Commonwealth Bank fixing fuel prices for local government
5 September 2006
The Commonwealth Bank has announced a diesel hedging product specifically for Local Government Authorities to reduce the impact of fluctuating international oil prices.
"We’re expecting oil prices to remain at high levels into the medium-term. The volatility of recent years will also continue to be a feature of the market," said Tobin Gorey, Commonwealth Bank Commodity Analyst.
The Diesel Index Swap is a wholesale product that allows all Local Government Authorities (LGAs) in Australia to fix the future price of their diesel. It follows on from the Bank’s highly successful launch of the Diesel Index Cap earlier this year that allowed small businesses and farmers an opportunity to cap the price of their fuel.
"In a volatile oil market it’s all about being able to budget and manage risk with more certainty. The Index Swap will allow our Local Government customers to protect their profit margins and fix the future price of their diesel," said Brendan White, Commonwealth Bank Global Markets Head of Sales.
According to Mr White, diesel pricing is dependent on the international diesel index plus transportation costs, distribution costs, taxes and wholesale retail margins.
"Customers agree to fix the diesel index at a given level each month. If the average index is higher than the swap level for a month, the Bank pays the customer the difference to offset the higher price."
"On the flipside, if the diesel index falls below the agreed rate, the customer pays the Bank the difference. This cash settlement should largely offset the lower cost of fuel for the customer, resulting in a fixed cost."
Unlike other diesel swap products in the market, the Commonwealth Bank can offer the swap for volumes as low as 25,000 litres per month, allowing greater customer access to the product.
"The success of the Index Cap product would indicate an increasing appetite for fuel hedging products and the Bank is responding by providing councils with the opportunity to effectively manage the risk of rising oil prices."
How Diesel Index Swap works:
- The Diesel Index Swap is targeted to all LGAs with diesel operated vehicles;
- Applicants nominate diesel requirements over a nine month period from 1 October 2006 to 30 June 2007;
- The minimum quantity applicants can hedge per month is 25,000 litres in 1,000 litre increments;
- All applications must be received between 1 September and 22 September 2006;
- If the Bank determines that the total volume of diesel to be hedged is sufficient applications will be accepted and the deal will proceed;
- Applications are subject to credit approval;
- There is no upfront cost to the customer. Our solution fixes the diesel index (the Singapore Gasoil price in Australian dollars) at a given rate each month, in exchange for agreeing to a fixed rate for the period;
- If the Diesel Index is higher than the swap price, the Bank will pay the customer the difference; and
- If the Diesel Index is lower than the swap price, the customer pays the Bank the difference.
Applications for the Diesel Index Swap closes on 22 September 2006. For more information or an application form contact the Commonwealth Bank on 1800 627 795 or email: firstname.lastname@example.org
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