The government, having identified import parity pricing as a prime economic evil, is turning a blind eye to this practice in the fuel industry, which is making spectacular profits on rampant oil prices.
President Thabo Mbeki has been leading the charge against import parity pricing, the practice where domestic suppliers of, for example, steel and chemicals, charge world prices plus shipping and related costs to local manufacturing industry.
The government wants to stamp out the practice as it retards manufacturing exports, jobs and economic growth. Yet import parity pricing remains the cornerstone of the fuel industry.
Runaway fuel prices are a significant threat to growth: crude oil trading this week was at a shade under $65 a barrel.
The petrol price has increased dramatically with Gauteng prices up by nearly 50% — from R3,78 a litre for leaded 93 octane in January last year to the current R5,62.
The country’s leading supplier of fuel, Sasol, meanwhile saw profits from its synthetic fuels operations jump by 65% — R1,45-billion — to R3,69-billion in its last six-month reporting period.
Conventional refiners are also doing very well, with BP, the world’s second-largest oil company, last month reporting record profits of $10,47-billion in the first half of 2005 compared with $8,14-billion last year.
Mbeki, in his State of the Nation address this year, raised import parity pricing by the steel and chemical industries as examples of obvious “market failures”.
Import parity pricing has for a long time been a cornerstone of the Byzantine set of regulations that the government uses to regulate the fuel industry.
Although South Africa produces its entire fuel needs domestically, either through synthetic fuels that make up 40% of the total, or refining imported crude, the Department of Mineral and Energy’s basic fuel price mechanism is based on prices from Mediterranean and Singapore refineries.
This is intended to be an independent measure. Controversy arises when notional shipping costs to South Africa are added, 17,5c a litre in the case of petrol, or R3,3-billion annualised.
Mediterranean and Singapore refineries both import crude and therefore already include a shipping cost. The R3,3-billion fictional shipping cost is particularly hard to swallow for Gauteng consumers because their fuel actually comes from nearby Secunda.
Synthetic fuel manufacturers Sasol and PetroSA (formerly Mossgas) manufacture 40% of the country’s fuel needs: Sasol producing 33% of the country’s needs and PetroSA 7%.
The other 60% is produced from imported crude by refiners Shell/BP, Engen, Caltex and Sasol/Total (at Natref).
The government changed the way the basis of the fuel price is calculated in April 2003, when Mediterranean prices were included.
The pricing mechanism was changed from being called the in-bond landed cost (IBLC) to the basic fuel price (BFP).
Colin McClelland of the South African Petroleum Industry Association (Sapia) says that they monitored the price for a year after the switch and found that on average the BFP was about 8c a litre lower than the IBLC — a R1,5-billion a year saving.
McClelland confirms that very little refined product is imported into South Africa. “We import crude and refine locally. Product imports usually only [occur] when we have refinery shutdowns.”
He supports import parity pricing: “Given that oil is imported into South Africa, I see no other way [to price fuel] as the imported price has to be paid for the lion’s share of what we use.”
It has long been argued that import parity pricing works doubly to Sasol’s advantage in that inland prices are set artificially high by monopolistic pricing by pipeline operator Petronet. These are used when setting inland fuel prices.
Sasol spokesperson Johan van Rheede says, “as far as pipeline charges are concerned, I know that the pipeline tariff is significantly lower than road or rail transport”. He referred inquiries to Petronet.
Van Rheede says Sasol is participating in an industry-wide study to assess pricing practices in the chemicals sector. He did not respond to questions on import parity pricing in the fuel sector.
McClelland says Sapia welcomes the new Pipelines Act and the pipeline regulator, which “will be set up in terms thereof to set tariffs in future”.
McClelland says Sapia supports the deregulation of the fuel market.
Chief director of hydrocarbons at Minerals and Energy Nhlanhla Gumede did not respond to e-mailed questions or a telephonic request for a response to the e-mail.