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

1

A long term view of fuel

Jan Havenga

1st of September 2011

2

AGENDA

• Fuel transport in context

• South Africa’s freight challenges

• Impetus for change: Solutions for sustainability

• The future

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

4

South Africa has spatial challenges, and fuel is at 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

5

Fuel “avoidance” can only have two dimensions and two approaches for each

• Supply side – the more efficient use of fuel• Demand side – using less fuel

• Incremental change – re-alignment• Radical change – re-invention

With

Fittingly – this relates to the second law of thermodynamics – viewed by many physicist as the most important law

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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

7

AGENDA

• Fuel transport in context



• The future

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?

9

South Africa is a transport hungry country with spatial challenges

• South Africa’s transport demand and GDP output in relation to global demand and output

Transport demand is higher than GDP

Source: 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.

GDP CO2 emissions Surface freight tonne-km

Maritime freight tonne-km

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0%

1%

2%

6%

RSA

as %

of w

orld

figu

re

10

GDP per ton-km is low for South Africa

Norway

Japan

Ireland

Iceland

France Ita

ly

Germany

Luxe

mbourgSe

rbia

Finland

Croatia

Australia

Mexic

o

Czech

Republic

Slove

nia

Hungary

United St

ates

Estonia

South Afri

ca

Montenegro

-

5

10

15

20

25

30

The world average is $3.44 – South Africa - $1.15 - inordinate demand is a risk

Logistics costs as a percentage of GDP declined in 2009

2003 2004 2005 2006 2007 2008 200912%

14%

16%

18%

190

210

230

250

270

290

310

330

350

Logistics costs Percentage of GDP

% o

f GD

P

Rand

(in

billi

on)

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The most important drivers of this decline were the prime rate and fuel price

2003 2004 2005 2006 2007 2008 20090

50

100

150

200

250Fuel Price : Diesel (Real)

Prime Rate

Inde

x =

2003

These are “administered” costs, beyond the logisticians control, but represent the price paid for logistics services on a macro level

12

This “price” attaches a cost to logistics services

• 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

In simple terms, it requires us, as a nation, to consider 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

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Considering lower fuel price and interest rate, what could we have expected?

2003 2004 2005 2006 2007 2008 2009 Postulated position

10%

11%

12%

13%

14%

15%

16%

17%

190

210

230

250

270

290

310

330

350

Logistics costs Percentage of GDP

% o

f GD

P

Rand

bill

ion

Performance gap = 24 billion

15

2003 2004 2005 2006 2007 2008 2009 2010 -

1

2

3

4

5

6

7

8

9

10 Fuel Price: Diesel

Cost

(in

Rand

)

2003 2004 2005 2006 2007 2008 2009 20100

2

4

6

8

10

12

14

16Prime Rate

Inte

rest

rate

(in

%)

And the future outlook of the underlying cost drivers are uncertain – consider the 2010 values

We have to consider these risks, and the trade-off between them

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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. 2010 2. 21st Annual State of Logistics Report. 2010

And our modal imbalance contributes to this – the most important risks are imported fuel and the environment

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Global comparisons should be considered with caution

Cypru

s

Poland

Greece

Austrailia

France

Germany

Portugal

Sweden

Europe

Spain UK

India

Austria

Vietnam

Canada

Finland

U.S.

Netherlands

ItalyJapan

Luxe

mbourg

Ireland

Brazil

Belgium

Hong Kong

South Afri

ca

Denmark

Singapore

KoreaChina

Thailand

Moro

cco

Argentina

0.00

5.00

10.00

15.00

20.00

25.00

But it does seem if South Africa has challenges

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Status Quo Worst case -

100

200

300

400

500

600

700

Ra

nd

(in

bill

ion

)

A significant (though not unlikely) change in these variables will double South Africa’s logistics bill to maintain the same output

** Worst case scenario assumptions: R3000 per tonne of CO2 emissionsR15 per US$ exchange rate$300 per barrel of oil

This 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

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The structural imbalance in the freight transport industry exposes the country to significant external risks

• 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 dependence

The adequate management of these risks also imply the availability of highly skilled logistics professionals – the shortage of which is well known

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A cross border paradox adds to this problem

• South Africa’s freight demand in context:Total demand Domestic Seaport related Cross border

related

Tons (millions) 875 643 210 21

Ton-kilometre (billions)

297 153 134 10

Cost (billions) 155 110 39 6

SADC trade demand is insignificant

22

Interdependency is lopsided – Botswana example

• 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%

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The consequence is lip service to regional integration

• 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

Rail bulk volumes is growing

2007 2008 200980%

85%

90%

95%

100%

105%

OverallCorridors

Rail

mar

ket s

hare

Inde

x =

100

But corridor market share (contestable?) declined further over past years

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The most important road cost driver is still fuel

Source: Transnet Freight Demand Model and the Logistics Cost Model

-

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

35,000,000,000

40,000,000,000

45,000,000,000

Two thirds of the R40 billion fuel bill is spent on corridors

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Externality costs are not yet “invoiced”

-

50,000,000,000

100,000,000,000

150,000,000,000

200,000,000,000

250,000,000,000

Rail externality costRoad externality costsOther modes costRail costsRoad costs

But the charging for some of these components are imminent

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27

Expansion in industrial output has been one of the key driving forces behind freight transport growth between the 1890s and the 1990s

Population Urban population Energy Use World economy Industrial output0

5

10

15

20

25

30

35

40

45

Coeffi

cien

t of

incr

ease

27

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

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Specialisation increasingly led to a time and place 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

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As a case in point, unprecedented trade growth in Europe resulted in freight transport growth outpacing GDP over the past decade

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)

29

Inde

x 19

95=1

00

This is described as the “de-coupling” of freight and GDP

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The magnitude of the supply/demand disparity is alarming - half of the $61 Trillion Global GDP in 2008 represented trade

1820 1832 1844 1856 1868 1880 1892 1904 1916 1928 1940 1952 1964 1976 1988 2000 -

10

20

30

40

50

60

Expo

rts a

s % o

f wor

ld G

DP

31

And trade moves south

0%

10%

20%

30%

40%

50%

60%

1999

2008

This will change and decline again in 30 years. And the big losers will be the developing world

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AGENDA

• The context of intermodal



• The future

Segmentation is based on the supply chain structure of an economy

Extraction Intermediate Manufacturing Consumption

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Final Manufacturing

Agriculture Road: R25Rail: <R1

Road: R17Rail: R2

Road: R71Rail: R1

Mining Road: R34Rail: R4

Mining

Road: R4Rail: R9

AgricultureRoad: R3Rail: <R1


Mining

Road: R7Rail: <R1

Road: R4Rail: R1

Road: R6Rail: <R1

Road: R3Rail: <R1

Road: R9Rail: <R1

Domestic

Exports

ImportsTonkm

RoadRail

(Road Cost / Rail Cost) In billions

Indicating the type of improvements required economy

Extraction Intermediate Manufacturing Consumption

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Final Manufacturing

Agriculture Road: R25Rail: R1)

Road: R17Rail: R2

Road: R71Rail: R1

Mining Road: R34Rail: R4

Mining

Road: R4Rail: R9



Mining

Road: R7Rail: <R1

Road: R4Rail: R1

Road: R6Rail: <R1

Road: R3Rail: <R1

Road: R9Rail: <R1

Domestic

Exports

ImportsTonkm

RoadRail

(Road Cost / Rail Cost) In billions

Capacity for growth

Industrial supply chains

New products for cost

efficiency

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Consider the following equation used for logistics costs comparisons

• Logistics costs relative to GDP = • The equation is improved by either:

– Lowering logistics costs– Improving GDP

• The upstream focus is often growth. Physical separation mostly happens if it leads to growth

• The downstream focus is often on costs. Living means are distributed irrespective of logistics costs

We’re dealing with the upstream issues by creating capacity. Major downstream opportunities remains unexploited

36

All freight flows can be depicted for volume in tons per segment of the economy

4 highly pronounced lines are visible, but 2 relates to growth and 2 to cost efficiency

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But compare rail actual flows, with the flow of commodity value – enabling growth is great, but for the 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)

Densified flows enables better solutions – all flows

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Densified flows enables better solutions – all flows excluding export lines

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Densified flows enables better solutions – the flow of fuel

* Not to scale40

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Better solutions - to move away from this

Source: Rapport, 31 July 2011

Is this a train? Definitely not effective. This can be done cheaper

42

To afford fixing this

And cross subsidise where it counts

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AGENDA

• The context of intermodal



• The future

44

Sustainable development is dependent on three constructs (Strong sustainability model)

Biosphere (environmental)

Sociosphere (social)

Econosphere (economic)

45

But we experience the Mickey Mouse version of the Sustainability model

Social Environmental

Economic

(Business as usual)

The belief that economic growth is key, might be wrong

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Causing global warming

Source: Hansen, J. et al., Goddard Institute for Space Studies, Table of Global-mean Monthly, Annual, and Seasonal dTs Based on Met.station Data, 1866-present (an Internet accessible data file).

1866187218781884189018961902190819141920192619321938194419501956196219681974198019861992199812.80

13.00

13.20

13.40

13.60

13.80

14.00

14.20

14.40

14.60

14.80

Deg

rees

in C

elci

us

47

And consuming too much energy

Source: wikipedia, based on World Trade Monitor, CPB Netherlands Bureau for Economic Policy Analysis

Inde

x 20

00=1

00

Total energy cost

48

US average domestic crude oil prices

19461949

19521955

19581961

19641967

19701973

19761979

19821985

19881991

19941997

20002003

20062009

-

20

40

60

80

100

120 NominalInflation Adjusted

US

$

49

In Europe the turnaround to rail will continue to be targeted

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”

Growth in tonne-km from 2005 up to 2050

Rail Maritime Road Total0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

% G

row

th

50

In the USA rail also concentrated on corridor transport, while in South Africa the reverse is true

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

-

50

100

150

200

250

USA railUSA roadSA rail SA road

Inde

xed

(199

0)

In South Africa this can only be achieved by entering the dominant market segment – DC to DC FMCG heavy intermodal

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

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

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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

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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