FINANCE

When opportunity knocks / Staff reporter

Karl Gotte from Commercial Banking at Standard Bank
Karl Gotte, Commercial Banking at Standard Bank.jpg

Businesses should use any savings they make from lower oil prices to build up resources and diversify into different markets thereby maximizing opportunities while they last, says Standard Bank.

Oil prices dropped more than 50% between June last year and early 2015–the worst plunge in five years—but speculative buying activity and a drop in US drilling activity pulled prices off their lows.

“The fuel price reprieve shouldn’t alter core strategies—it is only one input cost and businesses should not bank on it. They should rather use it as a way of building up their resources,” says Karl Gotte from Commercial Banking at Standard Bank.

While savings can be used to invest in generators to make businesses less reliant on a strained power supply system, businesses need to consider diversifying and achieving more operational agility to survive the tougher conditions.

“Businesses should see that they do something sustainable with these savings going forward. The opportunity won’t last forever—we’ve already seen petrol prices going up,” says Gotte.

Another risk for businesses without a diverse target market is posed by the weaker rand. “A weak currency makes exports more viable, so having this ability to diversify is such an important string in the bows of many businesses”.

This could be as simple as establishing strategic relationships with other businesses—but the basic idea underlying such moves should be to increase sale opportunities. Many wholesale businesses are creating mutual relationships to leverage marketing, IT and financial functions.

Gotte says while businesses should continue to build up their reserves, they must also start thinking about other businesses to achieve more operational agility. “Increasingly, businesses need to act quickly, like reducing costs in the short term while still being faster than their competitors to market.

An ability to shift resources quickly will further enable businesses to take advantage of market conditions and business opportunities—while they last.

“Before the oil price dropped, we thought there would be an interest rate increase in the first quarter of 2015. This expectation has now shifted out. Inflation is at the bottom end of the band and it does look like the environment is a little better from that perspective, although risks of an interest rate hike later in the year still exist” says Gotte.

But this does not detract from the fact that the economic environment remains tough. “There are headwinds, but it’s just a bit better than anticipated six months ago.”

Exporting manufacturers will be better off with the rand depreciating, while importers could be faced with higher prices.

“This would have been even worse if it weren’t for a bit of a benefit on oil. Lower petrol prices will help certain sections of the transport sector, for example. The ones that stand out would be the courier and logistics markets, but it must be remembered that the fuel and the road accident fund levies are both increasing. So, while savings from fuel usage would have been seen, the majority of that benefit will be chewed up quite quickly by the higher levies,” says Gotte.

In the case of transport, there is also a risk of lost contracts for those that were moving resources as lower commodity prices place pressure on many suppliers, who are themselves under significant pressure to cut costs.

“It depends on what you are moving. When combined with the higher taxes, any future increase in oil prices sees these benefits dissipate very quickly.”

Larger commercial businesses are likely to consider hedging against potentially higher oil prices to lock in lower prices now against their future fuel obligations.

“Oil prices won’t remain low forever, so we are seeing more demand for hedging in an effort to lock in lower prices,” says Gotte.

According to him many clients have been looking at buying generators and considering alternative sources of securing energy, which he believes is something for the broader business community to think about.

Staff reporter

 

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