Outlook for Diesel prices and implications for Transport Sector
Between July 2014 and January 2016, the price of Brent Crude oil fell from $115/barrel to $30/barrel, a fall of nearly 75%. Despite this sharp fall in crude oil prices, the cost of transportation in India has hardly shown any significant reduction. The reasons are not far to seek. Between July 2014 and January 2016, the excise duty on petrol has gone by 100% while the excise duty on diesel has gone up by 200%. Since the landed cost of crude oil has come down drastically, the consumers do not really feel the pinch. This has surely helped the government shore up its revenues. For example, the government is likely to have a shortfall of Rs.50,000 crore in its disinvestment targets and Rs.40,000 crore shortfall in its direct tax collections. These shortfalls will be partially made up by higher excise on petrol and diesel.
So, what is the outlook for diesel costs?
Globally, the large banks like Citigroup and Goldman Sachs are now expecting that the worst for crude oil prices may be over. That means, crude may bottom around the $30/bbl mark and gradually start moving up. Transporters need to be prepared for flat to higher costs on diesel in the months ahead. Firstly, even if the global crude oil prices fall from here, the incremental benefit will accrue to the government revenues in the form of higher excise duties. If the crude oil prices were to move up, as it looks likely now, then the higher landed cost will be anyways passed on to the diesel consumers. Unlike kerosene and LPG,diesel is already subjected to free pricing and hence any rise in crude prices will hit the transport sector.
Apart from the high cost of diesel which keeps transport cost high, there is another key factor which is the demand / supply imbalance in the trucking industry. This imbalance is created because those who own trucks and those who need to move freight are not seamlessly connected. This inefficiency keeps transport costs high in India. The average logistics cost of companies in developed markets is around 8%, while in India it is nearly 15%.
This is where Mytrux.in can play key role. The technology driven platform will bring the owners of trucking space and the users of trucking space under a common agnostic platform. This will ensure that the demand/supply imbalance will be largely addressed helping push down that aspect of transport costs.
Trend 1: Focus will shift to smart-shoring…
This is an interesting trend. For years businesses have focused on off-shoring and on-shoring based on the cost of production. Transport costs were much lower and hence they did not really matter. Smart-shoring refers to a situation where businesses will also consider how close the facility is so that goods can be transported at minimal cost in the most efficient manner. Take the case of a hospital that is sourcing medicines from a distant location. As long as transport costs were low, it did not really matter. But what if the transport costs were likely to remain high and follow an upward trajectory.
That is where an efficient aggregator of the trucking industry like Mytrux.in can play a key role. Using our algorithms in-built into our platform, you can identify the nearest and most efficient location as well as the best sharing transport system to keep your transport costs at the bare minimum. At a time when transport costs are likely to go up sharply, this will be an extremely useful tool for businesses to cut transport cost and for truckers to ensure zero-slack truck utilization.
Trend 2: Focus of packaging will shift to smart-trucking…
Currently, the focus of packaging is more to underline the brand focus with the marketing story in mind. High transport cost will ensure that adequate focus is given on smart-packaging. That means, packaging not only meets the aesthetic and marketing needs, but also ensures efficient transportation. That includes packaging that is efficient to transport, packaging that can ensure more products moved per shelf, packaging that is designed to endure the length of the transportation etc. In short, the entire business of packaging will start seriously considering the transportation of goods as a critical input for designing the packaging.
Trend 3: From lean inventory policy to lean transportation policy…
This will probably become the biggest trend as an outcome of high costs of transportation. For many years businesses have survived in an environment of low transport costs. Due to the organized nature of the buyers of space and the unorganized nature of the truckers, the costs remained low. Also, the subsidy on diesel ensured that diesel prices were always affordable. All that has changed in the last couple of years! That means logistics strategy will shift from lean inventory policy to lean transport policy. Before embarking on lean transport policy, let us first understand what lean inventory policy is. Because of low transport costs, companies could afford to follow just-in-time (JIT) inventory policies. This focus on managing inventories helped them to reduce their working capital costs substantially.
The shift will now happen to lean transport policy. The focus will not be on lean inventories because that is applicable more when transport costs are low. Businesses will now have to go for a trade-off. What businesses will need to do is to ensure that their transport costs are reduced drastically. While they do not have control over the price of diesel, they surely have a control over how efficiently the raw materials and the finished products are moved. That is what businesses will not focus on. How they can reduce transport cost, how they share trucking space, how they can plan their inventory backwards after considering the complete transport cycle from raw material to finished products etc.
That is where Mytrux.in has a huge role to play. We believe that Indian trucking industry has entered an era of high transport costs. The cost reduction will have to come by tweaking your transportation model. The Mytrux.in platform will not only allow a complete schedule planning for your production, but will ensure that your transport experience becomes efficient, economical and democratic. You will have full control over your production system from farm to fork, on our Mytrux.in platform.
The moral of the story, therefore, is that transportation is likely to become pivotal to logistics management for businesses. Cost of diesel will continue to be a critical cost component, but businesses will have little control over this factor. What they will have control over is how efficiently they tweak their trucking needs to get more value for their money. Needless to say, Mytrux.in is always there to lend you a helping hand in the process!