Putting Bunkering on the Boardroom Table
By Götz Lehsten, Executive Vice President, OW Bunker
The bunkering industry has never before faced the extreme challenges that it does today. Fluctuating oil prices, tighter margins, as well as continued regulatory pressures, all set against significant financial turbulence and uncertainty that is affecting every global economy and business within it to some degree or another. In an increasingly fragmented bunker market, smaller players are finding it incredibly difficult to cope and the industry is facing rapid consolidation.
However, the real test of a company and the strength of its business model is often defined by how it reacts in tough economic times. The reality is that the bunkering industry still holds great opportunity. Success though will only be realised by those companies that have the financial muscle and capital resource to expand in line with their customer base, and the ability to adapt to the changing dynamic and profile of the industry as it becomes a vital cog in the wheel of future business prosperity.
OW Bunker has placed a great emphasis on this, expanding globally so that it can provide customers with access to quality products and services when and where they need them. In the past few years new offices have been established in Chile, Dubai, South Korea, Australia and Geneva to name but a few. The company has also expanded its physical operations in South America and Europe as well as significantly investing in a fleet expansion and renewal programme. OW Bunker now has over 30 state-of-the-art vessels serving customers on a global basis.
What is clear is that standing still is not an option, and those that do not accept this, or the case for change within the industry will simply fall behind.
Ultimately, shipping is responsible for up to 90% of global distribution; it drives globalisation, and it is the bunker industry that fuels it. With bunkers now accounting for, in many cases, over 50% of a ship’s operating costs, it has a major influence on bottom line and profitability – and so the companies selling fuel take on greater responsibility.
The procurement process is a serious business - from cost and availability to quality and performance. As competition intensifies companies are under even more pressure to increase efficiencies within the supply chain, while not incurring any additional costs. The role of the bunker provider is to ensure that the customer has speedy access to the best quality products, at anytime, and in any place, as well at the best price. It is fundamental to the success of that business and central to business performance improvement (BPI).
While BPI is common vernacular and the catch phrase of the management consultancy community, it demonstrates the clear shift and development that the industry has made, moving from a position of relative obscurity to centre stage. Based on this, surely it is not be beyond reason to consider that the issue of bunkering should warrant attention at the highest level within an organisation? As managing bunker costs becomes increasingly debated across the boardroom tables of major ship owners and operators, so too must the bunker supply and trade sector adapt to a new era of scrutiny and reliance previously unknown.
While this seat at the boardroom table is justified, bunkering companies must also embrace the change that is happening within the industry. They must grasp how important they are to business, both figuratively and directly as a key protagonist in fuelling global trade. It is easier said than done, and is another reason why consolidation will continue, as many companies realise that they do not stand up to scrutiny.
To be successful there needs to be a key change in the way that bunker providers work with their customers; they must move from being viewed as a supplier to being a partner. It requires a psychological change in mindset, as well a practical change in operation, based on the skills and services that are provided.
To some extent it is a natural evolution. Due to the dramatic increase, volatility and continued uncertainty of fuel prices, ship operators are exposed to much more risk than they have been used to. This has placed a dramatic amount of importance on the implementation of effective hedging strategies to control and locks in costs, maximising profitability and mitigating as much risk as possible. Some shipping lines have stated that they will have to pass on the additional costs through increased rate levels to shippers. This can be avoided, to some degree, through a proactive risk management programme, enabling operators to provide their clients with assurances that their freight costs are secured for 12 or 24 months. While shippers may find that their rates increase, they have the assurance of knowledge that prices are locked in, much like a fixed rate mortgage; there are few financial advisors advocating tracking interest rates amid the current economic downturn, so why would unprecedented ship fuel costs be treated any differently?
The onslaught of the lack of credit in the market is also opening up new areas of risk management that is presenting the industry with further challenges. For example reduced credit lines are leaving more and more companies exposed to falling into arrears beyond their existing credit, leaving them with the responsibility of immediately paying the difference; also known as the ‘margin call’.
As an example, if two counterparties have an agreed $500,000 credit line and one buys 2,000 metric tonnes per month of IFO380 fuel over a 12-month period at $300 per tonne with an initial delivery date of Q2 2009, but one week later the price of fuel oil drops to $280, the buyer is $480,000 in arrears on the hedge. However, the current credit line ensures that no security needs to be posted. Conversely, if the price falls a further $20 per tonne to $260, the buying counterparty will be $960,000 in arrears on the hedge and owe the selling counterparty $460,000 as an immediate cash payment, as they will have exceeded the initial credit line agreement. This payment is due immediately, despite the first delivery often being weeks or months away. This could cause significant problems for the hedger if they do not have access to cash, which is becoming increasingly more common due to the current liquidity issues within the global economy
This has also led to the importance of companies understanding their exposure to counterparty risk, due to the lack of confidence in the financial strength of organisations’ financial stability. Ship owners and operators must now have a detailed understanding of the creditworthiness of counterparties both from a derivatives and physical supplies perspective. Fundamentally, developing a risk
management strategy is now not just about controlling volatility in the market prices of bunker and freight costs, but also implementing a counterparty risk control programme both for ship owners and operators who need financing from banks, as well as bunker companies who are being forced to take on board more counterparty credit. Advising and implementing such a strategy falls within the job description of a bunker provider, and it changes the level of relationship that they have with their customers.
For instance the communication and interaction is based on a complete understanding of the industry and its challenges, as well a total knowledge of the customer’s business and its objectives. It changes the foundation of the relationship from fuel ‘seller’ to a consultancy-based partnership that is focused on maximising operational and financial performance. It changes the approach from being ‘told’ by the customer what they want, to discussing, debating and advising the customer on what they need and ‘why’ they need it, based on an understanding of the current market challenges in line with their strategy for business growth and development.
Central to achieving this level of relationship is ensuring you have the right people in your business, with the right skill sets and gravitas. It’s not something that happens overnight, but requires natural ability, supplemented with in-depth training. It is something that OW Bunker has invested heavily in over the past few years, with the implementation of its intensive two-year training course. All candidates are trained in sales, products and services, skills and systems tuition, risk management as well as in depth education on the OW Bunker brand, its values and its position within the market. For a six-month period, which they will spend abroad, the trainees will also conduct courses on innovation and look at the potential for new opportunities in bunkering and trading, as well as learning about different business styles, cultural diversity, and new propositions. Crucially, some of the candidates have been recruited from outside the bunkering industry; people who can bring new skills, new experience and new ideas from other markets. Not only is this central for the future growth of the business, it is paramount for setting new benchmarks of excellence and for the continual professionalisation of the industry itself.
The current economic uncertainty has only expedited the inevitable consolidation of the bunkering industry; but this consolidation is central to its positive progression.
Ultimately there are not many companies that have the capital resource to invest in the development of their operations, from fleets and storage facilities to the best talent available. There are not many companies that have a world-wide presence to consistently service their customers, who are looking to take advantage of the opportunities that globalisation provides. And there are not many companies that have a real understanding of bunkering and its context within global enterprise, or the ability to communicate in a language that business, and most importantly, the decision-makers in the boardroom understands. It is where this industry must aim for; the bunkering industry will be a better market for it and the shipping sector's board members better served.
The bunkering industry has never before faced the extreme challenges that it does today. Fluctuating oil prices, tighter margins, as well as continued regulatory pressures, all set against significant financial turbulence and uncertainty that is affecting every global economy and business within it to some degree or another. In an increasingly fragmented bunker market, smaller players are finding it incredibly difficult to cope and the industry is facing rapid consolidation.
However, the real test of a company and the strength of its business model is often defined by how it reacts in tough economic times. The reality is that the bunkering industry still holds great opportunity. Success though will only be realised by those companies that have the financial muscle and capital resource to expand in line with their customer base, and the ability to adapt to the changing dynamic and profile of the industry as it becomes a vital cog in the wheel of future business prosperity.
OW Bunker has placed a great emphasis on this, expanding globally so that it can provide customers with access to quality products and services when and where they need them. In the past few years new offices have been established in Chile, Dubai, South Korea, Australia and Geneva to name but a few. The company has also expanded its physical operations in South America and Europe as well as significantly investing in a fleet expansion and renewal programme. OW Bunker now has over 30 state-of-the-art vessels serving customers on a global basis.
What is clear is that standing still is not an option, and those that do not accept this, or the case for change within the industry will simply fall behind.
Ultimately, shipping is responsible for up to 90% of global distribution; it drives globalisation, and it is the bunker industry that fuels it. With bunkers now accounting for, in many cases, over 50% of a ship’s operating costs, it has a major influence on bottom line and profitability – and so the companies selling fuel take on greater responsibility.
The procurement process is a serious business - from cost and availability to quality and performance. As competition intensifies companies are under even more pressure to increase efficiencies within the supply chain, while not incurring any additional costs. The role of the bunker provider is to ensure that the customer has speedy access to the best quality products, at anytime, and in any place, as well at the best price. It is fundamental to the success of that business and central to business performance improvement (BPI).
While BPI is common vernacular and the catch phrase of the management consultancy community, it demonstrates the clear shift and development that the industry has made, moving from a position of relative obscurity to centre stage. Based on this, surely it is not be beyond reason to consider that the issue of bunkering should warrant attention at the highest level within an organisation? As managing bunker costs becomes increasingly debated across the boardroom tables of major ship owners and operators, so too must the bunker supply and trade sector adapt to a new era of scrutiny and reliance previously unknown.
While this seat at the boardroom table is justified, bunkering companies must also embrace the change that is happening within the industry. They must grasp how important they are to business, both figuratively and directly as a key protagonist in fuelling global trade. It is easier said than done, and is another reason why consolidation will continue, as many companies realise that they do not stand up to scrutiny.
To be successful there needs to be a key change in the way that bunker providers work with their customers; they must move from being viewed as a supplier to being a partner. It requires a psychological change in mindset, as well a practical change in operation, based on the skills and services that are provided.
To some extent it is a natural evolution. Due to the dramatic increase, volatility and continued uncertainty of fuel prices, ship operators are exposed to much more risk than they have been used to. This has placed a dramatic amount of importance on the implementation of effective hedging strategies to control and locks in costs, maximising profitability and mitigating as much risk as possible. Some shipping lines have stated that they will have to pass on the additional costs through increased rate levels to shippers. This can be avoided, to some degree, through a proactive risk management programme, enabling operators to provide their clients with assurances that their freight costs are secured for 12 or 24 months. While shippers may find that their rates increase, they have the assurance of knowledge that prices are locked in, much like a fixed rate mortgage; there are few financial advisors advocating tracking interest rates amid the current economic downturn, so why would unprecedented ship fuel costs be treated any differently?
The onslaught of the lack of credit in the market is also opening up new areas of risk management that is presenting the industry with further challenges. For example reduced credit lines are leaving more and more companies exposed to falling into arrears beyond their existing credit, leaving them with the responsibility of immediately paying the difference; also known as the ‘margin call’.
As an example, if two counterparties have an agreed $500,000 credit line and one buys 2,000 metric tonnes per month of IFO380 fuel over a 12-month period at $300 per tonne with an initial delivery date of Q2 2009, but one week later the price of fuel oil drops to $280, the buyer is $480,000 in arrears on the hedge. However, the current credit line ensures that no security needs to be posted. Conversely, if the price falls a further $20 per tonne to $260, the buying counterparty will be $960,000 in arrears on the hedge and owe the selling counterparty $460,000 as an immediate cash payment, as they will have exceeded the initial credit line agreement. This payment is due immediately, despite the first delivery often being weeks or months away. This could cause significant problems for the hedger if they do not have access to cash, which is becoming increasingly more common due to the current liquidity issues within the global economy
This has also led to the importance of companies understanding their exposure to counterparty risk, due to the lack of confidence in the financial strength of organisations’ financial stability. Ship owners and operators must now have a detailed understanding of the creditworthiness of counterparties both from a derivatives and physical supplies perspective. Fundamentally, developing a risk
management strategy is now not just about controlling volatility in the market prices of bunker and freight costs, but also implementing a counterparty risk control programme both for ship owners and operators who need financing from banks, as well as bunker companies who are being forced to take on board more counterparty credit. Advising and implementing such a strategy falls within the job description of a bunker provider, and it changes the level of relationship that they have with their customers.
For instance the communication and interaction is based on a complete understanding of the industry and its challenges, as well a total knowledge of the customer’s business and its objectives. It changes the foundation of the relationship from fuel ‘seller’ to a consultancy-based partnership that is focused on maximising operational and financial performance. It changes the approach from being ‘told’ by the customer what they want, to discussing, debating and advising the customer on what they need and ‘why’ they need it, based on an understanding of the current market challenges in line with their strategy for business growth and development.
Central to achieving this level of relationship is ensuring you have the right people in your business, with the right skill sets and gravitas. It’s not something that happens overnight, but requires natural ability, supplemented with in-depth training. It is something that OW Bunker has invested heavily in over the past few years, with the implementation of its intensive two-year training course. All candidates are trained in sales, products and services, skills and systems tuition, risk management as well as in depth education on the OW Bunker brand, its values and its position within the market. For a six-month period, which they will spend abroad, the trainees will also conduct courses on innovation and look at the potential for new opportunities in bunkering and trading, as well as learning about different business styles, cultural diversity, and new propositions. Crucially, some of the candidates have been recruited from outside the bunkering industry; people who can bring new skills, new experience and new ideas from other markets. Not only is this central for the future growth of the business, it is paramount for setting new benchmarks of excellence and for the continual professionalisation of the industry itself.
The current economic uncertainty has only expedited the inevitable consolidation of the bunkering industry; but this consolidation is central to its positive progression.
Ultimately there are not many companies that have the capital resource to invest in the development of their operations, from fleets and storage facilities to the best talent available. There are not many companies that have a world-wide presence to consistently service their customers, who are looking to take advantage of the opportunities that globalisation provides. And there are not many companies that have a real understanding of bunkering and its context within global enterprise, or the ability to communicate in a language that business, and most importantly, the decision-makers in the boardroom understands. It is where this industry must aim for; the bunkering industry will be a better market for it and the shipping sector's board members better served.