Industry bullish on fuel price hike
Asian workers are seen working at a construction site in Dubai.
Abu Dhabi - Businesses hope to benefit from windfall gains after reduction in diesel price.
Transport, construction, shipping and trading businesses are bullish about the substantial cut in diesel prices which will reduce the cost of doing business and increase profits.
Under the UAE's zero subsidy policy, oil prices will be fixed based on the average of international oil prices in a month. It will be introduced in a phased manner.
The rise in gasoline prices will ultimately affect consumers because traders and businesses are likely to pass on the costs.
However, a drop of 29 per cent in diesel prices is significant. It will help transport, shipping and fast-moving consumer goods businesses with immediate effect as their fuel costs will dip significantly.
The construction industry, one of the biggest employers in the UAE, uses heavy trucks for transportation of machinery. Therefore, the industry will be the biggest beneficiary of the oil price deregulation.
"Fuel costs can constitute up to 40 per cent of a project's total cost," said Syed Abrar Ali, general manager of Trans Middle East, an oil and gas construction company based in Abu Dhabi.
With mega oil and gas, railway, nuclear power, housing and industrial projects under construction in Abu Dhabi and elsewhere, construction companies will stand to benefit from windfall gains.
Carla Slim, an economist at Standard Chartered Bank in Dubai, said higher fuel prices will have a limited impact on competitiveness, specifically for the luxury segment of the retail sector, which has faced its own challenges recently.
"The impact of the subsidy reform on average disposable incomes does not compare to the impact of the 57 per cent year-on-year depreciation of the Russian ruble, which has caused a slump in the number of tourists to Dubai; nor does it compare with the 17 per cent y/y depreciation of the euro against the US dollar which makes luxury goods in the UAE relatively more expensive," she said.
New fuel prices will likely have a one-off impact on inflation, reflecting the first price increase, which will close the gap between subsidised prices and new de-regulated prices.
"We expect higher fuel prices to feed through to the 2016 average inflation rate rather than 2015, since the new prices will only be implemented as of August 1," Slim said.
Moderation in the housing market should partly offset the one-off impact of higher fuel prices on 2015 and 2016 average inflation rates. "We raise our 2016 average inflation forecast to 4.3 per cent from four per cent. We maintain our 2015 average inflation forecast at 4.3 per cent," she added.
Zahabia Saleem Gupta, an associate analyst at Moody's Investors Service in Dubai, said the impact on inflation will be moderate.
Gasoline makes up less than four per cent of the UAE CPI (consumer price index) basket. As a result, the direct impact of the fuel price hike on inflation will be roughly one per cent, Gupta said.
The overall impact could be higher due to spillover into the cost of other goods and services. This should, however, be offset to some extent by the drop in diesel prices, Gupta said.
She said inflationary pressures could rise if crude oil prices bounce back from the July 2015 average of $57. "We expect annual crude oil prices to average $60 in 2015 and $65 in 2016, an increase that will be reflected in the UAE fuel prices," she added.
According to the UAE National Bureau of Statistics, inflation increased by 4.22 per cent year-on-year in June 2015, mainly driven by rising housing costs.
After the fuel price hike, Moody's expected inflation to come down as property prices decline over the coming months because of lower demand and additional supply in the market.
In the medium term, "we expect the increase in domestic consumption of fuel to moderate, which should in turn boost hydrocarbon exports."
Heavy subsidies pushed oil marketing and distribution companies into financial losses estimated at Dh12 billion in 2012.