Feature: World Fuel Services on the Benefits of Working with a Strong CounterParty
Knowing how to manage risk is the key to a successful long term strategy in the bunker market – and this holds true for buyers, suppliers and traders. This has never been so true following the demise of OW and the recent news regarding Hanjin Shipping.
Knowledge is Power
In bunkering, the term “risk management” is often used in the narrow sense of applying analytical tools and hedging strategies to handle fluctuations in the price of fuel. However, a risk management strategy should be so much more: it is about identifying and quantifying all the dangers that exist in the market, and developing strategies that will protect your company from the many potential pitfalls.
Before entering into any commercial transaction, you should have a clear understanding of the counterparty you are transacting with. Then you should maximise the benefits of working with strong counterparties and minimise your exposure to weak or disruptive elements in the market.
Strengths and Weaknesses
If you work with the wrong party, the consequences can be severe and far-reaching. The eventual financial cost could be far greater than any short-term gains you may have made by striking what seemed at the time to be a “good deal”.
If you are a bunker buyer and you know that a particular supplier or trader is having a difficult quarter, you might be tempted to take advantage of this by driving the price down by a few dollars a tonne. But you may be just one of many buyers who are exploiting their weakness. Collectively, you may be driving that supplier or trader closer to its financial limit. One more push, and they may go over the edge, especially if they are a smaller player who have no diversification beyond the maritime industry.
Every few years or so, alarm bells will ring in the industry when a big trader, supplier or shipowner goes under, leaving a slick of unpaid bunker fuel bills. In 2016, Hanjin Shipping’s demise has caused ripples through the market, and we are still feeling the effects of OW Bunker’s collapse in 2014. OW Bunker started 2014 promisingly with an IPO on the Copenhagen Stock Exchange; but by November it filed for bankruptcy, sunk by debts of more than $1 billion.
The problem for bunker buyers in these situations is that they can find themselves being chased twice for payment on the same fuel delivery: once from the failed trader’s administrators or bank; and again from the physical supplier. The problem for the physical suppliers is that even if the buyers pay the trader or the administrator, this money may never trickle back to them. Indeed, the aftermath of the OW Bunker debacle has probably made it even more difficult for physical suppliers to be recompensed for the fuel.
The key moment was the London High Court’s judgement on the Res Cogitans – one of the ships that were caught up in the OW Bunker collapse. The High Court ruled that OW Bunker assignee ING Bank was entitled to be paid the entire bunker bill by the shipowner – leaving the supplier out on a limb. In essence, the Court found that because the physical supplier had contracted with OW Bunker, and not the vessel operator, they had no maritime lien on the ship.
This has prompted some in the industry to argue that suppliers should perhaps now look to sell directly to shipowners, so they still have a maritime lien if payment is not made. It has also been suggested that buyers should consider establishing more direct relationships with suppliers, so they can avoid the dangers of an unknown parties in the supply chain and the prospect of being caught up in another OW Bunker web (and still being stung for double payments if the supplier pursues the case in other jurisdictions).
However, this ignores the fact that traders have performed a vital role in the bunker industry and they will continue to do so irrespective of how all the OW Bunker cases are finally resolved.
Shipowners and bunker suppliers can enjoy very successful direct relationships – in the right circumstances. When, for example, a ship owner operates a restricted number of services in a regional or local market and it deals on a regular basis with a supplier which it knows well and has established a long-standing credit line, then a direct relationship may be the sensible option. As we said earlier, a successful business strategy is based on risk management: maximising your knowledge and minimising the unknowns. In this instance, assuming the financial strength of the supplier was beyond question, adding extra links to the supply chain would probably serve no purpose.
The Vital Link
But the example above is not a typical scenario. Many bunker buyers will be fuelling ships which call at a great many ports – and within those ports they will have to shop around for the best price. They cannot build up a rapport with just one or few suppliers. They will have to work with people they do not know – and in order to do that they will need a trusted intermediary who does know all the suppliers, and the particular nuances of each market.
Just as buyers will not know all the suppliers they have to deal with, the suppliers do not know all the buyers. This means suppliers will understandably be reluctant to open credit lines to companies they do not know. Especially if they are ship owners who may only buy one stem from them and never come back to their port (and possibly never pay their bill). But suppliers will be willing to deal with, and offer credit to, a trader who is a regular presence in the market, can pool together the purchases of its many ship owning clients and is a known, secure financial counterparty for the supplier. From the supplier’s perspective, a key benefit of working with a first-rank trader such as World Fuel Services is that they will take on the credit risk of the buyer and pay the supplier directly. World Fuel Services will also use its experience and market intelligence to spot potential credit issues, so problems can be contained and resolved before they spread.
Why Use a Trader?
From a buyer’s perspective, the key benefits of using a trader include:
Suppliers are loathed to give credit and are very slow to process any new applicants; but a global trader will have already established networks that you can leverage.
A global trader can use its global network to build up a knowledge base for ports in every market, with intelligence on all the key suppliers. They will also have the capacity to work across different time zones.
Traders aggregate volumes, giving them significant buying power. A front-line trader will often be a key customer for many of the suppliers they deal with, so not only can they get credit, but they can also secure favourable prices.
Reputable traders can offer a wide range of value added services, such as help with price risk management, claims management or operations support outside hours.
In some cases, “going direct” is simply not an option. Many physical suppliers will only want to deal with customers that fit certain criteria. For example, they may only work with large customers who are likely to buy a significant amount of fuel or have lower credit risk. For buyers who do not meet the criteria, the trader is an essential go-between.
Choosing the Right Counterparty
Recent events have shown that shipowners and suppliers still need traders – but they have to be right kind of traders. Traders whose industry knowledge, financial resources and commercial integrity will actually strengthen the supply chain and bring added security.
To recap, risk management is about minimising the unknown and making clear-sighted decisions based on the data which you can quantify. When choosing counter-party, these are the factors you should consider:
- Financial strength and flexibility: When your counterparty is strong, you can lean on them for flexibility and to improve your cash-flow to invest in new markets.
- A track record of audited accounts: A trader which can offer a transparent record of its financial performance and guarantee that they operate under a compliant code of conduct is clearly a more trustworthy counterparty than one which “flies under the radar”.
- Diversified across multiple businesses: Companies that are established across multiple businesses and work in a range of industries and markets have a broader, more secure base and can offer support across all areas. World Fuel Services, for example, operates globally in Aviation, Land, Marine & Technology solutions and Energy Management.
- Industry expertise: A trader which is active in the market every day on a global basis and has experts in every region will have a tremendous network for gathering intelligence and they will know how to react to new information. They will know about potential problems before they occur, and can draw upon their experience to help in even the most difficult situations.
- Price optimization: By working with a major global trader you will have access to competitive prices and will also enjoy price risk management products, flexible credit terms, and fleet planning services to control spend. This is particularly true if you are leveraging World Fuel Services’ volume, global reach and proactive fuel purchasing strategy.
- Operational scale: If you are working with a trader that offers global support 24/7/365, it will reduce the pressure on your own internal resources and back office support.
- Business integrity: A company that has a strong commitment to Quality, Health, Safety, Security & Environment (QHSSE), and Compliance and creates a working environment where staffs are encouraged to act with integrity and think about their clients’ real interests is going to be more reliable than one which is merely interested in securing a cut- throat deal. A long term bunkering strategy needs to focus on building long term business relationships, not fixing a series of one-off deals.
- Value added services beyond fuel bunkering: Does your trader have a technical team or claims management facility? Again, without such services ship owner may be left exposed when things go wrong and should be part of the role of a strong counterparty.
There are many hundreds of traders in the global bunker market, but if you use the criteria above to whittle down the potential options, you will be left with just a handful of companies. World Fuel Services would definitely be on the list. Indeed, the breadths of the company’s global coverage combined with the depth of its local presence give it an unparalleled strength. It is important to remember that the trader is not just a link in the credit chain, it also has to facilitate a much broader two-way communication: making sure that the requirements of all parties are clearly communicated, understood and aligned. And when there are differences of opinion, the trader has to act as a mediator and find common ground. The trader is the glue that holds these relationships together, so it needs to be transparent, solvent and, above all, strong.
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Source: Ship & Bunker