No significant change of retailer’s margin in post-liberalisation oil derivatives market

Inspired by the general public and the political interest raised by sudden and constant fluctuations in the prices of motor fuels in the last quarter of 2014 the Croatian Competition Agency (CCA) started in January 2015 a sector inquiry into the oil derivatives market, in particular, into the Croatian motor fuels retail and wholesale market.

The object of the market inquiry was to establish the relevant facts about the way and mechanisms used in setting the prices of fuels in the period after the liberalization of this market in Croatia in February 2014, concretely from February 2014 to February 2015. It should be noted here that the formula for the calculation of the price cap for oil derivatives was revoked on 20 February 2014.

What followed was free price setting on each particular petrol station but also price volatility. In compliance with the data available to the CCA during the inquiry, although the law now provides for a possibility of daily changes in the price of fuels, the corrections concerned still follow the regular time intervals (in principle once a week on Tuesday). At the same time, the obligation on the oil derivatives retailers to regularly publish the prices of oil derivatives and motor fuels on their web sites has also been repealed.

In this market inquiry the CCA used a survey questionnaire involving, among others, five undertakings that place more than 90 % of all the fuels on the Croatian market – INA, Petrol, Lukoil Croatia, Tifon and Crodux Derivati Dva.

In accordance with the data collected in the inquiry, in 2014 a total of 2.5 billion tonnes of liquid fuel oil was placed on the Croatian market where the five retail leaders sold 2 billion tonnes.

The retail revenue was stable but indicating a rising trend compared with 2013 and a falling trend with respect to the volumes of sold motor fuels. The falling trend that started in 2009 thereby continued. The most significant fall was in the sold volumes (both retail and wholesale) of heating oil and gas oil and gasoline. However, the diesel fuels (both in retail and wholesale) showed a more significant rising trend.

In 2014 the imports of motor fuels considerably rose, where the amounts of imports of diesel fuels doubled, similarly as the imports of gasoline and LPG.

The data from the inquiry show that there were some 900 petrol stations in Croatia in 2014.

As to the structure of the retail price of motor fuels it appears that it consists of the purchase price, the premium of the economic entity (margin), excise duty (including the duties charged by the Croatian Motorways, Croatian Roads and Croatian Railways) and taxes (VAT). The biggest share in the retail price holds the purchase price and the excise taxes. The purchase price holds the share of some 30 % to 35 %; excise taxes hold some 40 %, whereas VAT’s share is about 20 %. It is important to note here that the VAT and the excise taxes fully, and to some extent the purchase price of the fuel, constitute the price elements that are beyond the influence of the traders.

The only one element of the price which is decided upon by the traders and that is not defined by the input variables is the margin. Its share in the price of fuel is the smallest – some 5 % to 10 %.

Within this market inquiry the CCA carried out a detailed comparative analysis of the margins used by the undertakings in setting the prices of oil derivatives in the first post-liberalization year and the margin that had been defined in the pre-liberalization period.

As mentioned before in this text, until 20 February 2014 the margin of the energy subject involved was defined, whereas following this date the margin has been set freely. As an example, in the pre-liberalization period the margin for one litre of eurosuper BS 95 and eurodiesel BS was between 60 and 76 Lipa, keeping the level of 66 Lipa on the eve of the liberalization.

Thus, in accordance with the data established in the market inquiry, in the first post-liberalization year (February 2014 – February 2015) the margins calculated by the relevant undertakings reflected the values that were actually required by the administrative order in the pre-liberalization period. At the same time, the margins differed among the undertakings concerned.

In respect of the input purchase price of fuel in the vertical fuel supply chain (production – wholesale – retail)  the results of the inquiry show that the fuel price in the oil trading is basically based on Platts pricing  “Mediterranean cargoes” subheading “CIF Med (Genova/Lavera)” from the Platts European Marketscan. In the pre-liberalization era the price quotation concerned was mandatory in the pricing formula for oil derivatives.  Here the inquiry showed that the suppliers outside Croatia hold a significant share in the purchase of fuels.

The CCA also compared the retail prices of motor fuels in the period from February 2014 to February 2015. This analysis showed that the retail prices of fuels differed among different undertakings in the same time intervals. These differences were not substantial and were in compliance with the established facts about the structure of the fuel retail price. It means that exactly the different margins applied by different traders reflect the different retail prices of fuel. Yet, given the fact the margins hold the lowest share in the final fuel price, these price oscillations are negligible. The changes in the prices are, one the other hand, following the benchmark price assessments of CIF Med quotations under the Platts European Marketscan.

In the one-year period at issue the retail prices fell relatively significantly – some 0.80 Kuna to one Kuna per litre of fuel. However, this was primarily due to the oscillations in the input variables: the fuel purchase price and the dollar exchange rate. These elements are commonly used in oil trading and they subsequently produce the change in the retail prices.

On one hand, there are changes in the fuel prancing that are the consequence of effective competition, and on the other hand, there are changes in the fuel pricing that may raise competition concerns. A number of national competition authorities in the EU thus carried similar market inquiries in the oil derivatives trading.

The CCA compared various market studies with its own. The comparative analysis that was carried out showed that there are equal patterns in the most national markets. First of all, there is a small number of vertically integrated entities and the national markets use the benchmark Platts quotations.

The CCA market investigation indicates asymmetry in the speed of the price adjustment as in other countries. This pricing phenomenon known as “rocket and feathers” means that prices of fuel increase promptly whenever prices of inputs increase, but take time to decrease after input price decreases.

Such asymmetric price transmission must not be a sign of collusive practices between undertakings. Nevertheless, we cannot rule it out where solid und convincing evidence would indicate such behaviour.

In this sense the CCA will keep monitoring the motor fuels trading activities in Croatia.

In conclusion, the sector analysis carried out by the CCA showed that in the period to which the analysis refers there were no indicators in Croatia that would in the post-liberalization period point toward any significant changes in the traders’ margins that amount to some 5 % to 10 % of the retail price. The key influence on the retail price is attributable to the input variables that are in general beyond the traders’ control, i.e. the purchase price of the fuel, excise and other taxes.