Road freight feeling brunt of Middle East war. Q&A with Gavin Kelly

Like most other sectors (all?), road freight is feeling the impact of the current Middle East crisis. Can you briefly clarify whether the impact is largely price, or price and supply constraints?

GK: The impact is 90% price (fuel input costs increased by 47%) in an area where this part of operating cost is anywhere between 33% and 55% - depending on a range of factors.

There are no large supply constraints for South Africa (currently) as 68% of petroleum products are sourced from Angola and Nigeria, another 23% from the far east. There seems to have been supply shortages within South Africa due to huge panic buying (depleting stocks at wholesalers and retailers).

There have been allegations of parties holding back product to benefit from the higher price. The Association has neither received any verifiable reports of such activity, nor is it aware of any reported cases to the Competition Commission or the Department of Petroleum and Mineral Resources.

Flowing from the above, there are reports of some smaller contractors having to drop certain loads due to diesel unaffordability. Is this a widespread problem and is there any way of mitigating this impact?

There have been cases where operators (transporters) have pulled out of some agreed work – where they have just not had the operating capital to purchase fuel at the new rate. It must be remembered that many operators get paid on a 60 day cycle – some even 90 days on invoice – so the spectre of having to fund operations where no cash reserves or access to affordable finance is present – drives some harsh decisions.

It does not seem widespread as yet – again the Association only “knows” what is reported to it – the only mitigation options available to transporters is to reduce fuel consumption. That is not necessarily a cheap exercise – and depending on options chosen, could be even more capex intensive than using credit to float the fuel demand.

As an industry, is there any room to manoeuvre in relation to negotiating bulk supply at a discount etc, or to avoid the worst surcharges?

The Association looked at an industry bulk discount in the past and eventually decided against such a structure as it became very clear that the Association would have started to compete with its own members (both operators and suppliers). In addition – there are such structures in place between oil majors and operators.

A huge question would be who would stand surety for the deposits for the fuel allocations.

A lot has been written about the price adjustment process and government's ability to assist the economy in relation to this crisis. Does the Association have a view on this and are talks ongoing regarding potential mitigating efforts?

There are various models around the world of how (retail) fuel price adjustments are made. Some countries do this on a daily basis, others over a fortnight (two weeks) whilst some do it every six months (then there are those like SA who do it monthly).

One of the most important aspects of freight logistics is predictability – a frequently fluctuating fuel price lessens predictability. One may argue that the ups and downs over shorter periods brings more cash flow perspective into the picture – but it would be very hard to nail down contracts for any reasonable period of time.

The Association is aware, and has been kept in the loop by the Central Energy Fund (CEF) regarding the intention to discuss fuel pricing mechanisms, including the “unregulated wholesale price of diesel”. This is – in fact – NOT true as the base price of wholesale diesel IS regulated.

The current pricing method seems to work – the under- and over-recovery based on the realities of the previous month prices, and it allows for predictability within a short time-frame. The Association would need to see what the CEF has to propose before making a final call, but the current manner seems a good process.

Lastly, prices and inflation are inevitably going to go up. Are there any indications as to the kind of increases likely to be passed on to the consumers? And how much time do we have before we start to see major service disruption?

Inflation is one thing – and that will be a two to three month average movement before the Reserve Bank will define what the “current” inflation may be vis-à-vis the inflation target. The Association believes that the Reserve bank will probably hold rates steady for longer (there were two rate decreases “pencilled in” for 2026). The economy (more specifically the consumer) does not have the depth to start absorbing interest rate increases on the back of such huge fuel product increases.

Retail price changes differ from product to product, what the retailers (and others in the supply chain) decide to do to mitigate incoming energy costs, and what stock levels are like (how much old stock is still in warehouses and needs to be moved).

There will not necessarily be major service disruptions as – according to the CEF and the DPMR – we have sufficient reserves and are sourcing product at sufficient levels from suppliers (as noted earlier not from the middle east through Strait of Hormuz).

There will be operators (transporters) who may very well close business – and that will have to be monitored.

OK lastly lastly...road freight is just one part of the puzzle. People forget that you are as dependent on diesel as other sectors, ie mining and power supply. Comment?

Road freight transport mainly uses diesel – probably at least 70% of all vehicles on the roads are diesel powered. There is also a vast array of equipment used in various applications (warehouses, cooling, loading and offloading, stacking, packaging, etc).

Many of these use diesel too (a lot of internal warehouse equipment uses gas – still dependence on petroleum processes).There are other aspects of logistics – packaging and wrapping that are petroleum based. Strange how everyone forgets that the ports, Transnet (railways), Eskom, agricultural sector, mining sector and any warehouse / retailer / manufacturing / refrigeration / health operations that require stand-by power and thus use diesel generators.