Industry Trend Analysis - Quick View: Rand Strength To Have Mixed Impact On Fuel Demand - APR 2018

The Latest: BMI's Country Risk team have changed their forecasts on the South African rand and now expect further strength over the coming months, despite remaining relatively pessimistic on the country's macroeconomic fundamentals. This shift in stance is predominantly predicated on the supportive technical picture and strong investor sentiment towards emerging markets . We foresee a year-end exchange rate of ZAR10.9/USD, up from a previous forecast of ZAR11.6/USD.

Implications: The fuel price in South Africa is set by the state and is predominantly driven by the global benchmark price for crude oil. However the price is also influenced by the USD/ZAR exchange rate, which influences spending power with regards to the purchasing of imported crude oil for refining into products. Expected appreciation of the rand adds upside potential to our fuel consumption forecasts within the country as consumers benefit from lower fuel prices in local currency terms. However, despite a shift to a more positive currency view, which will help the consumer, we continue to see a constrained demand picture with a disproportionately high cost of fuel in comparison to wages. South Africans continue to spend a disproportionate share of their total income on gasoline - around 3.2% for Q3 2017 according to data compiled by Bloomberg. This figure will rise further following several price increases in 2017.

What's Next: Despite the potential for fuel prices to benefit from rand appreciation, we continue to hold a moderately bearish view for consumption in the country over the short term. Importantly, the shift in view for the rand will paint a more negative picture for the South African mining sector, due to the negative impact on domestic gold miners' earnings. As a key sectoral driver of fuel consumption in the country, the negative outlook will be bearish for overall fuels demand, in particular for distillate fuel which is used for heavy machinery within the extractive industry.

Main Drivers
Front Month Brent Crude & Spot Price, ZAR
Source: Bloomberg.

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