Adrian Tolson, Senior Partner at 20|20 Marine Energy
The reality is that 2016 should have been a positive and progressive year for fuel suppliers. This is a fairly controversial statement, given the sentiment of the majority of industry opinion formers throughout the year, and significant consolidation that we are now seeing. However, when you consider the evolution of bunker prices over the past 12 months, there are questions to be answered as to why there are not more companies - especially physical suppliers – celebrating a successful 2016.
On 4th January 2016, the first day of bunker price reporting, Rotterdam 380cst bunkers were selling at $137/metric ton delivered. By 19th January 2016 they had dropped to $103/metric ton delivered. During the next 11 months Rotterdam bunker prices have risen to over $300/metric ton delivered; a tripling of prices and an average gain of over $18 per month! In the old school optics of physical suppliers 2016 should have been one of those great years that you only really dream about. So why does it appear that physical suppliers are not making money?
In the old school optics of physical suppliers 2016 should have been one of those great years that you only really dream about.
Firstly, some suppliers will have made money, but the market tends not to talk about them; the negative stories of cost cutting, downsizing and corporate Armageddon make for far more interesting reading, and bar-stool conversations on the conference circuit.
So what are the reasons for the lack of success?
Currently, there are physical suppliers – mostly smaller companies – that do not hedge and will have done well with a simple flat price long strategy. However, the reality is that today, most physical suppliers do hedge. In fact, after two years of falling markets in 2014 and 2015, and the lessons learned from the OW Bunker collapse, it would be hard to find a serious, and responsible physical supplier that does not hedge. The problem with this strategy though, is that in a rising market, the upside will always be limited for a supplier, just as the opposite hedging strategy in a falling market will limit the downside. Combine this with un-hedged suppliers selling every time prices rise, in conjunction with a general heightened level of competition, and suppliers' margins have tightened or disappeared.
Suffice to say, no one is making money in Houston
For those who have doubts over, consider this: bunker prices for 380cst in Houston for the whole of 2016 have traded at more than one dollar per barrel ($6-7/mt) below the wholesale purchase price of that product. Suffice to say, no one is making money in Houston, even if they're un-hedged, and now we hear the rumours of layoffs and downsizing. This is not a unique pattern, with similar unpromising economics being reproduced all over the world.
So what does 2017 hold? Well, increased OPEC accord and a pro-fossil fuels US administration may keep the oil price rally going, although it is unlikely to reach the multiples of 2016. Will this help margins pick up? Nothing from 2016 would lead you to this conclusion, and it would be a brave supplier who would take more flat price risk given the unpredictability of the markets. 2016 bunker financials are already generating rationalisation and therefore less competition in the industry, which will hopefully lead to overall improved margins. However it could be unrealistic for physical suppliers under intense pressure to depend on this dramatic a shift in margins to generate profit.
It is sad to continually repeat the statement that main bunkering port independent physical suppliers are dying out, but, unfortunately, slowly they are
It does, unfortunately, seem that the specialist physical bunker suppliers are being further squeezed out of the major bunker markets, reduced to the role of credit facilitators or logistics providers. Growing suppliers, mostly commodity traders, are those with a global sourcing system that can operate in a new world of bunker economics. It is sad to continually repeat the statement that main bunkering port independent physical suppliers are dying out, but, unfortunately, slowly they are. 2017 (as we saw in 2016) is unlikely to provide contrarian evidence to make anyone change their minds on this.
So what should physical suppliers do to mitigate the risks of this changing dynamic, and seize the opportunities that are available?
Firstly, it is important to stay away from supply in the major bunkering ports, unless there is a specific niche opportunity or there is a desire to run a logistics operation that is more focused on barging rather than bunkering economics. This has actually been a key message for almost a decade, but poor performance is only now being fully recognized. Many suppliers have fallen into the trap of blaming the "competition's crazy prices" or "traders driving down the market" for underperformance. The reality is that suppliers' own limitations have been exposed. Physical suppliers should leave the major ports for the refiners, cargo traders and those who have an obvious competitive advantage; let them work about focusing on fuel cost minimisation, and shaving margins to a point where only the best blenders and cargo sourcers can make money.
The growing concentration of bunker supply in major bunkering hubs is a trend already seen that will increase as we move into a post 2020 supply environment
Instead, physical suppliers should concentrate on supply locations that provide them with a true return for their expertise and the genuine value that they provide. This does not mean just searching for supply locations that provide the "Holy Grail" of a profitable niche opportunity; something many spend too much time looking for. Rather, they should look to capitalise on supply operations that are too small or logistically too complex for a cargo trader, where the logistical component and logistical margin exceeds the benefits of fuel cost minimisation.
It is likely that this kind of opportunity will grow, rather than minimise. The growing concentration of bunker supply in major bunkering hubs is a trend already seen that will increase as we move into a post 2020 supply environment. Supply locations that lose volume to this trend, and those that have trouble meeting 2020 supply specifications, will likely become ideal supply locations for the physical specialist. In certain cases these locations mat comprise some of the former large supply locations of the pre-2020 world.
Rationalisation is the by-word in today's bunkering industry and major physical suppliers just like major bunker traders will have to get used to this. Traders are seeing their share of the market shrink and physical suppliers are seeing their supply volumes erode as they rationalise away from the low margin bigger supply locations. The trick for independent physical suppliers will be to ensure that they have the expertise and flexibility to recognise and then quickly move into the smaller higher margin markets. Those that do will reap the rewards.