Here is the government decision on the regulation of fuel prices

Here is the announcement

After Wednesday’s government meeting, Minister of National Economy Márton Nagy held an extraordinary press conference at the Carmelite Monastery. The head of the portfolio announced: prices must return to the regional average, and the trader will be given two weeks to do so, if this does not happen, they will intervene, Index reported.

According to the minister, traders must adjust their prices to the regional average on a voluntary basis.

Mainly in the case of two fuel prices, the price of 95 gasoline and the price of diesel, it must be enforced that the prices must return to the regional average, said Márton Nagy, according to the paper.

The Minister of National Economy also announced that if the market players do not reduce their prices to an adequate extent,

then the government will re-negotiate the possibility of deploying regulatory tools and will act. They were given a two-week ultimatum for ER.

It is clear from the video uploaded on the website of the Hungarian government by Márton Nagy:

The head of the ministry said that the increase in fuel prices places a very heavy burden on Hungarian families, and he attributed the increase in the price of gasoline and diesel to the impact of the war. According to him, the regional comparison table published by the KSH last week had an effect: the price of diesel will drop to HUF 633 and gasoline HUF 647 until Friday. But the government does not consider this to be sufficient, as it is higher than the average level in the region, the difference is HUF 10 for diesel and HUF 27 for gasoline.

The regional comparison of diesel prices looks like this:

In the case of gasoline, this is the overall picture:

How will Mol’s exchange rate react?

After the announcement Mol’s share price did not react significantly to the announcement.As the leading player in domestic fuel sales and the most important wholesaler, Mol may incur serious losses due to intervention in the fuel market, as we saw with the previous price cap measure: the story, the relevant financial report, was a significant burden for the company in the short and medium term based on the price caps and special taxes in Central Europe, the company’s results could have worsened by 1.6 billion dollars.

In any case, Mol currently sells approximately 30 percent of the 95 gasoline and diesel on the market in Hungary, based on its 2023 annual report and the fuel turnover statistics of NAV, which means an average of 15.2 million liters of fuel for the company on a monthly basis (gasoline :diesel ratio was 1:3.3 within this). Since the pricing will be voluntary, it is difficult to calculate the exact impact on the company’s profitability, in any case, if we take the price drop realized based on the current average prices in the region (20 HUF per liter for gasoline and 31 HUF per liter for diesel), then this amounts to HUF 5.38 billion per month, annually It may cause an EBITDA decrease of HUF 64.5 billion.

The calculation is as follows: 44*20+145*31, where 44 million liters is the average monthly amount of gasoline, 145 million liters is the average monthly amount of diesel, and 20 and 31 are the price reductions per liter. Just to give some context, the Mol group’s annual profit in 2023 was HUF 1,149 billion, so the impact is 5.6 percent on the annual result.

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Although investors reacted badly to the previously introduced price cap measure, however, hin the longer term by strengthening market dominance Mol also won in the situation: under the scope of the price cap measure introduced at the end of 2022, the company significantly increased its market weight in retail and wholesale trade, primarily to the detriment of privately owned, independent (white) wells.

The government also maximized the wholesale price of fuel in March 2022, which significantly distorted the market, since gasoline and diesel could be sold at a higher price in any of the surrounding countries, therefore foreign wholesalers essentially withdrew from Hungary, for this reason, Mol had to supply the domestic wells almost entirely. The resulting fuel shortage did not affect all market participants in the same way: Mol prioritized the supply of its own filling stations, while the white wells that also bought from the company complained throughout the year that they did not receive enough fuel from Mol as a wholesaler. As a result, Mol was also able to significantly increase its share in the retail segment (i.e. the gas station market).

Since the government now expects a voluntary price reduction, it is difficult to predict the market effects.

What brought you here?

Since last October, the government has been communicating its objective to domestic fuel prices must be in the middle range of the regionin connection with this and the pursuit of this, a “also concluded an agreement” the government with the players in the fuel market. In recent weeks, the topic has heated up, the Minister of National Economy Márton Nagy has discussed fuel prices with the managers of Mol and MÁSZ several times, because according to him, the players have not complied with the agreement.

After that, government intervention became more and more likely, which the KSH’s regional fuel price comparison system birth followed – Márton Nagy indicated that this statistic will provide the basis for a possible intervention in the fuel market (distortions in the statistics were dealt with in a detailed analysis). Energy Minister Csaba Lantos indicated in connection with the report: if intervention is necessary, it is likely to be of one kind a dynamic price ceiling can be expectedwhich takes the regional average price as a basis for determining domestic fuel prices.

The experiences of the previous price cap

The price cap measure introduced in November 2021 and its effects on the market may flash back as a painful memory for many – as it is known, with the introduction of the measure the tax content of fuels did not change, the dealer’s margin decreased, and the dealers were not compensated.

They did not even have the opportunity to touch the excise tax because the European Union stipulates 36 euro cents as the minimum excise tax for gasoline, and since the forint weakened significantly against the euro in the months preceding the measure, the domestic tax rate fell below this minimum level.

That is why Mol and the Hungarian Mineral Oil Association also emphasized the importance of the stability of the domestic fuel market following a government briefing last September.

IF THE GOVERNMENT ROLLS BACK AUTHORITY PRICES, THEN SERIOUS SHORTAGES WOULD FORM WITHIN A VERY SHORT TIME.

But what exactly was wrong with the measure? A reference to the past follows.

From the beginning, the fuel price cap proved to be difficult to sustain and to strongly distort market conditions, so the government revised the measure in several rounds in the months before its introduction, successively removing an increasing number of consumers from the scope of the price cap. At the end of 2021, the government ordered the HUF 480 official price, which was extended in several steps until the last day of 2022. The following issues and difficulties arose in 2023 before the measure was introduced:

• At the beginning of March, the voices from the direction of the Association of Hungarian Road Carriers became stronger and stronger to supply chain disruptions attention was drawn. The government reacted to this by explaining in a government briefing the response measures that were intended to affect the fuel market with the aim of maintaining the gasoline price cap and security of supply. In the first round, the group of those entitled to the 480 HUF fixed petrol price was narrowed down, to be precise, Hungarian vehicles over 7.5 tons and foreign vehicles over 3.5 tons could only refuel at the high-pressure stations after that, at market prices.
• Then at the end of May came the announcement that it was fuel tourism to avoid, Hungary imposes different fuel prices for vehicles with foreign license plates and those with Hungarian license plates.

  IN CONNECTION WITH THIS DECISION, THE EUROPEAN COMMISSION INITIATED PROCEEDINGS AGAINST HUNGARY:

  called on the Hungarian authorities to comply with the EU legal provisions regarding the free movement of goods and services, the freedom of establishment, the free movement of citizens and workers, the principle of non-discrimination, and the notification rules under the Single Market Transparency Directive.

• From November Mol limited refueling at all its domestic filling stationsthe refueling limit at fast-charging stations became 100 liters/transaction − other networks have introduced (much) lower limits for official-priced products.

• Due to the protracted maintenance work at the Szachhalombatta refinery and the loss of imports, which previously accounted for 30 percent of domestic fuel consumption, the fuel supply problems became increasingly serious at the end of November, anda buying panic reaction started on the part of the population, practically, there was a partial fuel shortage on the entire Mol network. After that, the originally further planned fuel price stop was implemented.

Based on the previous example, intervention in the fuel market may even lead to a security of supply risk, and it further worsens the prospects that periodical maintenance started at Mol’s refinery in Szazhalombatta on April 20, which is planned to last until June 24. Past examples project an unfavorable outlook: in July 2022, the previous price freeze measure was still in place, when the maintenance of the refinery also became necessary, as a result of which the gasoline supply in the country was in a difficult situation, which the government responded by narrowing the scope of the price freeze measure and withdrawing strategic stocks reacted.

Cover image source: Getty Images