Importer Margin Review

Released: August 2007

Executive Summary

H&T have reviewed diesel and petrol importer margins (calculated by MED) to see if there has been any significant changes in importer margin levels recently and what impact the supermarket / oil company fuel discounting schemes may have made on these. Separately H&T has considered what effect the biofuel obligation (starting 2008) may have on importer margin calculations.

Importer Margins

Raw importer margins were generally increasing in line with inflation. However since mid 2006 we estimate importer margins have trended ahead by about 0.5cpl (around 4% increase). Also since October 2006 some supermarkets and oil companies have introduced fuel discount schemes typically offering 4cpl discounts (supermarkets with co-located fuel courts have been offering larger discounts).

H&T have estimated that about 25-30% of petrol and 10-15% of diesel may now be purchased through these discounting schemes and have concluded that the oil companies (on average) may be underwriting up to 2.5cpl of this cost, which equates to a 0.6cpl impact on margins (when spread over the full market demand).

Consumers who can use these schemes are getting cheaper fuel with an effective fuel discount of around 3.5cpl, but consumers who don't access the schemes could be paying 0.5cpl more. However, with a significant number of these consumers already getting a discount via card schemes it is difficult to conclude if the consumer is better or worse off. Assuming consumers who use card schemes continue to receive the same discount levels, the net impact on importer margin is in the range of negative 0.4cpl to 0.2cpl which is about negative NZ$ 21 million to NZ$ 10 million per year gross profit increase across the industry. This is within historic variation for margins.

Biofuels

From 2008 oil companies will be required to sell a percentage of biofuels in their fuel sales. This obligation can be met by including biofuel in petrol, diesel or both fuels.

As biofuels have less energy content per litre than petroleum fuels, oil companies may need to consider incentives for biofuel blends versus the equivalent petroleum fuel to encourage consumer uptake. This effect, combined with the flexibility the oil companies have to meet their obligation may result in additional price complexity in the market which will make margin analysis more complex.

MED's importer margin analysis will still need to be measured against established petroleum benchmarks as petroleum fuel will continue to make up the largest proportion of fuel sold. H&T have developed graphs that show how margin will be affected by the relative price of biofuels (in litres) and also indicate how any price incentives (for the lower energy content of the biofuels) may be reflected in the retail price.

Once biofuels are introduced it may be appropriate to extend the current importer margin calculations to include the cost impact of biofuels. However until there is a reasonable volume of biofuels and the market has been established for a couple of years (2010) it will be difficult to determine the most appropriate assumptions for estimating these new costs. Prior to 2010 (when the obligation is relatively small) the impact to importer margin requirements is not expected to be significant (less than 0.5cpl) even if biofuels are significantly more expensive.

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