The Herald (Harare)

21 February 2013

Zimbabwe: Ethanol Can Reduce Business Costs

editorial

Fuel prices are rising slowly but steadily as international crude oil rises in price, an effect of the world moving out of its global recession into a brighter world. There is nothing much that Zimbabwe can do about this except to sort out the ethanol substitutes, whose prices are static since they are related to the price of sugar cane, not the price of crude.

At least with international crude prices quoted in US dollars Zimbabwe just has to take the increase in oil prices in that currency, rather than worry about currency fluctuations as well.

There is intense competition in our fuel industry, and the switch from an industry dominated by multi-nationals to one dominated by three indigenous companies and one multinational, plus a host of smaller importers, has maintained or even enhanced that competition. It is very noticeable that quite significant jumps in the price of crude result in far smaller rises in the price of Zimbabwean fuel. Presumably most of our importers have managed to lock in refining, transport and other costs not related to the price of the raw material and are just maintaining their slim profit margins.

But the main guarantee that refined fuels in Zimbabwe will be sold at the lowest possible price is that plethora of service stations.

There are very few urban stations more than a few hundred metres from a competitor, and that must be maintained.

So when it comes to fuel prices the market seems to be efficient and works as it should.

But others are not so careful.

In some industries fuel is a major component of their costs, but never a majority component. The transport industry is the most affected, but we doubt if fuel is more than 25 percent of the total costs faced by a transporter.

So a 10 percent rise in fuel costs should see just 2,5 percent rise in transport costs.

When it comes to other goods the price rises driven by fuel increases should be trivial. In most cases fuel forms less than 1 percent of the total costs, so even a doubling in fuel prices would only justify a 1 percent rise in a retail price. Zesa's realignment of tariffs, within a negligible total revenue increase, should have a larger effect.

But different goods will be affected in different ways. Imports obviously have a higher transport component over domestic products.

This should give a small, but noticeable edge, to local producers if they do not cheat. And that will do no harm.

Unfortunately some people do cheat, although the scope for doing so is less now than it was a few years ago when everything was in short supply and profiteering was rampant. Competition and adequate supplies should minimise cheating, but consumers should be aware that it exists.

Quite often suppliers might have other increased costs, such as a new pay award made by the relevant national employment council. If wages rise 5 percent and staff costs are around 40 percent of the final price of an item, then a 2 percent price rise is inevitable.

It is the same for fuel or any other input. What is required is that producers and retailers retain their models and deal honestly with the public, maintaining their mark-ups but not growing them.

Fortunately competition will keep those tempted in rough line, but this does mean consumers need to shop around to ensure that their previous favourite supplier is not a cheat. The one area where price fixing is rampant is, of course, the bus sector.

While intensely competitive, there is a strong herd instinct here, and a total willingness to push prices up willy nilly. That might mean a bit of a crackdown by the authorities. But transport operators, and especially the kombi drivers, have one easy way of saving money, to simply drive better.

Most kombi drivers could cut their fuel consumption, probably by as much as 20 percent, simply by obeying traffic rules instead of weaving and cutting into traffic flows, accelerating and coming to emergency stops.

The time they save on a journey is insignificant, but they burn their profits in their engine and in the amount of tyre rubber they leave on the road by driving the way they do. Reputable long-distance truck companies use a lot less fuel per kilometre than the cowboys.

Ordinary rush hour drivers could also save the fuel price rises with a bit more careful driving. Perhaps in the end the rise in fuel prices will help, more than even the roadblocks, to cut our appalling road death tolls as everyone drives better to save fuel.

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