel costs through cheaper alternatives can result in businesses taking decisions that will have a negative impact in the long term, states integrated end-to-end import and working capital specialist Blue Strata logistics manager Penny Henley.

On February 6, the price of the 93- and 95-octane grades of petrol in South Africa increased by 41c/ℓ – rising to R11.92/ℓ. Diesel increased by 17.8c/ℓ and liquid petroleum gas increased by 73c/kg. On April 3, the price of 95-octane petrol increased by 10c/ℓ at the coast and 12c/ℓ in Gauteng.

“To combat the fuel price esca- lation, importers of mining equipment will ultimately continue to drive up product pricing to maintain profit margins, leaving the mines to absorb these costs.”

Henley stresses that the mining industry can ill afford the ongoing fuel increases. “In an industry that experienced much downtime over the last few years, owing to labour issues and resultant increases in overhead costs, any fuel increase puts further pressure on its bottom line.

Consequently, Henley warns that while sourcing cheaper transportation options may be advisable in some respects, caution should also be exercised by importers.

“Choosing a transportation company purely on the basis of price could place the company at severe risk. Some companies have been known to significantly undercut on pricing to gain new business, with the result that they creep the prices back up over time or cut back on other areas, such as maintenance, leaving the vehicles in a poor state and at risk of breaking down, thereby, creating delays or stock short- ages,” she adds.

Henley points out that importers are often not able to counter the effects of fuel increases, as any reserves or buffers built into an importer’s logistics pricing for uncontrolled situations, such as storage costs caused by regulatory stops, are nullified by fuel increases.

“Importers need to monitor their service providers closely and ensure that they remain honest and do not inflate the increase for their own benefit,” she adds.

Henley proposes that importers should find other areas in which to cut costs, such as choosing a shipping line that may offer a more competitive price option owing to longer transit times as a result of slower sailings in an effort to save on fuel costs.

“However, while this will save costs, the importer should be cognisant of the fact that the product will have a longer lead time, which can result in the importer missing delivery deadlines.”
Henley further notes that ongoing fuel hikes are not unique to South Africa, but are a global phenomenon. “There are only a handful of fuel providers worldwide; therefore, we all have to ultimately source from the same providers and can rely only on trade agreements to estimate the impact of how much we are affected by the volatility in the fuel market.”

She stated in a media release in March that, while the latest petrol price increase would have to be absorbed by importers, ultimately, these cost increases would be passed on to the consumer, with the mining industry being no exception.

“Should the petrol price not stabilise in the longer term, an alternative method of transport, such as rail, may start to prove a viable consideration for importers.
“The current problem is that rail services simply aren’t reliable enough to ensure delivery on a specified date. Inefficiencies and a lack of maintenance in the rail system need to be dealt with if businesses are going to consider rail as an alternative mode of transport,” she added.

“That said, the differentiator between road and rail is starting to narrow considerably, as the fuel price continues to escalate and it becomes more difficult to justify the differential in price between the two. As a result, we may begin to see some businesses that are prepared to accept delays in exchange for a cheaper delivery cost,” Henley concluded.

Exorbitant Costs
Road Freight Association (RFA) technical and operations manager Gavin Kelly stated on March 7 that the increase in the diesel price and the additional increase of 23c/ℓ in the fuel levy in April would add to an already heavy burden placed on road freight operators. Smaller truck operators, in particular, would be affected.

He said South Africa’s new carbon tax, set for implementation in 2015, would reduce the country’s competitiveness even further.

Kelly added that the RFA would continue to lobby against the tax, especially since the freight industry had no other options, while the availability of supplies of clean fuels or biofuels remained an issue.

Engineering News reported in January 2012 that an industry lobby group comprising large mining groups and mineral processing companies was cautioning against the proposed introduction of a carbon tax in South Africa, until the country had fully charted its abatement potential and the cost implications of implementing its renewable-energy heavy power generation plans.

The Industry Task Team on Climate Change, which includes corporate heavy- weights Anglo American, AngloGold Ashanti, BHP Billiton, Exxaro, PPC, Rio Tinto and Xstrata, also proposed that government make transparent the implicit price that had already been attributed to carbon emissions through the adoption of South Africa’s Integrated Resource Plan (IRP2010) on electricity, which was promulgated in early 2011.

The IRP2010 indicates that South Africa will introduce 17 800 MW of new renewables capacity between 2010 and 2030, representing 42% of all the capacity expected to be added over the 20-year period.

The National Treasury released its first carbon tax discussion document in December 2010 and released a revised discussion paper thereafter.

In the initial paper, the National Treasury supports a direct tax on carbon emissions, as it will “impose the lowest distortion” on the economy. A tax of R75/t of carbon dioxide equivalents (CO2e), increasing to about R200/t CO2e over time, “would be . . . feasible and appropriate to achieve the desired behavioural changes and emissions reduction targets”.