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The introduction of a Bitumen Price Index BPI

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    1. The introduction of a Bitumen Price Index (BPI) First submitted to RPF in May 2001 Proposal made to the RPF in May 2001 Refresh our memories Method to introduce a mechanism for dealing with price adjustment on contracts that is: Open Fair Equitable practice Made on behalf of the various sectors of the bituminous product industry Comes in the wake of a ruling of the Competitions Commission that effectively does away with the regulated/published WLSP on 31 Aug 2000 No longer a rational, widely acknowledged bench mark for contract price adjustments of a product the price of which is exposed to: foreign currency exchange rates global crude oil price prices Local inflation as reflected by PPI Proposal made to the RPF in May 2001 Refresh our memories Method to introduce a mechanism for dealing with price adjustment on contracts that is: Open Fair Equitable practice Made on behalf of the various sectors of the bituminous product industry Comes in the wake of a ruling of the Competitions Commission that effectively does away with the regulated/published WLSP on 31 Aug 2000 No longer a rational, widely acknowledged bench mark for contract price adjustments of a product the price of which is exposed to: foreign currency exchange rates global crude oil price prices Local inflation as reflected by PPI

    2. 2 Bitumen Price Movements History has shown that: In the shorter period (commensurate with contract periods) the price of bitumen has shown very little relationship with local CPI The real price of bitumen has on average remained constant since 1972 SA price-taker not - maker. Ultimately these product prices are often driven by factors beyond the control or sphere of influence of SA No relevant local price indicator (PPI/CPI) No widely accepted bench mark price What remains? Supplier invoices? Unsatisfactory: Does not exploit/encourage market forces Will price reductions be passed on to end user? Neither is the supplier/ contractor fairly compensated for price increases Nor does the road owner benefit from price decreases. NO MEANS OF EFFECTING FAIR AND EQUITABLE PRICE ADJUSTMENTS ON CONTRACTS. HAVE LOOK AT INTRODUCING A WIDELY ACCEPTABLE MEANS OF DEALING WITH THE PROBLEM History has shown that: In the shorter period (commensurate with contract periods) the price of bitumen has shown very little relationship with local CPI The real price of bitumen has on average remained constant since 1972 SA price-taker not - maker. Ultimately these product prices are often driven by factors beyond the control or sphere of influence of SA No relevant local price indicator (PPI/CPI) No widely accepted bench mark price What remains? Supplier invoices? Unsatisfactory: Does not exploit/encourage market forces Will price reductions be passed on to end user? Neither is the supplier/ contractor fairly compensated for price increases Nor does the road owner benefit from price decreases. NO MEANS OF EFFECTING FAIR AND EQUITABLE PRICE ADJUSTMENTS ON CONTRACTS. HAVE LOOK AT INTRODUCING A WIDELY ACCEPTABLE MEANS OF DEALING WITH THE PROBLEM

    3. 3 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 The proposal is to introduce a bitumen price index that...The proposal is to introduce a bitumen price index that...

    4. 4 Initial study how did WLSP of bitumen vary compared to the landed cost of related hydrocarbon products a model to simulate the WSLP movements (exc. incentives) during Jan 89 - Jan 01 propose a method Briefly review the issues studiedBriefly review the issues studied

    5. 5 Typical Data

    6. 6 Pre September 00, the regulated selling price of bitumen - i.e. the price acceptable to government was closely related to the landed cost in ZAR of an equivalent petroleum product 180 cSt marine fuel oil. Pre September 00, the regulated selling price of bitumen - i.e. the price acceptable to government was closely related to the landed cost in ZAR of an equivalent petroleum product 180 cSt marine fuel oil.

    7. 7 Comments on Correlation A strong relationship between variables evident (R2= 0.9662) Scatter attributed to: stepwise adjustments to WLSP effect of other factors e.g. inflation It is therefore logical to conclude that, in an unregulated environment, that the driving force of input cost to produce a ton of bitumen, is to a large extent dependent on the landed costs in ZAR of a similar petroleum product. Logically also, it is reasonable to assume that the escalation of local input costs of production and storage should also be incorporated through a factor such as PPI It is therefore logical to conclude that, in an unregulated environment, that the driving force of input cost to produce a ton of bitumen, is to a large extent dependent on the landed costs in ZAR of a similar petroleum product. Logically also, it is reasonable to assume that the escalation of local input costs of production and storage should also be incorporated through a factor such as PPI

    8. 8 Proposed simulation model Introduced through a ratio WSLPi = f*MFOi/MFOi-1 + (1-f)*CPIi/CPIi-1 WSLPi-1i Where f = 0.6 Provides a periodic price adjustment factor

    9. 9

    10. 10 Corresponding correlationCorresponding correlation

    11. 11 Conclusions Model simulates actual movements in WLSP very well Suitable mechanism for introducing a BPI Introduction of local PPI improves the simulation marginally 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 nave

    12. 12 Conclusions/cont... A method such as examined also indicate the need for price reductions with accompanying benefits of: enhanced credibility improved competitiveness

    13. 13 Sufficient data now available to make firm recommendationsSufficient data now available to make firm recommendations

    14. 14 Study of the BPI model relative to price movements in the market. Bitumen Price at Jan reduced to 100 units %age change as per BPI applied theoretical price ratio NOTE: QUITE A FEW NEGATIVE VALUES AND compared next ...Study of the BPI model relative to price movements in the market. Bitumen Price at Jan reduced to 100 units %age change as per BPI applied theoretical price ratio NOTE: QUITE A FEW NEGATIVE VALUES AND compared next ...

    15. 15 Clearly the market is comfortable with the rationale Correlation is strong and approximates the line of unity.Clearly the market is comfortable with the rationale Correlation is strong and approximates the line of unity.

    16. 16 Method At the end of each month publish a BPI based on: Market price (ZAR) 180 cSt MFO at Durban for the past month PPI for the prior month BPI applied to pen grade bitumen, cut-backs and proportionally to emulsions and modified binders

    17. 17 Source material #1 Bunker Prices Bunker prices readily available on web site of Bunkerworld Bunker prices readily available on web site of Bunkerworld

    18. 18 Source material #2 FE Rates FER of SARS corresponds to an average of Bank selling rates Readily available in one shot from the SARS web siteFER of SARS corresponds to an average of Bank selling rates Readily available in one shot from the SARS web site

    19. 19 Source material #3 PPI PPI available on STATS SA website, albeit a month in arrears.PPI available on STATS SA website, albeit a month in arrears.

    20. 20 Contract administration Sabita working group: Two primary producers Two contractors Secondary supplier Consulting engineer Examined the issues No problems foreseen Recommendations

    21. 21 Recommendations BPI (based on past months bunker prices in ZAR and previous month PPI) applied to all bituminous products (excl tars) Bitumen be regarded as special product subject to rise and fall That monthly adjustments be made in terms of: Published BPI Rates entered by contractor on tender form A workable system is envisagedA workable system is envisaged

    22. 22 Tender info for price variations Applicable materials (e.g. pen grade bitumen, emulsion, cut-back, modified binder Binder type and concentration (emulsions and modified binders) Price for the base month (ex VAT) Application rates for tender purposes Variations ordered Relevant materials In the case of emulsions and modified binders on the binder volumesRelevant materials In the case of emulsions and modified binders on the binder volumes

    23. 23 Recommendation That RPF accept the concept BPI and recommends its introduction on contracts That a task team be appointed to draft insertion into contract documents to that effect That the matter be taken up with SAFCEC to facilitate its introduction