LPG

Key highlights

  • Increased LPG import agreements reduced supply chain costs and dependence on unreliable sources, leading to improved customer service levels
  • Price discipline ensuring recovery of cost movements
  • Afrox supported peak demand during winter through proactive solutions
  • Operating margin improvements through efficiency initiatives

Key challenges

  • Supply constraints from local refineries during peak demand periods
  • Initial draft recommendations from the Competition Commission remain a concern
  • Ongoing concern over illegal cylinder-filling operations

Performance review

Key performance indicators

Afrox is confident that continued interaction and provision of information will aid the DoE to support the industry and address pricing concerns in the future.

Achieving security of supply

LPG supply is significantly impacted by refinery production. With import supply agreements concluded for Richards Bay and the Western Cape in mid-2016, Afrox is in a position to meet the bulk of demand for the South African market. This includes increased demand in Emerging Africa, which allows for improved volume growth.

The Richards Bay import facility will ensure regular import parcels are scheduled as storage space becomes available, thereby securing supply. This was previously imported on an ad hoc basis, depending on product shortages, which caused additional strain on Afrox resources, logistics and in turn, increased risk levels. These agreements now allow the business to receive LPG on a monthly basis, ensuring consistency. The new agreement will supplement LPG supply from local producers and ensure uninterrupted supply during planned maintenance shutdowns at suppliers and peak demand during winter months.

LPG accounts for 32% of the Afrox turnover and 21% of GPADE.

With such import agreements in place, the business is well positioned to capitalise on growth opportunities. Afrox will use the import solution on an ongoing basis, engaging in new and larger agreements to secure future supply. Imports accounted for 28% of supply in 2016, and we foresee this growing to beyond 35% in the coming year.

In terms of securing demand and market share, our sales and marketing teams have dedicated LPG sales members who identify cost, pricing, growth areas and strategic market opportunities while considering logistics. These employees liaise daily with logistics and distribution teams to optimise supply across operations and customers. This approach provided strategic business solutions during shortages and is now being redirected towards establishing long-term relationships.

Competition Commission market inquiry

Afrox made several submissions to the Competition Commission market inquiry into the LPG sector in response to the initial report issued on 10 May 2016. Information to support our submissions was obtained from the World LPG Association (WLPGA) and its various members.

The final report from the Competition Commission is expected to be published in March 2017. The inquiry began in September 2014, and Afrox will continue to monitor developments and evaluate the possible market impacts to ensure an appropriate response.

Illegal cylinder filling

A significant threat to safety is the continued operation of rogue operators and illegal LPG fillers who also contribute to competition in the sector. Such operations refill LPG cylinders regardless of brand and fail to comply with safety regulations in the process. As no industry-driven initiatives are in place, Afrox takes legal action where possible to halt such operations and potentially reduce ownership liability on the cylinders in the event of an incident. We provide customer and employee training on safe operation procedures pertaining to cylinders, in an attempt to reduce LPG-related incidents.

Future focus areas

  • Defend existing market share through ongoing investments and efficiency improvements. This includes remaining agile and cost-effective through the use of imports and developing this solution further to support larger and longer-term imports
  • Leverage our current strengths and brand equity to capitalise on new growth opportunities locally and in Emerging Africa
  • Improve profitability through the application of best commercial practice principles, ongoing focus on asset utilisation and ROCE

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