Neste and St1 Finnish Diesel fuel price war

Online newspaper Taloussanomat wrote yesterday on the escalating competitive situation in Finnish diesel fuel retail. Changes in the taxation had raised the price of of the liquid over 1.6 Euros per litre to match gasoline prices but whilst gasoline price has continued to rise, diesel fuel has retreated in recent weeks as stations have been competing on price.

Chairman of the board of St1 Mika Anttonen blames Neste Oil (OMX: NES1V) for dumping prices. He says he has contacted competition authorities and told Taloussanomat, that he was told dumping prices is legal. Neste Oil on its part said that St1 has started a price war and that they are responding. There is large variability in prices depending on the location at the moment. Anttonen said that a government owned firm such as Neste Oil should not compete in such a manner that he dubbed balance sheet competition, a rudimentary term for trying to undermine competitor for longer term gains.

This would be an understandable tactic if Neste Oil were a natural monopoly with certain cost advantages. While the company maintains a dominant position in oil transport the retail side is oligopolistic with Finnish retailing cooperative S Group owned ABC and Russian Lukoil’s subsidiary Teboil and some smaller fringe players also taking part. Neste has also been betting heavily on biodiesel.

Today Anttonen said that gasoline will soon cost over 2 Euros. It has often appeared as if Mr. Anttonen is trying to play negotiations with competitors through national media to reach some sort of tacit agreement. This is not the first time that he communicates a price target for the coming weeks that is far above the current market price.

It would be surprising if competition authorities have not noticed this. Even if the agenda is simply to give his expert opinion, it can lead to unwanted consequences. He has also rued entering fuel retail business saying that 5-6 cents per litre profit margin isn't enough. St1 did manage to consolidate the market by purchasing Shell's Finnish fuel stations in 2010.