Africa

Why cover your fuel costs?

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Why cover your fuel costs?

Africa Direct will concentrate and combine the group’s resources to offer a holistic range of risk and execution services dedicated to the African financial and commercial markets.

JOHANNESBURG, South Africa, October 12, 2021 / APO Group / –

Expect the unexpected

The COVID pandemic has clearly demonstrated to us the folly of hoping for the best and assuming all will be well. Many things we took for granted two years ago have been swept away by health problems, government restrictions and the impact on our societies and economies. We underwrite a wide variety of insurance policies as individuals. We insure our goods and possessions, our health, our vacations, our jobs, our old age, even our pets. So why don’t companies insure more of the risks associated with what they do?

Oil addict

Crude oil is still one of the most important engines of the global economy, and price fluctuations have significant effects on economic growth and well-being around the world. Although the shift away from liquid fossil fuels to renewable fuels, the global economy still relies heavily on diesel and gasoline. Oil price shocks, caused by external events, started in earnest in the 1970s and 1980s and are, to say the least, increasingly frequent; they send shock waves through global markets and threaten businesses around the world.

Global demand for oil tends to be stable and slow, driven primarily by economic growth and, to an increasing extent, climate legislation. Prospects for future oil supplies are more uncertain, especially given the continuing political instability in exporting countries and the uncertainty surrounding the discovery and exploitation of new reserves (e.g. the Rovuma gas field in the northern Mozambique). Due to these uncertainties and black swan events, such as the global COVID pandemic, oil prices are likely to experience further (more and more) drastic fluctuations in the future. Investors and business leaders love stability and visibility. Volatility and wild fluctuations in prices can be extremely damaging to economies and businesses. These risks can and should be addressed!

Serious liquidity problems in USD

The price of crude oil and petroleum derivatives such as diesel and HFO are defined by global benchmarks denominated in dollars (eg Brent and WTI). In countries with weak and volatile local currencies, the problems associated with fuel price volatility are often compounded and magnified by exchange rate volatility. South Africa is a good example; its refineries are old, inefficient and unreliable and are unlikely to be modernized, which will end up making the country 100% dependent on imports of refined products which must be paid for in “hard” currencies. ZAR has the sad reputation of being the most volatile currency in the world, and it’s not something that should change anytime soon. The ZAR is not the only one to be volatile, the majority of African currencies are inherently weak and subject to large and substantial movements. The COVID pandemic has further weakened African economies and caused a very serious USD liquidity crisis. Although Dangote is building a huge refinery in Nigeria, to serve the entire region, the majority of African countries are and will remain dependent on imports of refined petroleum products for many years to come. The combination of fuel price volatility and currency weakness creates a difficult environment for African businesses. These problems can be solved, there are the right hedging products to protect your business against the uncertainty.

Protect your business

The three most commonly used hedging tools are swaps, futures, and options and they all require setting up lines of credit with the entity that executes the transactions for them. There are reasons why many companies do not hedge their exposure to fuel price volatility. Fuel hedging has traditionally been the preserve of large trading companies and banks because hedging products involve costs, credit or balance sheet guarantees and an accounting margin. This means that most SMEs and even some large companies simply cannot participate because they do not have the cash available to do so.

Profitable solutions

But the situation is changing! ICAP Africa’s new business division, Africa Direct, is implementing a credit and financing program to enable a much wider range of companies to hedge their fuel price exposure and benefit from this risk mitigation. Insurance companies are starting to offer credit policies and the funds are offering working capital on a basis similar to trade finance to allow businesses to finance their coverage. Africa Direct is looking to package them to ensure that fuel hedging products will soon be available to the entities that need and will benefit the most. The product brokerage service will be accompanied by a weekly market report for all clients, identifying and analyzing all key events and indices associated with global and domestic fuel prices. The TP ICAP group offers fuel brokerage services across the globe and Africa Direct will benefit from this global network as well as access to valuable price and market information generated by our international offices. The service will officially launch in the first quarter of 2022 and beta testing is currently underway.

ICAP Africa Direct is focused on providing a one-stop-shop for African businesses and investors. TP ICAP Group is a global leader in providing a wide variety of financial product execution and information services globally to wholesale market participants. Africa Direct will focus and combine the group’s resources to offer a holistic range of risk management and execution services dedicated to African financial and commercial markets. Africa Direct offers daily market analytical reports, targeted risk advice and strategies, fundraising and structuring, and a range of financial product execution services to help corporate treasurers and investors alike. make more informed decisions. Africa is the last real opportunity for growth and clearly identifying and effectively mitigating risks is a key to unlocking the potential. www.ICAPAfrica.org

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