Diesel price hikes hitting transport firms hardest

The price of diesel has increased by almost 150 per cent in Dubai and some of the Northern Emirates over the past two and half years, putting tremendous pressure on factories, fleet operators and logistics companies and adding to the country's inflationary spiral.

Diesel is now being sold at Dh18.50 per gallon by Emirates Petroleum Products Company (Eppco), Emirates National Oil Company (Enoc) and Emarat filling stations, while at the beginning of 2006, it was Dh7.50. Adnoc filling stations, on the other hand, have held diesel prices steady at Dh8.60 since 2006 due to Abu Dhabi Government support. By comparison, the average price of diesel in Saudi Arabia is Dh1.8 per gallon.

A spokesperson from Enoc said its increase, announced yesterday, reflected surging international prices that have broken through the $173 per barrel level for low-sulphur diesel – a rise of 21 per cent over the month of May – and $132 for crude oil.

He said: "We produce products from all of the GCC national refineries at the international prices and although we continually work hard to off set the negative margin incurred on fuel sales, such exceptional market forces leave us no option but to try to recoup a proportion losses.

"Equally, we would consider a price reduction to correlate with any lowering of international prices in the future.

"In spite of incremental fuel price increases over the past two months, we are buying at continually higher prices and as each shipment cost grows, we are still incurring losses with each gallon sold."

A top official from Adnoc, who asked to remain anonymous, said: "We have been selling a gallon of diesel for Dh8.6 since 2006 despite high increases in prices internationally and locally. We decided not to increase prices of diesel at our filling stations. We are backed by the Abu Dhabi Government which bears all the burdens.

Meanwhile, factories, fleet operators and logistic companies have accused oil retailers of making up for the huge increases in international petrol prices by pushing up diesel prices.

And they have called on the government to regulate the price of diesel in the same way it controls the price of petrol to protect their businesses and profit margins.

Rajesh Mukherjee, general manager for Transworld Logistics Park, said: "We have no option but to pass on the cost in the form of increased oil surcharges to our customers. This has been going on since the beginning of the year and business has to continue."

Mukherjee said his company is planning to increase its rates from the beginning of June to cover higher operation costs.

He added announcements on price increases are often sudden and do not allow companies to make accurate budget forecasts. "We have long-term contracts with some companies and whenever prices increase, we have to cover the extra costs.

"Unlike costs such as drivers' salaries and maintenance, it is difficult to budget for fuel," said Mukherjee.

In response to the diesel situation, the company has decided to revise its policies and either reduce the length of contracts or include a clause on the distribution of costs in case of an increase in fuel prices.

Kamaran Ahmad, general manager of the Fantasy Transport Company, said his company has started issuing contracts on monthly basis to address this issue.

"Some consider an increase of 20 to 30 fils not a massive increase, but for us it is. When filling an 18-gallon tank, if prices increase by 30 fils per gallon then it is equal to a Dh5.4 additional cost. And if we have five increases in a year then it is Dh25 extra for each bus every time we fill the tank. About 90 per cent of our fleet run on diesel and the increase in prices puts us under pressure," said Ahmad.

And Martin Palmer, general manager for contract logistics at Al Futtaim Logistics, said his company is currently trying to maximise utilisation of its diesel powered vehicles by maximising the loads, consolidating clients on single transport routes and re-analysing the routes as a way of reducing per kilometre running costs.

"We are, for example, looking at having our vehicles transport commodities on their way from points of destination as a cost cutting method."

However, transportation companies are not the only ones feeling the price pinch. A senior official at Star Cement in Abu Dhabi said: "The cost of transportation, especially, has more than doubled during the last year from Dh12 to Dh28 per trip. The drastic hike in transport costs is reflected in the cost of cement itself."

Traders have voiced similar concerns and said the prices of products were bound to increase because of a rise in transportation costs. Sources at Ras Al Khaimah and Al Ain poultry farms, said companies that had reduced the price of fresh chicken would reconsider their decision following the diesel hike. "Diesel is extensively used to run machines in sheds," said the manager of an Al Ain farm. "Most of the fans that are used to keep the temperature down are also run on diesel."

Any increases in transportation charges as a result of increased fuel costs will have a knock-on effect on the final prices of consumed items. In a recent report, energy analyst Douglas Westwood suggested increased investment would be needed in all energy sources, from natural gas to nuclear power.

"The need to develop regional alternatives to oil-powered air and automobile transport, and the advantages of electrified local rapid transit and regional rail networks will become obvious as oil prices increase," it said.

"Governments need to be investing heavily in building, improving and renewing local and regional rail systems to offset future transport problems that will arise in the critical years. Direct investment in electrified rail travel could ultimately become very profitable for private companies."

Industry viewpoint

Kamaran Ahmad, general manager of the Fantasy Transport Company, which operates 200 buses in Dubai, said the diesel price increase was putting the company under considerable pressure. "Urgent interference from the government is required to control increases in diesel prices. The neighbouring countries are not suffering from the international increase in prices because the prices there are backed by the government. We are looking forward for similar steps from the government."

Martin Palmer, general manager for contract logistics at Al Futtaim Logistics, said the company has attempted to minimise the effects of the increases in operation costs on the client, but it is difficult. "Our costs are huge on the fuel side. You typically cannot pass the whole amount on to the customers, so you are eating some part of it." Fuel costs contribute 40 per cent of the company's total operations costs, but Palmer said that this is likely to increase.

David Christmas, managing director of DHL Excel Supply Chain for the Middle East, told Emirates Business increasing fuel prices have forced the company to apply creative cost cutting solutions. "Fuel is our number one cost driver. It is a larger expense for our transport operations than anything else, but we do not want to recoup the higher costs of fuel by rushing to pass them on to our clients. We need to first apply methods we think would effectively minimise costs," said Christmas.

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