As mentioned in a recent Herald article, and discussed by Matt in this post, Z Energy expects petrol use in New Zealand to be flat or slightly declining in the next few years. In this post, I want to go back to the source material – a Z presentation which they gave at their 2014 Investor Day. There’s quite a bit of interesting stuff in there.
Firstly, Z Energy has a number of “strategic presumptions” which it sees as “the foundations of their core business”. These presumptions are listed below, and I’ve highlighted some of the interesting ones from our perspective.
- Oil will remain the predominant transport fuel for New Zealand and the world
- Global oil markets will ensure continuity of supply to New Zealand and oil price volatility will increase
- New Zealand will remain an import pricing market
- New Zealand transport fuel demand will remain flat to declining
- Fuel standards will not be a key differentiator
- We expect no major or extreme new regulatory shifts impacting our industry
- Shipping freight rates remain flat due to increased global capacity
- NZ consumers are value seekers and respond favourably to offers and Kiwi ownership
- NZD:USD will revert back to long term averages ─ 0.70 by 2018
- NZR refining margins will remain flat in the short term before recovering
- Rational competitive behaviour will continue
Looking at these in a little more detail:
Oil will remain the predominant transport fuel for New Zealand and the world
No arguments here – it’ll be at least a couple of decades before electric vehicles really start to make inroads into world vehicle fleets. LPG and other fuels could have a growing niche, as could biofuels, and electrified public transport could become more important. But oil will remain the big one.
NZD:USD will revert back to long term averages ─ 0.70 by 2018
For the last few years, the NZ dollar has been quite strong against the US dollar, compared with historical levels. This is insulating us from petrol and diesel price rises, to some extent. Z Energy are working on the assumption that the NZ dollar’s value will drop back to a more ‘normal’ level over the next few years.
NZD $1 currently gets you about USD $0.87. If that were to fall back to $0.70, with everything else staying the same, petrol prices would rise from $2.15 to about $2.36. Not a massive difference, true – around 10% more at the pump – but enough to have a small dampening effect on demand. The main impact would be to our current account deficit, but that’s a story for another day.
New Zealand transport fuel demand will remain flat to declining
In the following slide, Z point out that the fuel efficiency of cars could very well improve over time, as I’ve written here. They also note that the top selling cars today tend to be smaller than those of the mid-2000s. Of course, the future of the Commodore and Falcon seems rather in doubt anyway, given that Holden and Ford are winding down their manufacturing operations in Australia.
Z also shows what they expect to happen to fuel efficiency in the next slide, below. I’m assuming it refers to fuel efficiency for new cars entering the fleet, as the total fleet won’t improve that quickly. More interestingly, though, they expect light vehicle travel per person to remain pretty much flat over the next five years. It won’t even recover to pre-GFC levels, let alone the peaks of the mid-2000s.
Z assume that GDP (economic output) will increase, boosting travel demand, but on the flip side, higher prices and “broadband connections” will weaken demand. The use of broadband connections is an interesting metric. Z aren’t saying that broadband directly causes people to travel less. They’re saying that changing trends in social media, online connectivity, etc – the kind of thing we talk about on the blog quite often – are meaning people tend to travel less. They’ve found that they can represent this quite well through using broadband connections as a proxy variable.
Based on their forecasts of essentially flat vehicle travel, and a vehicle fleet which is slowly getting more fuel efficient, Z come up with the following forecasts for retail fuel demand – showing it declining over the next decade. Note that they’ve shown this forecast going a bit further out than the travel ones above.
So, an interesting release from Z Energy. As a private company in the mature (or slowly declining) industry of fuel distribution, it’s important for them to do this kind of forecasting. The industry is capital intensive, margins are slim, and the assets are often fairly long-lived – as are the liabilities, e.g. leases over petrol stations. Ultimately, the company will make investment decisions based on forecasts like the ones shown here. Forecasts which, it must be said, are a lot less bullish than the ones the NZTA are currently using for its Roads of National Significance…