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How Does the Fuel Market Work and what Drives (and Relieves) Prices?

How Does the Fuel Market Work and what Drives (and Relieves) Prices?

While families, companies and even the State are suffocated by the ever-increasing fuel purchase bill, signs are arriving that the times to come will not be better and a disturbing certainty remains: even though they have gone up, the truth is that fuel prices in Mozambique should be even higher because, if they continue like this, everyone loses, including the State which is covering the difference between the real price and the prices currently charged.

E&M explains how this market works, so impactful in practically everything around us, and reveals how to arrive at the final prices that touch us all in the pocket.

A few weeks ago, the gasoline companies called the press to protest against the sector’s weak revenue generation capacity. The calculations made at the time by the president of the Mozambican Association of Petroleum Companies (AMEPETROL), Michel Amade, indicated, for example, that a car that fills up in Ressano Garcia and crosses to Komatipoort, South Africa, will be paying, in Mozambique, 19.89 meticais less per liter. The fair price, according to the organization, would be 26.9 meticais more for diesel. As for gasoline, 19 meticais more per liter should be charged on the current 77.39 meticais, making 96.39 meticais per liter. This means that the price in Mozambique will be out of line with what should be the real price that could generate profit in the face of rising crude prices on the international market.

High prices for consumers but low prices for market operators: this is the dilemma of the national market
From the comparison made by AMEPETROL among seven countries in the region, namely Tanzania, Essuatíni, South Africa, Zambia, Zimbabwe and Kenya, Mozambique has the lowest fuel prices. And although the gas stations are aware that these values are high for the financial capacity of citizens and companies, they consider that keeping the current price structure may result in the reduction of the import capacity of some operators, who have already started to complain.

The Government, through the Minister of Economy and Finance, Max Tonela, has already admitted that “we may have to make another adjustment to guarantee the continuity of fuel supply in the country”. In fact, in mid-June of this year, the Energy Regulatory Authority (ARENE) announced the prospect, in the same month, of a new increase in the price of fuel and derived products, justified by an “external shock”. It was another blow to consumers, who still feel the weight of the adjustment made in late May.

What can’t be seen

Ricardo Cumbe, secretary-general of AMEPETROL, an organization composed of 30 associated operators, says that the issue of rising fuel prices has been analyzed in a simplistic way, that is, people make readings that are out of sync with reality, even relating what we are seeing these days to the conflict between Russia and Ukraine. “But it is such a complex issue that it requires a thorough exercise in order to understand its genesis,” he warns. The official explains that the industry’s activity is covered by legislation and the big problem is the lack of compliance with Decree No. 89/2019 of November 18, particularly with regard to price adjustment.

“People make misadjusted readings of reality, even going so far as to relate what is being seen to the conflict between Russia and Ukraine”

The critical point is that imported petroleum products have diversified costs and, according to the criteria established in the Decree, these costs must be accommodated in the price structure that is calculated at the end of each month by the Energy Regulatory Authority (ARENE), taking into account some factors that include the cost of freight to which other taxes, duties, VAT, the exchange rate factor, etc. are added.

The result of this exercise is a well defined table, which translates the final results that are obtained after weighting the data of the last two months in terms of quantities imported. To these, the cost of importing is added and a weighted average is made that results in the final price. “It turns out that this average does not satisfy the operators,” says Ricardo Cumbe. And why is that? AMEPETROL believes that the weighted average contradicts the law that establishes the obligation for operators to maintain a stock of fuel capable of covering 23 days of market supply. Instead, it accommodates an average that represents 60 days. “There is a contrast here that impacts our speed of recovery of a real cost that we incur for imports. Because the structure works on the basis of the average and the legislation considers 23 days,” protests the secretary general of AMEPETROL. The most comfortable scenario, he continues, is in the 23 days option defended in the law. Why? “With the financial limitations and the reduced capacity to make imports, we are only limited to bringing in orders that sometimes fall short of a 23-day coverage. The other challenge is that by using a weighted average, ARENE accommodates the current price to a cost from the previous month (in this case, relatively lower). So the ‘average’ factor is never going to bring us an alignment from a timeline point of view, for actual cost recovery,” argued Ricardo Cumbe. But that’s not all. “Once the calculation is done by the regulator, there are the minimum and maximum.

So, if the price variation is up to 20%, the regulator has the autonomy to chancel whether or not the new price structure should be complied with by operators. But when the variation is above 20%, the regulator loses this autonomy. It is the latter situation that has occurred in recent months, according to AMEPETROL. “When this is the case, the matter should be referred to the Council of Ministers, which has not been happening on a monthly frequency since last year, as established by [decree] 89/2019, of November 18. “In the face of this disagreement, operators end up resorting to an option they call a ‘nominal price structure’.

But, within this option, the Government differentiates the nominal structure from the one that the operators identify as being the most correct. From this difference results a variation that will determine the compensation element. It is on this figure that the amount that the Government owes to the gasoline companies, currently valued at around $140 million, falls.

“This has been eroding the cash flow levels of the companies since last year, and the more we try to continue to operate, the more we go into debt because we are forced to resort to bank financing and attract high interest rates. All of these elements are the reason for the great concerns that we have been expressing to the authorities in the sector,” he clarified.

Signs of Neglect

In addition to the factors behind the sharp increases in fuel prices, the representative of one of the market operators who prefers anonymity recalls that, according to the law, prices should be adjusted and announced in the third week of each month. But this doesn’t always happen. Only when prices change. When they don’t, there is no communication.

“And that’s not how it should be. Even when prices remain unchanged, it would make all the difference if the authorities came to the public to explain the reason for this, to create confidence in the communication,” he argues. For this reason, he believes that “what is contributing to the uproar that we are seeing as a result of price increases is the lack of one-off adjustments. The government, in order to safeguard social protection, maintained the expectation that the price increases on the international market were temporary phenomena and that in two or three months they would normalize. That didn’t happen and prices increased considerably.

The price has risen every month since September last year, except in March this year. But only now are they being passed on to the market. Currently, the barrel of oil on the international market has been oscillating between 110 and 120 dollars, compared to the previous 80 dollars (approximately).

An even more hidden face: disorganized operators

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After all, not all market operators have the technical and financial capacity to operate. The accusation is made by an E&M source that represents one of the reference oil companies in the national market. With several years of experience and presence in many other markets, the source told us that a country the size of Mozambique would not need more than nine fuel importers, but at this moment there are 30 importers licensed to import and distribute. Angola, for example, with a much larger size than Mozambique, has only four companies that import. “This means that the companies that entered the market in the last four to five years came to cause disturbance because they don’t have the size, organization, and financial capacity to be in this business, thus ending up harming the entire chain,” he denounced.

He adds, however, that some of these companies don’t have the financial capacity ecause for a long time they adopted unsustainable practices – such as discounts and very low prices – to gain market share, which is even against the law since the retail price is fixed by the Government and cannot be changed. That’s why, with this crisis, according to the source, of the 30 companies operating, about five or six have never imported fuel and only seven or eight are actually importing. He also refers that when there are many companies in an unsustainable situation, the bank starts to have restrictions in issuing bank guarantees. And any problem with part of the players becomes systemic.

The difference between the price charged and what should be charged is what generates the government’s debt to the importers, which accumulates every month

For example, ships arrive and only approach the port to unload when they have the bank guarantees duly issued. But it often happens that, when the ship arrives, it finds that only 30% or 50% of the bank guarantees are in place, and it stays offshore for a few days waiting for the company to complete the requirement. This ends up making the product more expensive, because each day that the ship is offshore costs $25,000. In other words, the weakest links in the chain can damage the entire supply process. Even so, he admits that the way the fuel import market works in Mozambique is “very good for the fact that it is centralized and allows for the ease of negotiating better prices with suppliers (these are larger aggregate purchases and not each one doing it individually), besides allowing for greater control of product quality and delivery terms.

Generally, import contracts are concluded between suppliers and all 30 market players on behalf of IMOPETRO, which is the procurement agent. The fuels are received almost every day in the ports of Maputo, Beira, Nacala and Pemba.

Prices will continue to rise

The operators warn that if already in May, the legislator had warned that the price of fuels was below the adequate level, one cannot expect easiness in the coming months, since the bills that the gas stations are now receiving are at levels that exceed the costs of April and May. It means that all the variables that determine the upward adjustment of prices until the end of this year are present, despite some sort of luck occasioned by the exchange rate stability that has lasted for 16 months.

&M

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