SA buyers to gain from regulated LPG prices

26 July 2010

26 July 2010 | Nick Martindale

The South African government will regulate the price of liquefied petroleum gas (LPG) in a policy that will result in lower rates for energy buyers.

The administration hopes cutting prices by more than 30 per cent will reduce the country’s dependence on the fragile electricity network and provide consumers with a viable alternative to fuels such as wood, paraffin and biomass.

The Department of Minerals and Energy has set the refinery gate price at R5.49 (48p) per kilogramme until 3 August and intends to review this monthly, taking into account fluctuations in the price of crude oil and the value of the rand.

Other costs, including primary transport, operating expenses, secondary transport, operating capital, depreciation and both wholesale and retail profit, will also be capped and added on to the refinery price to spread the impact throughout the supply chain.

But while the regulation should mean lower prices for buyers, there are concerns about the impact this will have on suppliers.

Andrew Hillman, managing director of Bespoke Sourcing Solutions, said: “The smaller players in the sector will find it most difficult to adjust. Service levels may be impacted as smaller business try and find ways to adjust and save costs to make up for the sudden reduction on revenue.”

Lower margins could also make it uneconomical for distributors to deliver LPG supplies to more remote parts of the country, he added.

Short-term supply shortages could also be an issue as demand for LPG increases, said Andrew Muhimbise, a consultant at Octopus Procurement in Uganda.

“In the long term only efficient and innovative distributors and suppliers will be in business,” he said. “The opportunities created could be backward and forward linkages and mergers of distributors and suppliers.”

South African gas producer Afrox said it was too early to tell what impact the new structure would have on its business but said it would be able to meet any rise in demand.

It said: “Afrox will be engaging the Department of Energy to address any possible improvement or negative consequences that may result from the implementation of the regulation.”

LPG currently accounts for around 2 per cent of South Africa’s energy market. The prices of petrol, diesel and illuminating paraffin are already regulated.

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