State 'is squeezing the life out of gas market'
Regulations are stifling efforts to create a competitive liquefied petroleum gas marketplace, Afrox argues
The regulation of liquefied petroleum gas (LPG) in SA is counter-productive and discourages large-scale LPG imports, says gas and welding products supplier Afrox.
The unfavourable regulatory environment stifles efforts to create a competitive LPG marketplace, which is required to significantly increase the per-capita LPG consumption as part of the overall energy mix in SA, says Mark Radford, Business Unit Head for LPG and Light Industries at Afrox.
Afrox, the owner of the Handigas brand, increasingly relies on imported LPG amid inadequate supply from the country’s ageing crude oil refineries. The proportion of imports for LPG sales in the Southern African Development Community has increased from 5% four years ago to 30%, Afrox says.
The increased reliance on imported LPG raises questions about the pricing of the product, which the government regulates at the refinery gate and retail stages. Through the maximum refinery gate price (MRGP), the government sets the maximum price at which a refinery can sell LPG.
LPG is primarily used as a thermal fuel and is used by industrial, commercial and household consumers. On the other hand, the maximum retail price of LPG, which the government sets every month, takes into consideration a number of factors including the maximum refinery gate price, transport costs, operating expenses, working capital, distribution costs and retail margin.
With undersupply from the country’s large refineries – Natref oil refinery in Sasolburg, Engen refinery in Durban, Chevron refinery in Cape Town and Sapref in Durban – imports become a stop-gap measure, especially during the winter months when LPG demand tends to spike. But for a while now there have been mutterings that the maximum gate refinery price disincentives LPG production and financially sustainable importation of the product.
The South African Petroleum Industry Association (Sapia), the industry body for the petroleum industry in SA, says the maximum refinery gate price renders LPG imports uneconomic. “The system does not adequately cater for imports,” says Sapia executive director Avhapfani Tshifularo.
Afrox, which has marketed LPG for 50 years, has highlighted falling LPG production from local refineries, resulting in an increase in imported LPG in the six months ended June 30. “Overall LPG product supply remains key in growing the domestic market as imported product has become more competitive as a direct result of Afrox’s efforts to offer a more reliable supply scheme,” says Radford.
How does Afrox recover the costs associated with imports? Radford says the regulated LPG retail price provides for distribution expenses. “This is however only adjusted annually and Afrox therefore either has to absorb interim cost increases or improve distribution efficiencies to mitigate these costs,” he says.
The additional costs associated with imports are currently not catered for in the maximum retail price and this is a matter that the industry has regularly raised with the Department of Energy, he says.
Given the regulatory constraints, Afrox has found its own means to make importation profitable. “Afrox has negotiated long-term import agreements that have resulted in more cost-effective imports, and has agreed prices with non-regulated customers. That, to a certain extent, mitigates import costs in exchange for security of supply,” says Radford.
With revenue of just more R1bn, the LPG business was the second-largest contributor to Afrox’s revenue in the six months ended June 30. In that period, Afrox increased LPG revenue by 10.6% to just more than R1bn, from R947m in the previous corresponding period. Gross profit after distribution expenses increased by 20.1% to R221m, up from the previous R184m.