16 July 2013
FUEL PRICES SET TO
BURN THIN MARGINS
Economists are forecasting petrol
prices to hit $1.70 this month – a 25
per cent jump from the national
average of $1.35 in 2012. With the
falling Aussie dollar at a 36-month
low against the US dollar, and rising
oil prices due, largely, to the
Egyptian conflict, some are
predicting petrol could hit $2 per litre
by the end of the year.
Inevitably, diesel prices will follow suit and the impact will flow through to the
transport industry. This needs to become a high-priority issue for transport
operators and financiers, who will need to act quickly to prepare for a
prolonged period of high fuel prices.
The last time fuel prices jumped this dramatically was in 2008, when diesel
prices increased by 40 cents over a four-month period, followed by a 40 cent
decline over the next five months. That nine months of volatility – due to the
global financial crisis and the demise of Lehman Brothers – did not result in a
wave of transport company collapses. But this time the environment is
different and operators may lack the cash reserves to get them through.
Source: Australian Institute of Petroleum and Ferrier Hodgson analysis
How will this impact on my business?
Transport operators may be lulled into a false sense of security under the
belief that their fuel levy surcharge will insulate them from the worst oil price
movements. While the levy is likely to ultimately cover the price rises, their
impact is not immediate and operators need to prepare themselves for the
possibility they could be out of pocket for four to six months before any
recouped cash hits their bank account.
The expected increase in
petrol prices could translate
into a cash shortfall of
approximately $400,000 –
$600,000 for a transport
operator turning over $20m a
year.
For typical linehaul operators, fuel represents approximately 25 per cent of
total expenses – even more if the business is skewed to B-doubles. A
hypothetical business turning over $20m, with an annual fuel bill of $5m,
would struggle to cope if fuel costs increased 25 per cent - or by $1.3m.
Based on typical fuel terms of 14 or 30 days, fuel levy adjustments calculated
monthly or quarterly in arrears, and customers terms of 45 to 90 days, there
is potential for a four- to six-month cash-timing issue. For the hypothetical
transport operator mentioned above, this could translate into a cash shortfall
of $400,000–$600,000.
If your fuel levy terms and conditions cover only 75 per cent of any fuel
increase, this reduces your profitability by $325,000, or 40 per cent. Even if
your fuel levy covers 100 per cent of any fuel increase, there is still a
working-capital impact between paying your fuel bill and receiving payment
from your customer.
What can operators do?
It is critical operators take a proactive, first-mover approach before the fuel
price rises materialise. You may get a more positive hearing from customers
if you are the first in line to raise the issue. Financiers should also take an
active and involved approach to this issue – it will have an impact on every
transport business in the country, and there are likely to be casualties; make
sure yours are amongst the survivors.
Ferrier Hodgson can help you negotiate out-of-sequence fuel levy increases
and/or immediate payment terms. We can help you undertake a thorough
working-capital review to better position the business for survival. We can
also help with advice on fuel-saving techniques to insulate against further
future fuel price rises.
Brendan Richards
Partner
+61 408 565 433
Craig Morgan
Senior Manager
+61 400 868 070
Every month, Ferrier Hodgson’s transport and logistics specialist Brendan Richards sends a Transport & Logistics Postcard
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