Diesel hedging has surged dramatically in Southern Africa in recent years, driven by large market volatility and growing corporate awareness of the risks associated with fluctuating diesel prices.  

Roger Hewson, Corporate Commodity Structurer at RMB said: “The volatility of diesel prices has now reached levels three times higher than that of the South African Rand (ZAR), shifting focus towards diesel as a significant risk factor for Southern African companies. 

“Many corporates in Southern Africa have direct exposure to diesel costs, such as mining companies, large manufacturing facilities, and airlines. 

“And even more companies have indirect exposure which may be surprising to some. 

“Hospitals and property companies are exposed through the need for diesel generators for example. And all companies that have goods transported are effectively exposed to diesel prices through costs charged by logistics providers.” 

Oil prices, normally fairly volatile, have experienced seismic shifts in recent years, driven by both economic and geo-political factors, the latter, and most obviously, being the Ukraine war and the escalating tensions in the Middle East. The diesel volatility has been further accentuated by unprecedented swings in refining margins, making diesel hedging a critical risk management consideration for businesses across Southern Africa. 

“We have experienced a sharp increase in queries to help businesses manage their exposure through hedging strategies,” Hewson noted. 

Hedging diesel prices is a strategic approach that businesses can employ to mitigate the financial risks associated with fluctuating diesel costs. 

“By locking in future diesel prices, businesses can protect their profits from margin squeeze and reduce uncertainty in cash flow. Without any protection businesses very existence may be under threat such is the volatility in diesel prices,” Hewson noted. 

South Africa has a diesel hedging formula that links local prices to global diesel prices and the rand. While not perfect, due to differences between the formula and the actual diesel prices used, the formula offers a robust hedging solution.

While oil prices have traditionally been the primary focus, recent market developments have highlighted the importance of considering crack spreads, which have experienced significant volatility, following the energy crisis in Europe. Crack spreads describe the difference between the price of crude oil and the price of refined petroleum products.

“But many companies still do not fully grasp the importance of hedging diesel risk or are even aware that this risk can be effectively managed and antiquated treasury management policies can hinder adoption,” Hewson warned.  

The popularity of diesel hedging has extended beyond South Africa's borders, with neighboring countries adopting similar approaches. While there may be minor variations in pricing and regulatory frameworks, the underlying principles of diesel hedging remain largely consistent across the region.

By effectively hedging diesel costs, businesses can protect their margins, improve their financial planning, and enhance their overall resilience to market fluctuations. 

“As the Southern African region continues to grow and develop, diesel hedging is poised to become an even more essential component of corporate risk management strategies,” Hewson concluded.