Gordhan: Fuel prices will rock SOEs

Minister of Public Enterprises Pravin Gordhan has told Parliament that most of the companies in his portfolio will be rocked by the latest fuel price hikes, with exposure to these hikes racking up millions in extra costs.

In a reply sent to Members of Parliament last week, Gordhan said an increase in fuel prices above budgeted levels impacted most entities.

Economic Freedom Fighters MP Mzingisi Dlamini had asked what the impact of fuel price hikes had been on the turnaround strategies of parastatals.

Entities such as Eskom, Denel, SA Express and Transnet are all in the process of recovery from years of mismanagement at the expense of the fiscus.

‘Further risk’

Gordhan said the increases would significantly affect the operations and turnaround strategies of most state-owned companies in the immediate future.

He further said the volatility evidenced in fuel price changes added further risk to the predictability of turnaround plans for state-owned entities, because it was impossible to forecast these impacts.

Regarding Eskom, he said the power utility would be “squeezed” to cut costs.

“Implications of fuel price increases to the turnaround plan are that targeted areas of cost reduction would be squeezed to provide further savings, since the fuel cost increases would erode these savings,” said Gordhan.

READ MORE: Fuel, utilities gobble up spare cash

He said in financial year 2017/18, Eskom had spent a total of R3-billion on fuel-related products, including R319.9-million on open cycle gas turbine fuel, R2.1-billion on heavy fuel, and R567.9-million on motor fleet fuel.

“Eskom’s exposure to the fuel price increases in financial year 2017/18 is estimated at R97.2-million.

“In the 2018 financial year, the three fuel categories listed above made up 2.31% of Eskom’s total operating costs. If it were not for the fuel increase, the fuel cost proportion would have been 2.24%,” Gordhan said.

However, he added, if future fuel price increases remained below inflation levels, there would be no risk to the turnaround initiatives being driven within Eskom.

Regarding SA Express, Gordhan said the company took two months of data to derive an average cost per litre of R7.78.

“If the actual average for April and May 2018 is multiplied by the fuel burn, the cost increases by R97-million, which will erode profit margins; and turnaround strategies will be adversely affected,” said Gordhan.

Daily monitoring

Gordhan said fuel consumption at Alexkor was being monitored on a daily basis and that the price had had an impact on cash flow.

Fuel consumption and contractors for the Pooling and Sharing Joint Venture of Alexkor at Richtersveld contributed to between 25% and 35% of production costs, he said.

“The increase in the fuel price will put a significant strain on the company and negatively affect its financial sustainability,” said Gordhan.

According to the minister, the 2017/18 financial year saw Denel spending R6.5-million on fuel, despite relatively low business activity.

“The financial impact was significant, given the cumulative percentage increase in the fuel price during the period.

“The increase in the price of fuel – diesel 500ppm and unleaded petrol – was 20.5% and 25.8% respectively,” he said. 

Calculations for Denel were done using baseline prices of R11.53 per litre for diesel and R13.30 per litre for petrol (the cost as at April 1 2017) and final prices of R14.50 for diesel and R16.20 for petrol (the cost as at June 30, 2018).

In practice, this added up to an extra R500 000 spent on petrol and an extra R700 000 spent on diesel during the period, Gordhan said.

Higher operating costs

Meanwhile, the South African Forestry Companies Limited (Safcol) felt the negative impact of the continued fuel price increase as fuel costs continued to rise at a rate above inflation. This was because the increase in fuel price translated to higher divisional operating costs.

“The higher the increase in fuel price, the more difficult it is to operate a profitable business.

“It is evident that a further increase in fuel price results in diminishing profit margins and reduction in cash reserves. Taking into account the increases that have been effected, the company is forecasting an increase in direct costs of about R8.8-million,” Gordhan said.

These increases have a knock-on effect on the salary bill, and other employee’s related costs, he added. “Failure to realise planned margins, due to higher costs in operations, will result in the company’s growth strategy not being achievable.”

Gordhan said there was no doubt that with the latest fuel price increase, the situation would worsen.

He said the recent fuel price increase had not yet impacted on Transnet’s operational performance. ― Fin 24

Khulekani Magubane
Khulekani Magubane

Khulekani Magubane is a senior financial reporter for Fin24. 

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