October fuel hike puts South Africa’s road freight under pressure

Source: Engin Akyurt via Pexels

The October increase in the price of fuel reminds everyone, especially the consumer, of just how exposed the broader logistics sector is to the volatility of global oil markets. With fuel prices continuing to rise, transport companies will inevitably raise the cost of transport due to increasing pressure on operational costs.

Depending on the type of operation, routes, vehicles and specific conditions of the transport leg, fuel can account for between 35% and 55% of operating costs. Fuel is one of the three largest operating costs in the transport industry, meaning even small price fluctuations can have significant consequences. South Africa moves more than 80% of its land-based freight via road freight, and a large amount of general freight on rail also uses diesel. One can therefore understand that highly volatile fuel prices have an effect far beyond the road freight industry.

Diesel at the heart of freight costs

The October fuel price adjustment sees petrol increasing to R29,88 and R30,25 per litre inland, which represents an 11,6% and 12% per litre increase, respectively. Diesel increases by R2,84 and R3,24 per litre, depending on the amount of sulphur, resulting in a 10% or 11% increase on the base fuel cost of between 35% and 55%.

Diesel fuels a great majority of freight movement in the country, from line-haul trucks that link ports and distribution centres to small delivery vehicles supplying local markets.

Since almost every sector depends on road freight, changes in diesel prices have an exponential and expanded effect on the logistics industry and, unfortunately, the impact of fuel costs is inevitable.

As noted earlier, fuel is one of the biggest variable expenses and it impacts both short- and long-distance operations. It affects all legs in a logistics chain, and some transporters will now face severe cash-flow constraints.

Global pressures shaping local fuel prices

Global fuel market dynamics play an enormous role in determining fuel prices. Supply and demand remain very relevant in what the global customer is prepared to pay for a barrel of oil, as well as the perceived shortage that drives a buying spree and thus the price for a barrel. Secondly, as oil is primarily bought with US dollars, the value of the rand against the dollar plays a further, in our case negative, role in resulting in more expensive fuel at the pump.

Unfortunately, the majority of the petroleum products, including crude oil and refined petroleum products, consumed in South Africa are imported, and this directly results in the domestic fuel cost either rising or falling.

The October increase was primarily caused by increasing global oil prices, geopolitical concerns, a weakening rand and the growing instability in global energy supply networks. The political turmoil in major oil-producing countries has now caused increased volatility in the market, which has led to worries about possible interruptions to major distribution and transportation routes.

Oil markets typically react quickly to geopolitical risks, pushing crude prices higher and driving up the cost of refined fuel products downstream. For an economy like South Africa that imports oil, the outcome is often inevitable: higher domestic energy prices.

The ripple effect across logistics

Again, the fuel price increase does not end at the pump price. Once fuel prices increase, the cost of moving goods from production sites to distribution centres and finally to retailers is all exposed to price increases.

Road freight plays a crucial role in the long-distance movement of goods among ports, factories, warehouses and retail locations.

Freight companies need to remain financially viable, and thus transport companies must choose whether to increase their rates, by a variety of factors and either by the full fuel price increase or a percentage thereof, or whether they have the financial reserves to withstand the increases. The latter will place pressure on cash flow and reserves. Rate adjustments are often inevitable due to the recurring fuel price strain, even if some transport operators may temporarily withstand the cost to preserve contracts and relationships with clients.

How operators are managing volatility

The transportation sector has grown increasingly defined by the volatility of fuel prices, and many transport companies adjust by reducing the volume of fuel used. Fleet managers leverage telematics technology, fuel choice, optimal routing software, driver training, new engine and vehicle technologies, and congestion and standing-time minimisation or avoidance, as well as load sharing.

Environmentally friendly driving techniques, better vehicle maintenance and more sophisticated logistics planning are now essential resources for controlling operating expenses.

Fuel adjustment methods have been incorporated in several transport contracts, enabling operators to partially compensate for rapid price changes without disrupting long-term commitments. These approaches may reduce the effects of rising fuel prices; however, they are not sufficient to eradicate them.

Navigating an uncertain road ahead

The fuel price increase illustrates how vulnerable the country’s transport sector is to international energy trends.

Unfortunately, it is difficult to completely rule out further fuel price increases. There are already indicators that South Africa is heading towards further fuel price increases in November should tensions in the Middle East not be resolved. The ongoing geopolitical tension and the surge in risk, coupled with the supply and demand factor, mean adaptability will continue to be vital for South Africa’s freight sector.

Transport companies’ strategies for navigating this increasingly unstable operating environment will continue to be shaped by limiting fuel use, enhancing operational efficiency and preparing for unpredictability.

One thing is certain: in a country that is dependent on road freight, such as South Africa, every adjustment in the price of diesel has consequences extending beyond the petrol pump. It goes deep into the transport systems that keep the country running.