dr jan havenga, director: centre for supply chain management, department of logistics, stellenbosch...
DESCRIPTION
Future Fuel Distribution Strategies for Southern Africa, 2 & 3 November 2011, Southern Sun O. R. Tambo International, GautengTRANSCRIPT
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1
A long term view of fuel
Jan Havenga
1st of September 2011
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2
AGENDA
• Fuel transport in context
• South Africa’s freight challenges
• Impetus for change: Solutions for sustainability
• The future
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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
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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
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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
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AGENDA
• Fuel transport in context
• South Africa’s freight challenges
• Impetus for change: Solutions for sustainability
• The future
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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?
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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
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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
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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)
11
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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
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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
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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
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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
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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
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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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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
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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
• South Africa’s freight challenges
• Impetus for change: Solutions for sustainability
• The future
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Segmentation is based on the supply chain structure of an economy
Extraction Intermediate Manufacturing Consumption
33
Final Manufacturing
Agriculture Road: R25Rail: <R1
Road: R17Rail: R2
Road: R71Rail: R1
Mining Road: R34Rail: R4
Mining
Road: R4Rail: R9
AgricultureRoad: R3Rail: <R1
AgricultureRoad: R2Rail: <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
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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
AgricultureRoad: R3Rail: <R1
AgricultureRoad: R2Rail: <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
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
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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)
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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
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To afford fixing this
And cross subsidise where it counts
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AGENDA
• The context of intermodal
• South Africa’s freight challenges
• Impetus for change: Solutions for sustainability
• The future
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Sustainable development is dependent on three constructs (Strong sustainability model)
Biosphere (environmental)
Sociosphere (social)
Econosphere (economic)
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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
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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
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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
$
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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
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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
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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
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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