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Record-high diesel price offers traders new hedging opportunities

The Johannesburg Stock Exchange (JSE), which manages South Africa's futures exchange, has introduced contracts that allow investors to protect against changes in diesel prices that were raised to a record on Wednesday.

The diesel-hedge contracts started trading on February 20, JSE commodities derivatives director Chris Sturgess said.

"Anyone who is in the logistics business will be the biggest user," Sturgess said on the sidelines of a conference in the Free State province town of Bothaville. "We are talking from farmers to mining companies."

The department of energy increased the price of diesel in Gauteng province by 2.1% to a record R13.39 per litre for March starting on Wednesday after the average rand-dollar exchange rate declined in February from a month earlier.

The rand slumped to the weakest level since October 2008 against the dollar on January 30. Africa's biggest economy imports about 70% of its oil needs, processing the remainder of its fuels from coal and gas.

One contract is for 5 000 litres, and prices are quoted in rand per litre, the JSE said in a presentation on its website. Rand Merchant Bank, the investment- banking unit of FirstRand, South Africa's second-largest lender, acted as the first market maker, it said.

Diesel and fertilisers are the two biggest costs for farmers, said Jannie de Villiers, the chief executive of Grain SA, the biggest representative of commercial farmers in South Africa.

"Farmers need to embrace it and they need to understand how it works and try to make use of it to hedge their costs," he told reporters, referring to the diesel contract. – Bloomberg

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