The introduction of a Bitumen Price Index (BPI)

Follow-up report

Resolution of RPF May 2001

• That the proposed BPI be monitored and reported to the next RPF

What is a BPI?• a transparent and defendable

mechanism of price adjustment irrespective of the agreements negotiated between particular suppliers and their customers

• driven largely by global factors• does not promote price regulation• does not encourage arrangements related

to market share

Why a BPI?

•Demise of a “regulated” WLSP in August 2000 •Lack of a creditable datum for adjustment of a product with a price tag linked to global dynamics of crude prices and f.e rates

Advantages of a BPI

• promotes just and fair practice• lends credibility to periodic price

adjustments• facilitates equitable administration of

state contracts

Initial study

• How did WLSP of bitumen vary compared to the landed cost of related hydrocarbon products

• Model to simulate the WSLP movements (exc. incentives) during Jan 89 - Jan 01

• Proposed method

Correlation MFO (Durban) - WLSP

y = 0.8954x + 357.45R2 = 0.9612

600

800

1000

1200

1400

1600

1800

200 400 600 800 1 000 1 200 1 400 1 600

MFO R/ton

Bitu

men

WLS

P R

/ton

Effects of local inflation

Introduced through factoring

FPi = WSLPi-1 [f*MFOi/MFOi-1 + (1-f)*PPIi/PPIi-1)]

Tracks a theoretical WLSP with monthly adjustments

Comparison - Actual WLSP and factored prices

Factored Correlation MFO - BitumenJan 98 Base

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

Pric

e R/

ton

Bitumen WLSP

Factor 0.6

WLSP and Factored prices

y = 0.8423x + 119.86R2 = 0.9641

500.00

1000.00

1500.00

500.00 1000.00 1500.00

Bitumen WLSP R/ton

Fact

ored

Pric

e R

/ton

Conclusions reached• Model simulates actual movements in WLSP very

well• Introduction of local PPI improves the simulation• Suitable mechanism for introducing a BPI• In the absence of a WLSP there is evidently no other

alternative• The notion that presentation of invoices of supplier

as a means of substantiation of increases is probably naïve

• That the proposed BPI be monitored and reported to the next RPF

Monitoring process

• Price movements of relevant products• PPI• Market quoted prices• Testing the model proposed

Tracking price movements

• Durban Bunkers Price (USD) - daily• USD - ZAR exchange rates - daily• quoted prices of various producers - date of

change• Volumes declared• PPI from SSA

Parameters determined

• Durban bunkers prices (DBP) in ZAR

• Indicator price = WLSPi-1(0.6DBPi/DBPi-1+ 0.4PPIi/PPIi-1)

• Weighted market price

Comparative Price Movements

900

1 100

1 300

1 500

Jan Feb Mar Apr May Jun Jul Aug Sep

Month 2001

HFO

(ZA

R/to

n)

1 300

1 400

1 500

1 600

1 700

1 800

Bitu

men

(ZA

R/to

n)

DBP

Ind Price

Market

Price Correlation

y = 0.2409x + 1032R2 = 0.7458

1350

1370

1390

1410

1430

1450

1350 1450 1550 1650

Indicator Price (R/ton)

Wei

ghte

d M

arke

t Pri

ce

(R/to

n)

Conclusions

• Historical pattern continues• Model has proved to be robust• Month-to-month “indicator price” can be

published 1 month in arrears• Basis of a “recommended retail price”• Primary producers are in favour of the

scheme