The JSE has introduced diesel hedge futures and options to its range of commodity derivatives


This is the first time that businesses in SA will be able to hedge against movements in the local pump price of diesel. It’s an exciting development,’ says the Director of Commodity Derivatives at the JSE, Chris Sturgess. He says the contracts will be traded in rand per litre, with each contract representing 5 000 l of diesel. He anticipates that the agricultural, mining, logistics and transport sectors in particular will benefit from these new contracts. ‘We see any company that uses a lot of diesel in the course of their work as a potential client.’

The contracts will help reduce risk by providing a hedge through following the price of the European gasoil future, as traded on the New York Mercantile Exchange. Gasoil is a refined crude oil product and is close to diesel in the refinery process.

‘The new contracts provide investors with a hedge against movements of the price of diesel refined in Europe, but this price also plays a big role in what we pay for diesel in SA,’ he says. With so much volatility in energy prices, the contracts will give businesses the opportunity to lock in their margins, regardless of movements in the price of diesel.

‘Mining companies and farmers could be using call options to lock in the price. If the oil price is going through the roof, they will be able to say: “That is the maximum I will pay”. On the other hand, importers and refiners in the country who may be concerned that the diesel price is going to fall, could lock in the price at the higher level. If they think prices are going to come tumbling down and that pump prices will reduce, they can decide to sell the contract and lock in a profit,’ says Sturgess.


‘We see any company that uses a lot of diesel in the course of their work as a potential client’


Investors have the option of buying as many contracts as they need. ‘You can buy one contract for the next 10 days just to get a different average price,’ he says. Rand Merchant Bank will be acting as the market maker for these contracts. 

André Greeff, energy specialist at BVG, explains that the SA wholesale diesel price is made up of taxes and levies as well as the basic fuel price (BFP) of diesel. The BFP (free on board) is determined by international energy prices, which are quoted in dollars, as well as the rand/dollar exchange rate.

‘European gasoil is the proxy for the basket of international energy prices used to calculate the SA diesel price. The JSE’s futures and options combine this price with the rand/dollar exchange rate and this means that the JSE futures price is very strongly correlated with the local wholesale diesel price and provides an excellent way to manage risk,’ says Greeff. The price of the diesel contracts will be calculated on the average exchange rate and average European gasoil futures in the month before the contract expires.

Sturgess says the JSE has seen increasing interest in the diesel hedge contracts from potential players in the market. ‘Our main objective right now is to educate people about how the contract works. We’ve received a lot of phone calls and enquiries, as well as some trades. People are testing the principle around the contract. That’s a good approach. They’ve been testing it with small volumes to see if they’re comfortable with it,’ he says.

By Kim Cloete
Image: Fredrik Broden/reneerhyner.com