PHOTO
A petrol station attendant refuels a car at a petrol station in Budaiya, west of Manama, Bahrain December 29, 2015. Bahrain's cabinet has approved a new pricing system for diesel and kerosene that is set to begin in January, state news agency BNA reported on Monday. REUTERS/Hamad I Mohammed - RTX20E4O
03 January 2016
Higher fuel prices due to kick in by mid-January will likely spur an increase in the freight, logistics and distribution cost of providing goods and services across the Sultanate, with the end-consumer ultimately expected to pick up the extra tab, business leaders have warned. The price of petrol (super) is predicted by market pundits to jump an estimated 40 per cent to around 170 baiza per litre at the pump, while diesel will spike a marginal 10 per cent to 162 baiza per litre. These prices correspond to current pump prices in neighbouring United Arab Emirates (UAE), which last August scrapped fuel subsidies and announced a system of fixing prices at the start of every month based on average international fuel price trends over the preceding month.
The pricing mechanism due to come into force in the Sultanate on January 15 will be largely modelled on the UAE system, say experts, a move that will also bring about the harmonisation of the prices of petrol and diesel in both states, thereby bringing to an end the phenomenon of fuel smuggling from Oman into the Emirates.
While appreciating the government's motivations for lifting the subsidy on motor fuels, given the impact that the oil price collapse has had on state revenues, business figures contacted by the Observer fret that the looming fuel price increase would have a ripple effect on businesses and the wider economy.
Hamed al Harrasi, Group Chairman of Teejan Group of Companies -- a prominent Omani business enterprise, said petrol prices if rumoured to rise by 35 per cent or more, would drive up logistics costs.
This would have a knock-on effect on the prices of goods and services reaching the end-consumer, he pointed out.
"For certain items, beverages for example, the margin is very small, say 3-4 per cent; for foodstuff, rice, and so on, it could be not more 10 per cent. If the transportation cost increases substantially -- and transportation is indeed a substantial cost component in Oman (because the country is geographically spread out) -- then there will be an impact," Al Harrasi said.
According to the well-known business figure, transportation and distribution costs can be roughly 10 times higher for a business here in Oman than in a place like Dubai where much of the population is concentrated in high-rises within a small geographical area.
"The volume of goods you would normally distribute in a one-square kilometre of Dubai is the same volume you would distribute in a 10-square kilometre area in Oman, simply because the market is distributed across large areas here. Consequently, the cost of transporting goods and people is substantially higher here in Oman in comparison."
Significantly, the proposed fuel price rise is prompting large businesses with substantial fleets and logistics components to assess the impact of the increase on their operational costs and bottom-lines.
Parasuram Iyer, General Manager of Bahwan Electronics LLC, a major player in the consumer durables segment, commented: "We are going to assess the fuel burden on our operations. Of course, we have been capturing the cost data on fuel separately, but we had not tried to assess the elasticity of the price of fuel to the total profitability because it was never required to have been done in the past, but now we will have to do so. In fact, post this announcement by the government, we are having a relook at our annual budgets to factor in this cost of increase."
The price hike, according to Iyer, is expected to have a cascading effort at multiple stages along the supply chain, primarily because markets are distributed across vast geographical distances.
"We import goods that go from the port to the warehouse, at which point there will be a cost escalation, however minor it may be. To get the product from our warehouses to the point of sale, whether it is a showroom or hypermarket or a consumer's house, there will be an additional cost. Definitely, we will have to factor in these costs into our pricing sooner or later."
Echoing these concerns, Babu Thomas, Chief Financial Officer of Al Siraj Investment Holding LLC, said the fuel price hike would hurt businesses that have already committed goods or services at prevailing tariffs.
"Manufacturing companies like us do forward booking of sales either within Oman or in export markets.
We cannot go back to our clients are seek a recovery of the additional freight cost. Furthermore, factories based around Muscat will have to transport their goods to Sohar Port, thereby incurring a higher freight burden. We cannot transfer this cost to the client. Such companies are going to suffer, if not by very much, at least at the rate of 3-4 per cent of their manufacturing costs," he remarked.
Higher fuel prices due to kick in by mid-January will likely spur an increase in the freight, logistics and distribution cost of providing goods and services across the Sultanate, with the end-consumer ultimately expected to pick up the extra tab, business leaders have warned. The price of petrol (super) is predicted by market pundits to jump an estimated 40 per cent to around 170 baiza per litre at the pump, while diesel will spike a marginal 10 per cent to 162 baiza per litre. These prices correspond to current pump prices in neighbouring United Arab Emirates (UAE), which last August scrapped fuel subsidies and announced a system of fixing prices at the start of every month based on average international fuel price trends over the preceding month.
The pricing mechanism due to come into force in the Sultanate on January 15 will be largely modelled on the UAE system, say experts, a move that will also bring about the harmonisation of the prices of petrol and diesel in both states, thereby bringing to an end the phenomenon of fuel smuggling from Oman into the Emirates.
While appreciating the government's motivations for lifting the subsidy on motor fuels, given the impact that the oil price collapse has had on state revenues, business figures contacted by the Observer fret that the looming fuel price increase would have a ripple effect on businesses and the wider economy.
Hamed al Harrasi, Group Chairman of Teejan Group of Companies -- a prominent Omani business enterprise, said petrol prices if rumoured to rise by 35 per cent or more, would drive up logistics costs.
This would have a knock-on effect on the prices of goods and services reaching the end-consumer, he pointed out.
"For certain items, beverages for example, the margin is very small, say 3-4 per cent; for foodstuff, rice, and so on, it could be not more 10 per cent. If the transportation cost increases substantially -- and transportation is indeed a substantial cost component in Oman (because the country is geographically spread out) -- then there will be an impact," Al Harrasi said.
According to the well-known business figure, transportation and distribution costs can be roughly 10 times higher for a business here in Oman than in a place like Dubai where much of the population is concentrated in high-rises within a small geographical area.
"The volume of goods you would normally distribute in a one-square kilometre of Dubai is the same volume you would distribute in a 10-square kilometre area in Oman, simply because the market is distributed across large areas here. Consequently, the cost of transporting goods and people is substantially higher here in Oman in comparison."
Significantly, the proposed fuel price rise is prompting large businesses with substantial fleets and logistics components to assess the impact of the increase on their operational costs and bottom-lines.
Parasuram Iyer, General Manager of Bahwan Electronics LLC, a major player in the consumer durables segment, commented: "We are going to assess the fuel burden on our operations. Of course, we have been capturing the cost data on fuel separately, but we had not tried to assess the elasticity of the price of fuel to the total profitability because it was never required to have been done in the past, but now we will have to do so. In fact, post this announcement by the government, we are having a relook at our annual budgets to factor in this cost of increase."
The price hike, according to Iyer, is expected to have a cascading effort at multiple stages along the supply chain, primarily because markets are distributed across vast geographical distances.
"We import goods that go from the port to the warehouse, at which point there will be a cost escalation, however minor it may be. To get the product from our warehouses to the point of sale, whether it is a showroom or hypermarket or a consumer's house, there will be an additional cost. Definitely, we will have to factor in these costs into our pricing sooner or later."
Echoing these concerns, Babu Thomas, Chief Financial Officer of Al Siraj Investment Holding LLC, said the fuel price hike would hurt businesses that have already committed goods or services at prevailing tariffs.
"Manufacturing companies like us do forward booking of sales either within Oman or in export markets.
We cannot go back to our clients are seek a recovery of the additional freight cost. Furthermore, factories based around Muscat will have to transport their goods to Sohar Port, thereby incurring a higher freight burden. We cannot transfer this cost to the client. Such companies are going to suffer, if not by very much, at least at the rate of 3-4 per cent of their manufacturing costs," he remarked.
© Oman Daily Observer 2016
