The Malaysian Reserve

Oil firms ignore petrol dealers’ quest for guaranteed margins

features Picture for Petrol Station at the Federal Highway Subang, Most petrol station shows their oil market price according to the rates fixed by the government every Wednesday

Oil companies are convinced that the DGM proposal is just a way to pass the losses to them

By AFIQ AZIZ & ALIFAH ZAINUDDIN / Pic By MUHD AMIN NAHARUL

The proposal to guarantee petrol station operators a profit margin to offset their losses from the government’s weekly fuel price system is not gaining traction.

This is because oil companies are convinced that the dealers guaranteed margin (DGM) proposal is just a way to pass the losses to them, which dealers have faced since the weekly fuel price system was introduced.

The Petrol Dealers Association of Malaysia (PDAM) had proposed the guaranteed margin because their members suffer losses each time the fuel price is lower than the previous week. When this happens, petrol dealers have to sell stocks which they bought at a higher price in the previous week at the new lower price.

Under the proposal, dealers want oil companies to compensate them when fuel prices go up, and in return, dealers return extra profit to the oil companies when prices go down.

A former Shell executive said oil companies would not take on something that would incur losses, and added that the guaranteed margin as proposed by PDAM would effectively be unfair to oil companies.

Akhramsyah Sanusi, a former retail operations manager, said PDAM’s proposal ensured that oil companies compensate dealers when prices of fuel go up, but was doubtful that dealers would have an extra margin to pay back oil companies.

“The DGM solution is unbalanced because while there will be occasions where oil companies will compensate dealers, it is not known if dealers will be able to channel their earnings to compensate oil companies.

“This imbalance risks being unsustainable and is very much against the spirit of fairness to all stakeholders,” Akhramsyah said.

The petrol dealers had pushed for the margin guarantee because it would relieve them from the holding risks due to fuel price fluctuations.

“What this mechanism does is oil companies will compensate the dealers if we have net losses, and vice versa when we gain profit. Over a month, our margin will be as per if there were no price fluctuations,” PDAM president Datuk Khairul Annuar Abdul Aziz had said of the proposal.

“This way, oil companies undertake the risk and not the dealers.”

The weekly float policy, introduced on March 29 last year, has been a bane for petrol dealers who have suffered from higher operational costs and dwindling margins. The system has seen the closure of over 300 petrol stations nationwide to date.

“It is the weekly price mechanism that should be reviewed by the Domestic Trade, Cooperatives and Consumerism Ministry (KPDNKK). Any other solution around it is just working around the root cause of the problem,” Akhramsyah said.

KPDNKK Minister Datuk Seri Hamzah Zainuddin had said the government would study a new formula to improve the current weekly mechanism.

However, there have been no updates on the matter so far.

Apart from the margin guarantee, petrol dealers are also seeking a revision of their commission rate. Khairul Annuar said the 12.9 sen per litre commission, mandated by the government since 2008, had become obsolete due to the rise in operational costs in the last 10 years.

PDAM is now seeking a raise of 18 sen per litre, which is about 40% higher than the current pay.

Taman Muda petrol retailer Kamaruddin Atan said the commission rate has to be revised every five to 10 years to remain feasible. Kamaruddin said the government could also consider changing the commission system to be percentage- based instead of a fixed rate.

“It will be better if we can go on a percentage basis, but alternatively, if we can raise the commission by at least six sen, then that will be good too,” Kamaruddin said.