Oil Marketing Companies – OMCs as well as Bulk Oil Importing Companies in Zambia are facing tough times following the instability and continued increases in prices of global crude and refined petroleum products. With the newly introduced monthly fuel price adjustments, the sector is facing this challenge on a monthly basis.
The industry is generally facing increases in the need for working capital or cash needed to make new orders on a month on month basis which is eating away on the already slim margins that the sector comprehends with. The increases in working capital or cash needed for new orders are due to the need for more capital to make new orders which are at higher prices for every new month, a situation which is driving up financing costs.
A check with industry players has revealed that there is need for urgent action to come up with a country strategy on how to deal with this Oil price instability that is not only resulting in increased pump prices, but has a deep effect across the economy. If not handled well, the price increases risk wiping out economic strides for the entire year.
A check with Mount Meru Zambia, one of the fastest growing players the Zambian Petroleum industry revealed that the Russia – Ukraine conflict is having a direct effect on the Zambian economy. Mount Meru Managing Director, Dharmesh Patel stated that if crude oil prices goes up on the international market, the effects are direct on the prices of fuel in Zambia.
He stated that international fuel prices increase, there is a trickle down effects on the price of fuel into Zambia. The increase in prices is resulting in a reduction of the margins immediately the international prices are adjusted upwards. By the time the monthly adjustment is made, some volumes would have been sold at the old price and this is were the working capital is being affected.
In an exclusive interview with the Zambian Business Times – ZBT, Patel said that if these adjustments are not handled carefully, someone in the equation might lose money, either the government or the oil company’s, hence the monthly fuel price review by the Energy Regulation Board – ERB is helping to make sure that everything is in line with the international market.
Patel said that the purchase of fuel now is dependent on the M-1 average (which is average for the last 30 days) which is a mixed bag for oil companies because sometimes business is done on lower margins but it only for a short period of time because the price review is done every month now.
He added that it is difficult when the price goes up because it means that the company’s also need to invest more in the working capital for that increased unit, he however stated that the only possible solution is to hope for the stability of fuel price on the international market.
The Russia – Ukraine conflict is having deep economic domino effects in Zambia as it feeds into other essential commodity prices which are dependent on the transport sector. The transport and logistics sector costs and prices are heavily dependent on fuel prices. Petroleum and its by-products is also an important raw materials in the production of many goods, both consumable and non-consumable.
