Petrol prices: Z 'would go broke' if prices dropped by 18c across NZ

Mike Bennetts, chief executive of Z Energy, says he's been pushing for change for years. Photo / Sarah Ivey

The head of New Zealand's biggest fuel retailer, Z, says his company wants to get on with recommendations of a market study but doubts it would survive if prices dropped by as much as a Government minister claims they could.

Z chief executive Mike Bennetts said while relieved there was a definitive report with clear findings he still disagrees with some of the methodology and modelling of profitability in the industry.

And if petrol prices dropped by 18 to 32c a litre as Consumer Affairs Minister Kris Faafoi has claimed, his company would be in trouble - if it was across the country.

''Our fuel gross margin is 18c a litre and the post tax profit is 3.5c a litre. He may be talking about a certain part of the country but from my expedience that would cause us to go broke. I think everyone has to be very careful about the numbers here.''

But Bennetts wants to get on with implementing the recommendations which will establish a more transparent wholesale tier and allow smaller players to shop around for bulk product.

''We are very keen to crack on with this as there has been uncertainty in our industry for two to three years now.''

The Commerce Commission has recommended major petrol suppliers face a wholesale pricing regime and have their supply contracts regulated. It says motorists were potentially paying $400 million more a year than they would in a more competitive environment.

Faafoi said his numbers on savings came from areas where competition had been introduced for the first time.

Among a raft of recommendations in a 589-page report, the Commission is also regulating wholesale supply contracts to give resellers more freedom to compare offers and switch suppliers.

Commerce and Consumer Affairs Minister Kris Faafoi. Photo Mark / Mtichell

The Government will now take the commission's recommendations to Cabinet with a view to ''swiftly'' implementing changes, including:

• A more transparent wholesale-pricing regime

• Greater contractual freedoms and fairer terms to facilitate wholesale competition

• Introducing an enforceable industry code of conduct

• Improve transparency of premium-grade fuel pricing by requiring service stations to display it on signs

One of the major reforms proposed is the introduction of Terminal Gate
Pricing (TGP) which means the major fuel companies, including Z Energy, BP and Mobil, will be required to offer a spot price at which they will sell fuel to wholesale customers at storage terminals.

In Australia the terminal gate price is the price at which fuel companies sell tanker loads of to wholesale customers from seaboard terminals on a spot basis. The minimum amount that can be bought is 35,000 litres.

By comparing retail prices with terminal gate prices, customers can judge whether they think a service station is charging a fair mark-up.

The report shows the commission has largely put away the regulatory stick, it does warn it considers ''a credible threat of further regulation if a TGP regime does not facilitate competitive wholesale prices within a reasonable period of time'' would also incentivise the majors to offer competitive prices.

''This type of regulatory intervention is likely to be lower cost and with a reduced risk of unintended adverse consequences compared to regulated participation in infrastructure-sharing arrangements or price control.''

Bennetts said his company believed in TGP, supported by a robust industry code, as it would help create a more observable wholesale market, and enhanced competitive conditions.

''We've been advocating this for some time now. It's just been really hard to get your competitors to agree to something that may disadvantage them. You can't sit around for years on end.''

Petrol stations will have to clearly advertise the price of premium fuel under new rules. Photo / Stuart Munro

Z Energy shares rose 0.4 per cent to $4.96 after the release of the report, trimming their loss so far this year to about 8 per cent. The release of the report followed a politically charged debate about pricing and Prime Minister Jacinda Ardern saying motorists were being ''fleeced'' by the fuel majors.

Grant Swanepoel, head of equity research and institutional equities at Craigs, said the industry was initially knocked by the announcement of the market study.

''That was fuelled a little bit by our prime minister talking about fleecing. Since that point it's been quite clear that the ComCom analysis is challengable - anybody who's tried to model knows that different assumptions have different outcomes.''

He too said it was a relief that some of the ''proposed meddling'' a while ago have been distilled down.

''It's just knowing what the change is planned is enough to give certainty to markets.''

Swanepoel said there remained some investor confusion over why the review was needed.

Competition had intensified recently with cut-price operators like Gull, Waitomo, Allied and NPD expanding, and Timaru Oil Services is building a new 32 million litre fuel terminal in the South Island.

Jimmy Ormsby, managing director of Waitomo, a family-owned chain of 40 service stations which is expanding beyond the North Island into Christchurch and Timaru said in
markets where it had set up, per litre prices for 91 octane had fallen by up to 20c and diesel by 30c.

He welcomed the terminal gate price regime and more open disclosure of contracts but unlike Z, he was less enthusiastic about the need to show premium pricing on signs because of the cost of building new signs.