Adrian Tolson, Senior Partner, 20|20 Marine Energy
It goes without saying, that there is a good deal of luck in both life and business. Success is based on how we deal with it, what we learn and how we consolidate and take advantage of the opportunities our luck has given us. This is particularly applicable to bunkering.
The marine energy sector, as we know it today, is a relatively new creation. Until three decades ago it was dominated by both major and national oil companies. A combination of oil and shipping crises, 100% conversion refineries, de-regulation and ultimately higher prices gave birth to the independent fuel supplier and created the current marine energy market. And while the independent may not always have the sales volume of a major, their presence has brought leadership, innovation, flexibility and improved practices.
Thirty years ago it is hard to imagine that Los Angeles was still the largest bunkering port in the world, when estimates of the worldwide bunker market volume were around 120-130 million metric tons.
The growth of the independents has gone hand in hand with the growth of shipping and international trade; a stroke of luck one might say. Thirty years ago it is hard to imagine that Los Angeles was still the largest bunkering port in the world, when estimates of the worldwide bunker market volume were around 120-130 million metric tons. Compare this to today's volume at 350 million metric tons and we can see the gap that needed to be filled by independents.
Clearly the independents' success is not all based on luck. But their growth and financial success also created a complacency and lack of recognition that a good part of success was based on fortune. In today's world, this no longer works. We have seen seven years of highly volatile oil markets, seven years of depressed shipping markets, both underpinned by increasing environmental regulation. What we need to do now is to transition to a new era of professionalism. Put simply, the "seat of the pants", "back of the envelope", "finger in the wind", "happy go lucky" world of independent bunkering is over!
The key questions are twofold. Where do we need to become more professional? And how do we prepare ourselves for the future? The answers are as follows:
One of the key influences that led to the growth of the independents was the shipping crisis in the first half of the 1980's, where the repeated failure of shipping companies led the majors to reconsider easy bunker credit. We have seen ups and downs in shipping since then, but nothing so serious as the consequences of the global economic downturn in 2008.
No banker, commodity trader or outsider has ever reacted with less than total shock to the amounts of open credit the bunker industry extend every day with questionable security
Prior to this, credit was as likely to be done in a haphazard fashion, often at a trader or trader manager level, sometimes with involvement of a relatively ill-qualified CEO or CFO, and sometimes with an equally ill-qualified credit manager. There was little real risk analysis involved and happily the booming shipping market produced relatively few defaults.
As the 2008 recession intensified, there was a sudden rush to find experienced bunker credit managers, which created a huge opportunity for all those employed by marine credit reporting companies. Some credit management systems improved dramatically, others hardly changed and continue to this day to be quite surprisingly amateurish.
No banker, commodity trader or outsider has ever reacted with less than total shock to the amounts of open credit the bunker industry extend every day with questionable security.
There is no definitive research on how much time buyers, shipowners or traders really spend evaluating the supplier they are buying from. The conventional wisdom would suggest not much. Indeed for every company who follows strict due diligence in examining the financials, ownership structures, reputation, insurance and barging of a supplier, there are more who still buy on the cheapest price. In the post OW Bunker world some will be trying to close this gap, but clearly more work needs to be done.
Of course credit and counter party risk are key elements of risk management, but specifically we are talking about oil price risk management. For at least 20 years, speakers on the bunkering conference circuit have discussed the obvious benefits of risk management on both sides of the buy/sell equation. But it is clear that there are many companies that practice none.
Even those that appear more sophisticated are often still speculating
A simple hedging program will do much to control the considerable oil price risk for both buyers and sellers. Huge multinational fuel suppliers try their luck in the casino of bunker prices on a daily basis, using, in the worst-case scenario non-existent hedging strategies. Even those that appear more sophisticated are often still speculating.
On the ship owning side, very few companies are active in oil price risk management, with hedging decisions, if any, being left to financial managers, who know little of the markets in which they are trying to hedge. The process is flawed, but there is considerable expertise available. If OW Bunker's collapse taught the industry one thing it is that uncontrolled oil price risk will ultimately be catastrophic.
Despite the well-documented concerns at both a media and regulatory level, there are still buyers who procure fuel without testing it at the point of delivery. Considering that those physical suppliers, which espouse professionalism, do not buy fuel without testing it first, it is extraordinary that some ship owners do not?
many of the worst claims incidents come from the most "reliable" sourcing
Some will depend on supplier tank analysis to check quality, but there are plenty of ways that the fuel can change before it is pumped onto the vessel. Some will not test because they always buy from the same "safe" refiner or supplier, and there have never been problems.
The nature of the industry is that all refineries have problems at some time, and many of the worst claims incidents come from the most "reliable" sourcing. Testing and pre-testing every bunker will considerably reduce the risk of low quality and non-compliant fuel.
At their core most fuel suppliers are classic industrial marketing companies. Many do not have a positive view of their customers. Many do not even really know who their final customers are.
customers are acquired by accident rather than through a targeted approach and with a view to securing long-term relationships
The sell side of the industry shows a considerable lack of sophistication when it comes to simple principles of business development, marketing, sales channel analysis, customer segmentation, key account management and CRM systems that drive relationships and engagement.
Selling is done in a sporadic, non-strategic way, where often, customers are acquired by accident rather than through a targeted approach and with a view to securing long-term relationships and partnerships. As well as being strategically naive, commercially, it often results in margin being eroded due to poorly chosen channels.
Most independent fuel suppliers are new companies, many first generation, some early second. They have come recently to the industry and have been lucky to benefit as it has grown, owing some of their success to timing. Every business and supply port has a life and competitive cycle, the concept and timings of which needs to be recognised. Independent fuel suppliers often ignore these cycles, the casualties of which have been well documented.
To survive, independents need to analyze and plan strategically, such as whether they supply in a single port, or multiple locations. They need to evaluate the market's current dynamic, how far along the cycle they are, analyzing the opportunities that exist in order to create a way forward that ensures successful growth and expansion.
Do shipowners and buyers have the right purchasing strategy? While many experienced professionals are involved in procuring marine fuels, for some it is still conducted in a non-strategic and sporadic way.
few go into the detailed evaluation that is required to optimize purchasing
For example, few go into the detailed evaluation that is required to optimize purchasing based on a ship-by-ship basis within their fleets. They negate the opportunity to optimize the purchasing channels and value of each fuel that is offered.
In today's increasingly complex regulatory environment, well thought out decision making is required and an extra level of analysis is needed. Fuel suppliers have a central role in helping them achieve this, but do they have the consultancy capabilities to provide it?
Terms and Conditions:
One of the great lessons learned from the OW Bunker collapse was how important the agreed Terms and Conditions of sale are. Terms that suppliers thought would protect their payments against any eventuality were suddenly rendered useless, and terms that shipowners accepted or even pre-negotiated with suppliers were equally as flawed. Both suppliers and buyers need to work on establishing terms and conditions that protect both parties, because, as is evident now, at some point, they will be required.
With low fuel and oil prices, some see value in retracing the recent steps that have been taken to professionalize the industry
There are many more areas where the companies on both the sell and buy side in the marine fuel transaction chain need to raise their game. The fuel supply industry is in transition from well meaning amateurism to the maturity demanded of professionals. It's not there yet, relying too much on luck that will eventually turn against it. Clearly it is still a troubled and volatile business environment to operate in, with low freight rates, low margins, and increasing financial and regulatory risk. Unfortunately, this is not an excuse for businesses that are not fit for purpose to succeed in this new and changing commercial environment. With low fuel and oil prices, some see value in retracing the recent steps that have been taken to professionalize the industry. Decision making like this will only create one outcome; failure.