Dr Jan Havenga, Director: Centre for Supply Chain Management, Department of Logistics, Stellenbosch University a long term view of fuel 3 11 11
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Dr Jan Havenga, Director: Centre for Supply Chain Management, Department of Logistics, Stellenbosch University a long term view of fuel 3 11 11

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Future Fuel Distribution Strategies for Southern Africa, 2 & 3 November 2011, Southern Sun O. R. Tambo International, Gauteng

Future Fuel Distribution Strategies for Southern Africa, 2 & 3 November 2011, Southern Sun O. R. Tambo International, Gauteng

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  • 1. A long term view of fuel Jan Havenga 1
  • 2. AGENDA• Fuel transport in context• South Africa’s freight challenges• Impetus for change: Solutions for sustainability• The future 2
  • 3. The transport of fuel is a derived demand• Derived from the demand for transport• Which in turn is derived from economic growth It constitutes 4% of South Africa’s freight demand 3
  • 4. South Africa has spatial challenges, and fuel isat the centre of the debate• It is mostly imported• Prices are volatile• It relates directly to problems in the new world order• It is a grudge purchase: – Because of cost and uncertainty – Because of carbon footprint issues – Because of the perceptual link to American “conspicuous consumption” and its fallout 4
  • 5. Fuel “avoidance” can only have twodimensions and two approaches for each• Supply side – the more efficient use of fuel• Demand side – using less fuel With• Incremental change – re-alignment• Radical change – re-inventionFittingly – this relates to the second law of thermodynamics – viewed by many physicist as the most important law 5
  • 6. The strategies• Supply side: – Incremental: • Fuel efficient vehicles – Radical: • Electrification and modal shift• Demand side: – Incremental: • Relocalisation of supply and demand – Radical • Accept lower growth • Relocalise community structures 6
  • 7. AGENDA• Fuel transport in context• South Africa’s freight challenges• Impetus for change: Solutions for sustainability• The future 7
  • 8. But how big is SA’s demand problem –consider transport• 875 million tons• Over an average transport distance of 340 km• Delivering 297 billion ton-kilometres• At a cost of R155.5 billion• Which is 48% of logistics cost – Compared to a global % of 39% But is this significant? 8
  • 9. South Africa is a transport hungry countrywith spatial challenges• South Africa’s transport demand and GDP output in relation to global demand and output 7.0% 6% 6.0% RSA as % of world figure 5.0% 4.0% 3.0% 2% 2.0% 1% 1.0% 0.4% 0.0% GDP CO2 emissions Surface freight Maritime freight tonne-km tonne-kmSource: In 2004 the world produced about 49 000 Mt CO2 - equivalent of which South Africa emitted 440 Mt CO2 – equivalent roughly 1% -Scenario Building Team (SBT) 2007 , Jones,T.Rodrigue, J.P., Gielen, D. Transport demand is higher than GDP 9
  • 10. - 5 10 15 20 25 30 Norway Switzerland Japan Denmark Ireland United Kingdom Iceland Belgium France Greece Italy Austria Germany Sweden Luxembourg Netherlands Serbia Spain Finland Portugal a risk Croatia Poland Australia Slovakia Mexico Canada Czech Republic GDP per ton-km is low for South Africa Turkey Slovenia Romania Hungary Bulgaria United States FYROM Estonia Lithuania South Africa Latvia The world average is $3.44 – South Africa - $1.15 - inordinate demand is Montenegro Russia10
  • 11. Logistics costs as a percentage of GDP declined in 2009 17% 350 330 16% 310 290 15% Rand (in billion)% of GDP 270 14% 250 230 13% 210 12% 190 2003 2004 2005 2006 2007 2008 2009 Logistics costs Percentage of GDP 11
  • 12. The most important drivers of this declinewere the prime rate and fuel price 250 Fuel Price : Diesel (Real) 200 Prime Rate 150 Index = 2003 100 50 0 2003 2004 2005 2006 2007 2008 2009These are “administered” costs, beyond the logisticians control, but represent the price paid for logistics services on a macro level 12
  • 13. This “price” attaches a cost to logisticsservices• This cost can be lowered through efficiency, i.e. using less of the underlying components – Such as transport and keeping inventory (both warehousing and the opportunity cost of keeping this inventory) as well as the cost of administering these functions• But for the logistician it goes beyond using less, it is about the trade-offs between the components• And the cost of the components differ, have a different future outlook and associated risk• Making it difficult to “entrench” trade-offs in long-term systems and severely hampering the ability to respond to significant and unexpected changes 13
  • 14. In simple terms, it requires us, as a nation, toconsider these future risks• On the “supply” side – The cost of fuel – The opportunity cost of keeping inventory – The ability of people to operate and manage logistics infrastructure – The condition of the infrastructure – The environmental effect of logistics services• On the demand side – South Africa’s spatial challenges – South Africa’s growth aspirations – Changes in global market forces 14
  • 15. Considering lower fuel price and interestrate, what could we have expected? 17% 350 Performance gap = 24 billion 330 16% 310 15% 290 Rand billion 14%% of GDP 270 13% 250 12% 230 11% 210 10% 190 2003 2004 2005 2006 2007 2008 2009 Postulated position Logistics costs Percentage of GDP 15
  • 16. And the future outlook of the underlying cost drivers are uncertain – consider the 2010 values Fuel Price: Diesel Prime Rate 10 16 9 14 8 12 7 Interest rate (in %)Cost (in Rand) 6 10 5 8 4 6 3 4 2 1 2 - 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 We have to consider these risks, and the trade-off between them 16
  • 17. Logistics cost compares poorly Year South Africa(1) United States (2) 2003 15.2% 8.6% 2004 15.1% 8.8% 2005 14.9% 9.4% 2006 14.6% 9.9% 2007 15.7% 10.1% 2008 14.9% 9.4% 2009 13.5% 7.7%Sources:1. Freight Demand Model. 20102. 21st Annual State of Logistics Report. 2010 And our modal imbalance contributes to this – the most important risks are imported fuel and the environment 17
  • 18. 10.00 15.00 20.00 25.00 0.00 5.00 Cyprus Poland Greece Austrailia France Germany with caution Portugal Sweden Europe Spain UK India Austria Vietnam Canada Finland U.S. Netherlands Italy Japan Luxembourg Ireland Brazil Belgium Hong Kong Global comparisons should be considered South Africa Denmark But it does seem if South Africa has challenges Singapore Korea China Thailand Morocco Argentina18
  • 19. A significant (though not unlikely) change in thesevariables will double South Africa’s logistics bill tomaintain the same output 700 600 Rand (in billion) 500 400 300 200 100 - Status Quo Worst case ** Worst case scenario assumptions: R3000 per tonne of CO2 emissions R15 per US$ exchange rate $300 per barrel of oilThis will result in logistics cost at 25% relative to GDP (currently around 15% compared to the USA’s 10%) - South Africa will be more affected than most countries given the structure of its transport market 19
  • 20. The structural imbalance in the freight transportindustry exposes the country to significant externalrisks• The cost of energy – International oil prices and the security of fuel supply – The impact of the exchange rate on fuel imports• The cost of unwise energy usage – Increasing environmental damage caused by fossil fuel dependenceThe adequate management of these risks also imply theavailability of highly skilled logistics professionals – the shortageof which is well known 20
  • 21. A cross border paradox adds to this problem • South Africa’s freight demand in context: Total demand Domestic Seaport related Cross border relatedTons (millions) 875 643 210 21Ton-kilometre 297 153 134 10(billions)Cost (billions) 155 110 39 6 SADC trade demand is insignificant 21
  • 22. Interdependency is lopsided – Botswanaexample• Percentage of all Botswana freight demand that either originates or terminates in South Africa = 55%• Percentage of South African freight demand that either originates or terminates in Botswana = 0.2% 22
  • 23. The consequence is lip service to regionalintegration• The issue appears on strategic agendas, but often falls to the bottom of the list• Leading to: – Border post inefficiencies – Inconsistent regulatory environment – Import of unemployment 23
  • 24. Rail bulk volumes is growing 105% 100%Rail market share Index = 100 95% Overall 90% Corridors 85% 80% 2007 2008 2009 But corridor market share (contestable?) declined further over past years 24
  • 25. The most important road cost driver is still fuel 45 40 35 30Rand (in billion) 25 20 15 10 5 - Source: Transnet Freight Demand Model and the Logistics Cost Model Two thirds of the R40 billion fuel bill is spent on corridors 25
  • 26. Externality costs are not yet “invoiced” 250 200 150 Rail externality cost Rand (in billion) Road externality costs 100 Other modes cost Rail costs 50 Road costs - 2008 without 2009 without 2008 with 2009 with externalities externalities externalities externalities But the charging for some of these components are imminent 26
  • 27. Expansion in industrial output has been one of the key driving forces behind freight transport growth between the 1890s and the 1990s 45 40 35Coefficient of increase 30 25 20 15 10 5 0 Population Urban population Energy Use World economy Industrial output Source: Eurostat (TRANSvisions (2009) Final Report on Transport Scenarios with a 20 and 40 Year Horizon, Service contract A2/78 2007 for the DG TREN) A key tenet of industrialisation is specialisation 27
  • 28. Specialisation increasingly led to a time andplace disparity between supply and demand• Addressing this disparity requires the provision of freight logistics services• This is exacerbated by the increasing quest for global competitiveness leading to the scatterisation of production facilities – often far from demand 28
  • 29. As a case in point, unprecedented trade growth in Europe resulted in freight transport growth outpacing GDP over the past decadeIndex 1995=100 Source: Eurostat (TRANSvisions (2009) Final Report on Transport Scenarios with a 20 and 40 Year Horizon, Service contract A2/78 2007 for the DG TREN) This is described as the “de-coupling” of freight and GDP 29
  • 30. The magnitude of the supply/demand disparity isalarming - half of the $61 Trillion Global GDP in2008 represented trade 60 50Exports as % of world GDP 40 30 20 10 - 1869 1995 1820 1827 1834 1841 1848 1855 1862 1876 1883 1890 1897 1904 1911 1918 1925 1932 1939 1946 1953 1960 1967 1974 1981 1988 2002 30
  • 31. And trade moves south 60% 1999 50% 2008 40% 30% 20% 10% 0% International trade as % of global GDPTrade amongst Trade GDP economy as % of global GDP Trade amongst developing countries Advanced economy trade as % global between advanced and developing countries as % of global GDP advancedThis will change and decline again in 30 years. And the big losers will be the developing world 31
  • 32. AGENDA• The context of intermodal• South Africa’s freight challenges• Impetus for change: Solutions for sustainability• The future 32
  • 33. Segmentation is based on the supply chain structure of an economy (Road Cost / Rail Cost) In billions Agriculture Road: R2 Mining Rail: <R1 Road: R3 Rail: <R1 Road: R9 Rail: <R1 Rail: <R1 Road: R7 Mining Road: R34 Rail: R4 Intermediate Road: R17 Final Road: R71 Extraction Rail: R2 Consumption Manufacturing Manufacturing Rail: R1 Agriculture Road: R25 Rail: <R1 Mining Agriculture Road: R3 Rail: R1 Road: R4 Rail: <R1 Road: R6Rail: R9Road: R4 Rail: <R1 Tonkm Imports Road Domestic Rail Exports 33
  • 34. Indicating the type of improvements required economy(Road Cost / Rail Cost) In billions Agriculture Road: R2 Mining Rail: <R1 Road: R3 Rail: <R1 Road: R9 Industrial New products Capacity for supply for cost growth Rail: <R1 Rail: <R1 Road: R7 chains efficiency Mining Road: R34 Rail: R4 Intermediate Road: R17 Final Road: R71 Extraction Rail: R2 Consumption Manufacturing Manufacturing Rail: R1 Agriculture Road: R25 Rail: R1) Mining Agriculture Road: R3 Rail: R1 Road: R4 Rail: <R1 Road: R6 Rail: R9 Road: R4 Rail: <R1 Tonkm Imports Road Domestic Rail Exports 34
  • 35. Consider the following equation used forlogistics costs comparisons We’re dealing with the upstream issues by creating capacity. Major downstream opportunities remains unexploited 35
  • 36. All freight flows can be depicted for volume intons per segment of the economy 4 highly pronounced lines are visible, but 2 relates to growth and 2 to cost efficiency 36
  • 37. But compare rail actual flows, with the flow ofcommodity value – enabling growth is great, but forthe future we must consider costs• Rail freight in tons • Value of total freight = Transported tons x value per ton • Note: all commodities included (including export coal , iron ore and magnesium) 37
  • 38. Densified flows enables better solutions – allflows 38
  • 39. Densified flows enables better solutions – allflows excluding export lines 39
  • 40. Densified flows enables better solutions – theflow of fuel * Not to scale 40
  • 41. Better solutions - to move away from this Source: Rapport, 31 July 2011 Is this a train? Definitely not effective. This can be done cheaper 41
  • 42. To afford fixing this And cross subsidise where it counts 42
  • 43. AGENDA• The context of intermodal• South Africa’s freight challenges• Impetus for change: Solutions for sustainability• The future 43
  • 44. Sustainable development is dependent onthree constructs (Strong sustainability model) 44
  • 45. But we experience the Mickey Mouse version of theSustainability model (Business as usual) The belief that economic growth is key, might be wrong 45
  • 46. Causing global warming 14.80 14.60 14.40 14.20Degrees in Celcius 14.00 13.80 13.60 13.40 13.20 13.00 12.80 1894 1934 1974 1866 1870 1874 1878 1882 1886 1890 1898 1902 1906 1910 1914 1918 1922 1926 1930 1938 1942 1946 1950 1954 1958 1962 1966 1970 1978 1982 1986 1990 1994 1998 2002 Source: Hansen, J. et al., Goddard Institute for Space Studies, Table of Global-mean Monthly, Annual, and Seasonal dTs 46 Based on Met.station Data, 1866-present (an Internet accessible data file).
  • 47. And consuming too much energy Total energy cost Index 2000=100 Source: wikipedia, based on World Trade Monitor, CPB Netherlands Bureau for Economic Policy Analysis 47
  • 48. US average domestic crude oil prices 120 Nominal 100 Inflation Adjusted 80US $ 60 40 20 - 48
  • 49. In Europe the turnaround to rail will continueto be targeted Growth in tonne-km from 2005 up to 2050 200% 180% 160% 140% 120%% Growth 100% 80% 60% 40% 20% 0% Rail Maritime Road Total Source: TRANSvisions (2009) Study on Transport Scenarios with a 20 and 40 Year Horizon, Service contract A2/78 2007 for the DG TREN, Task 2 Report “Quantitative Scenarios” 49
  • 50. In the USA rail also concentrated on corridortransport, while in South Africa the reverse is true 250 200Indexed (1990) 150 USA rail USA road 100 SA rail SA road 50 - 1992 2005 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 In South Africa this can only be achieved by entering the dominant market segment – DC to DC FMCG heavy intermodal 50
  • 51. The result – a dream for 2040Demand side• Demand will be re-localised• As a result, international trade growth higher than GDP will have flattened• Hyper specialisation will turn around• Recycling will approach 100%• Waste will be recycled directly at source• 3 D printing• Average transport distances will decline 51
  • 52. The result – a dream for 2040Supply side• All freight transport will use renewable energy sources• Most long distance freight will be on rail or alternative high efficiency networks• High carbon footprint (caused by freight) commodities will not sell and the markets will disappear• Freight supply will be efficient 52
  • 53. Change…• “The world we have created is a product of our thinking. If we want to change the world, we have to change our thinking."• “Our task must be to free ourselves by widening our circle of compassion to embrace all living creatures and the whole of nature and its beauty.” Albert Einstein 53
  • 54. Will we get there?I don’t worry about the future – it comes soon enough and The environment is everything that isn’t me Albert Einstein 54