Dealing with the vagaries of a volatile economic climate

This article was originally published in TruckTalk Magazine.

Freight transportation is one of the major contributors to economic development in any given country, and South Africa is no exception, with around 90% of freight moved via the road. However, the country faces a number of unique local and international challenges that contribute to additional cost pressures for local companies.

The Russian invasion of Ukraine and the subsequent global sanctions that followed have disrupted energy and food trade at a macro-economic level, increasing logistics costs and fanning inflationary pressures.

These ongoing geopolitical dynamics have also led to soaring energy prices, creating another massive challenge. This is unsurprising, considering that the local transport sector is virtually dependent on petroleum fuels (98%), while our nation depends on imports for around 70% of its oil, mainly from the Middle East.

Given that macro-economic events are growing more severe and more frequent, and domestic challenges are demanding a refocus on resilience: business executives quite clearly require a better understanding of the environments in which they operate, how these might evolve and how they can mitigate against them.

A good example here would be paying attention to the longer-term sustainability challenge, namely the global drive to wean the transport sector off of internal combustion engine (ICE) vehicles and encourage a shift to electric vehicles (EVs).

Until EVs do take centre stage, however, the high cost of diesel fuel remains one of the single biggest issues facing the sector. In fact, by the third quarter of 2022, fuel costs had breached the 55% mark in daily operating costs, and by year-end, it was already hovering around 60% and it doesn’t look like there is much reprieve on the horizon.

It goes without saying that the continuous increases in the price of diesel inevitably drive the overall cost of transport and logistics up. The real issue for road freight transporters is that the spiralling price of diesel means they also need to increase their pricing to cover this cost. This is particularly challenging when one considers that these players need to be able to fund operations in the present - in this case, the use of fuel - while potentially having to wait for up to three months for payment for the services they have delivered.

What to look for in a financial partner

Owing to vehicle shortages and the fluid nature of the industry, road freight transporters need a financier that understands that quick access to funds is imperative and who has a number of tailor-made solutions to ensure funding can be secured quickly and with ease. In addition, your financial partner should be able to provide revolving asset finance facilities that are accessible quickly and available all year round.

They should also provide working capital solutions which assist with bridging the timing gap between transporter incurring cash outflows and receiving payments from their end clients.

These are just a few of the solutions that can help transport companies deal with the increasing vagaries of a volatile macro- and micro-economic climate. But having said that, it becomes critical to find a partner that is well aware of the complexity and variables at play, and which considers a holistic view of each client’s specific scenario in order to offer such solutions.

In other words, your financial partner of choice should provide more than a loan or funding, they must have a total understanding of all the moving parts, offer clear comprehension of the lending options available and the risks that could be faced and walk the journey with you to find solutions.