Ignorance About the Difference Between Brokers, Traders and Physicals is Pervasive - Using a Broker Reduces Risk

Marisa Femenia, CEO, LQM Petroleum Services

The fact that many experienced people in the market are still confused about the difference between a broker and a trader/supplier is shocking and risky. 

Why are people still confused?  The answer is simple: some traders and hybrid trader-suppliers have tried to conflate the two in order to give themselves optionality to broker one day, trade or advertise as a physical supplier the next.  In this complex and crowded market, customers' lack of knowledge introduces risk into their buying.  This is where a broker can help.

Brokerage is not a new or complicated model.  It has existed for thousands of years because it efficiently provides a function that adds value to buyers and sellers who may often have competing objectives – but need each other.  The objective of this article is to clarify the difference between a broker, trader and physical, and illustrate how common business sense should be applied to marine fuel purchase.  Leveraging low cost specialists, such as brokers, helps both buyers and sellers focus on their core businesses to better effect, with a great deal of visibility and low risk.

First things first – what is a broker and what is a trader

Brokers bring together buyers and sellers, negotiate, fill key gaps in information and facilitate seamless operations – providing service to the vessel from inquiry through post-delivery.  No credit risk is taken, no fuel is bought and re-sold.   How do you know you are being brokered? 

• You never get an invoice from the broker, only from the physical supplier/seller
• You have no financial obligation to the broker
• If the broker goes out of business there is no impact to you financially or legally
• Your broker informs you about physical suppliers and sellers, and helps you establish credit
• Information is the currency and the value of the broker – a good customer is well educated – which is why most of our customers are active, savvy players in international shipping

Traders by definition buy and re-sell, adding margin to compensate for credit risk, country risk, or to profit on the sale of contract barrels.  This is a value-added service but it is very different from a broker model.  If a company sends you an invoice and the name of the delivery company on the BDR/BDN is different from their name – you are being traded! 

The point is: Know Your Counterparty.  Understand how you are buying and from whom.  Counterparty selection should be based on experience, knowledge of how a company is managed, how they operate and finance themselves – this is the very information brokers can provide.

Why brokerage is the right solution in today's market: transparency and specialized service

Transparency benefits buyers.  Many buyers wrongly assumed they were "safe" because they were buying from a large hybrid trader/physical supplier prior to OW's collapse in 2014, and Bunkers International in 2015. 

In retrospect, these companies had significant deficiencies in their risk management policies, business approaches and financing.  All notions of safety have been shaken.  Now more than ever, real information and expert perspective has tangible monetary value, especially when it is coming from a market-neutral broker whose incentives are aligned with yours. 

Furthermore, as the world is becoming increasingly specialized, brokers perfectly fill the growing need to outsource in order to buy cheaply, intelligently and with low risk.  We aggregate volume and knowledge and evaluate suppliers' reliability, fuel quality and flexibility in order to inform our clients.  Likewise, suppliers gain candid feedback on competitors in the market, and reliable commentary on a buyer's activity and relations with other counterparties.  This level of knowledge and access is difficult to replicate in-house since few companies in the world handle the breadth of coverage and scale that a broker handles. 

The illusion of cost savings in cutting out the broker

When markets are weak, cutting out the broker can appear to be a boost to the bottom line.  Even the most simplistic thinker can multiply the standard broker commission of $1.00/mt times their tonnage and derive a savings.  But at what cost?  Like anything that sounds too good to be true, this assumption has many flaws. 

Most industries outsource specialized functions to experts who do it faster, better and cheaper, creating leaner organizations.  No company can do everything well; the building, training and developing of a team of specialized in-house buyers can be time-consuming and expensive.  Many in-house buyers have other tasks, and struggle to keep the focus and pace in their purchases across all time zones. 

On a subtler note, negotiating with suppliers is easier when a broker in-between handles conflict and facilitates long-term good relations.  Brokers can also be held accountable for Key Performance Indicators more easily than a co-worker who sits next to you every day – there doesn't have to be a political slant to every question.  As a result, pricing will be better over time via a broker.  The ability of a specialist to excel is clear in all areas of our life: for example, more money can be saved using a professional accountant versus trying to learn all the new tax rules every year and risking paying more because one "didn't know what one didn't know".

In closing, brokers are more equipped than ever before to service the varied needs of customers.  As with any down-cycle, we have evolved to be smarter, more efficient, more enabled with technology and more focused on transparency, accountability and service.  The value proposition is there.

With information comes choices.  Many ship owners would be well advised to check if their bunker buyers or operators know how they are buying, and who they are really buying from.  Many do not.  This means there is an opportunity to buy smarter and safer with a broker intermediary – buying without all the facts can be a costly alternative.