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Stronger Rand - why fuel gets cheaper but not cars in SA

2018-02-21 05:00

Lance Branquinho

OPEN DOOR POLICY: It can be a minefield finding that bargain car - there are pitfalls. We explain some of the jargon used by the salespeople. Image: DAVE FALL

Johannesburg - Fuel prices are likely to drop again at the end of February, according to the Automobile Association (AA). Current data suggests a petrol price decline of around 28 cents per litre and 36 cents for diesel.

The first Wednesday of each month is one of dread, or joy if you own a car. It’s when the department of energy enforces new petrol and diesel fuel prices, and those few cents adjusted up or down can alter your rolling month-to-month budget.

Most motorists are aware that the international price for oil, which is what your fuel is refined from, changes by the minute as major suppliers bid on the raw commodity. Beyond the physical price movements in crude oil, there are two other influences on the price, one well known and the other less so.

Oil is priced and mostly traded in US Dollars, the relationship between your Rand and the US currency can exert a notable effect on the price of fuel.

Then there’s government stealthy fuel levy (about 35% of the price) and by far the largest not market tradeable influence on the fuel price.

Fuel is getting cheaper

So, is the fuel price going to come down a lot this year? Oil has been trading at very low levels for the last two years and is slowly ticking up to near $70 a barrel. To put that price into perspective, it traded just shy of $150 a barrel ten years ago, so if you factor inflation, it’s very cheap at the moment.

The Rand has strengthened substantially against the Dollar too, which should bring more fuel price respite in March, but the medium-term outlook isn’t quite so optimistic.

Government has a massive budgetary shortfall of around R50-billion. It needs to find additional sources of revenue, quickly, to deal with that R50bn discrepancy and by far the easiest way is taxing motorists at the pump, by increasing the fuel levy.

                                                                           Image: iStock

'If you start discounting cars you’ll ruin the residual values'

Expect the budget speech to vanquish any optimism you had about continuously cheaper petrol and diesel, thanks to a Cyril Ramaphosa influenced strengthening Rand.

The other expectation amidst times of a strengthening Rand would be that new car prices should become cheaper. But they don’t. Ever.

The rate of increases simply slows down to below inflation. Expressed differently: if you earn a handsome increase on your salary each year, it will be cheaper for you to buy a new car when the Rand is strong, and your purchasing power exceeds that of inflation but in material terms, that car’s list price will not decrease.

                                                                           Image: Quickpic

Reason? Cars are a substantial capital investment and if you start discounting them you’ll ruin the residual values of those financed vehicles already in ownership, which have interest-bearing debt. That would lead to many unhappy customers. Brands, whether they are manufacturing locally or importing, prefer stability because vast sums of money are required to order batches of new models for the South African market.

A system of bimonthly re-negotiations on the price of imported cars, or the imported components which are supplied to manufacturer cars built locally, is simply too risky and complicated. That’s the reason why a rampant Rand does not mean a juicy discount at the dealership. The best incentive you can hope for is a few optional extras becoming standard equipment.

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