As the war in Ukraine and escalating Middle East tensions continue to fuel volatility in global oil markets, fluctuating diesel prices pose a growing threat to SA businesses, according to RMB corporate commodity structurer Roger Hewson.
Oil prices have undergone seismic shifts in recent years, said Hewson, with unprecedented swings in refining margins adding to the ongoing effect of geopolitical tension and economic factors.
As a result, the volatility of diesel prices has now reached levels that are three times higher than that of the rand, making it a risk factor for SA companies.
“Many corporates in Southern Africa have direct exposure to diesel costs, such as mining companies, large manufacturing facilities and airlines — and even more companies have indirect exposure which may be surprising to some,” Hewson said.
Hospitals and property companies, for example, are exposed to diesel prices because they rely on diesel generators. Additionally, any companies that rely on logistics providers to transport their goods are effectively exposed to diesel prices through the costs charged by these logistics providers.
Due to growing corporate awareness of the risks associated with diesel price volatility, RMB has seen a sharp increase in queries to help businesses manage their exposure through hedging strategies.
By hedging diesel prices, businesses can mitigate the financial risks associated with fluctuating diesel costs by improving their financial planning, protecting their profit from margin squeeze and reducing uncertainty in cash flow.
While not perfect, SA’s diesel hedging formula, which links local diesel prices to global prices and the rand, offers a robust hedging solution, according to RMB.
However, Hewson warned that many SA companies “still do not fully grasp the importance of hedging diesel risk or are even aware that this risk can be effectively managed”, and “antiquated treasury management policies can hinder adoption”.
“As the Southern African region continues to grow and develop, diesel hedging is poised to become an even more essential component of corporate risk management strategies,” Hewson said. “Without any protection, businesses’ very existence may be under threat — such is the volatility in diesel prices.”
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