Flatlining?

Is this the end of petrol price cycle?

"The petrol price cycle across Australia has collapsed for the first time in its 40-year history – and the big winners are motorists." This was the opening statement in an article in The Daily Telegraph.

I don't think so!

The truth is that petrol and retail heavyweights were sparring for market share: Whether the hostilities will escalate into a full boxing match, only time will tell. I will be looking for a lot more evidence before I give the price cycle the eight count.

The newspaper article went on to say that Caltex, BP and Mobil "… should have raised their prices".

There is no 'should' in fuel pricing. Petrol retailing is a free market were individual businesses make their own individual decisions. Pricing is the result of many factors, including cost price, volume, ancilliary business (convenience stores, carwashes, etc), distribution costs, population and competition. To think that the day of week dictates when a board price has to move is way too simplistic.

That being said, let us get back to what is happening to the price cycle. Yes, data may have shown that the board prices for ULP remained relatively constant over a sustained period. In the last weeks of February, the five city average – Sydney, Melbourne, Brisbane, Adelaide and Perth – peaked at $1.22, before quickly retreating back to $1.18. The problem is that the price that persisted was below the cost price for many independent operators.

Below cost selling

Over time, below-cost selling has contributed to industry rationalisation. In the 1970s, there were around 20 000 retail sites in Australia; now there are about 6500. Similarly, the number of distributorships has fallen from over 4,000 to about 100. The number of refiner–marketers is likely to reduce from four to three in the foreseeable future.

Operating in this industry is marginal at best. Data in the recently published Monitoring of the Australian petroleum industry: Report of the ACCC into the prices, costs and profits of unleaded petrol in Australia implies that the industry suffered a loss of $480million on the sale of unleaded petrol in 2008–09. Further, in the past seven years, wholesalers made net losses more often than profits and the average net profit at retail was only 0.4 cpl. The figures for returns on sales and assets provide even more dismal reading.

The report indicates that the return on sales for distributors and retailers combined is less than 5% (returns on assets are 10%). Our colleagues in the upstream sector – exploration and production of crude oil – made nearly 15% return on sales and 35% return on assets during the same period.

Clearly, downstream operators are not making the returns required for their level of investment, while our cousins in the upstream sector pump 'liquid gold'.

Impact on competition

So, are motorists the winners? I think not. Below-cost selling is having a detrimental impact on competition. The end result will be higher prices. As the ACCC has recognised, the independents and smaller operators lead the market in lowering prices. It is the major retailers that take it to extreme depths.

For motorists, this is short-term gain and long-term pain. For governments, it's a 'catch 22': At what level of competition can motorists enjoy competitively priced petrol, while at the same time keeping margins at a level that makes independent operators viable? If we do not get this right, we will be administering the last rights to independent operators, not the price cycle.

Nic Moulis is the General Manager of the Australasian Convenience and Petroleum Marketers Association (ACAPMA). ACAPMA is an employer association representing the interest of distributors and retailers in the Petrol and Convenience industry.