If we are led to believe the latest rumblings coming out of the current Government, apparently fuel prices through competition could be expected to drop 18 cents to 32 cents a litre because of new petrol company rules breaking the supply dominance of the big fuel companies.
• Minister expects to see fuel prices drop 18c-32c a litre because of new petrol company rules
• Petrol prices: Z 'would go broke' if prices dropped by 18c across NZ
• Commerce Commission recommends new regulation to drive fuel prices down
• Government says it will move to break market stranglehold by fuel majors
This is premised on the Commerce Commission finding that major petrol suppliers will need to change how the wholesale fuel supply market works, essentially to improve competition.
So how has this figure been calculated?
According to Consumer Affairs Minister Kris Faafoi: "Those are examples of what happens when competition does happen." One of 'those' examples is referring to an 18c price drop in Wellsford petrol when Gull entered the local market. That sadly, seems the depth of the analysis.
Z Energy recently flagged that the first five months of FY20 trading had been adversely affected by several factors but notably compression in both volumes and margins in the retail fuel market.
One could argue that fuel retailing has already been through a differentiated step change and that the landscape has never been more competitive.
During July and August, increased industry discounting and promotional activity has resulted in margin contraction of both the Z and the Caltex brands. Z Energy noted that its percentage of retail fuel sales on discount has increased from about 75 per cent to about 90 per cent.
If we take the latest retail petrol margin data, MBIE estimate a regular petrol margin of about 25c/litre, which is consistent with Z Energy's estimates at the end of September 2019 (see graph below).
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Is the Government to have us believe that petrol retailers shouldn't be making any money? That doesn't seem a sensible premise to attract new competitors into a market.
Z Energy reported an about 7 per cent return on capital in its latest result, down from a 12 per cent high in FY17.
By my way of thinking, a 7 per cent return does not sound outlandish. What does this mean for all New Zealand industries? Is this a Government that is opposed to an industry making a reasonable return on their assets? If so, then should all industries be looking over their shoulder under the current regime?
Clearly, the Government has no idea around the commercial realities of this industry. Instead of attempting to score political points, how about focussing on making the industry more efficient, or better yet, supporting local players to achieve better outcomes for everyone?
• Mark Fowler is head of investments at Hobson Wealth Partners.