Industry Insight: Is It Better to Buy Bunkers Spot or on Contract?

Id it better to buy bunkers spot or on contract? File Image / Pixabay

Bunker buyers often debate on the best way to buy their fuel. Is spot better, open to the crazy spikes we sometimes see when there are supply shortages or credit squeezes? Or is it better to play it safe with a contract, potentially losing out on gains if premiums drop?

Below we explore the pros and cons of each method to help you better make a decision.

Spot Purchasing

This is the most common form of bunker purchasing. We estimate that 89% of all bunker stems are done on a spot basis. If you are unsure of where you may need to bunker (e.g. you don't have regular routes) this is the safe way to go. However there are risks.

Failure to know a particular market well means suppliers may try and overcharge you for the fuel. Additionally, tight availability in a port can increase premiums dramatically. Not to mention that industry shocks can spook the market and raise prices for everyone (in 2014 when OW Bunker went bust, premiums in Singapore rose by over $20/mt in the space of a day).

If you are buying spot bunkers, we strongly suggest using a transparent broker who can help with specific information in each port. We also advise buyers to nominate vessels well in advance (normally 7 working days) in order to avoid higher prices due to lack of availability and to have a full range of suppliers to choose from.

Buying on Contract

This is an option favoured by bunker buyers who don't want to risk the daily fluctuations of the spot market and purchase enough volume to negotiate themselves a good premium over Platts for up to 6 months. It is often used by liner services who lift in the same ports continuously and with a predictable schedule.

The advantages are: time saved on negotiating every stem; avoid paying higher premiums if the market has a shortage; a guarantee of supply.

The disadvantages are: you will be tied to one supplier so any disputes can turn the deal sour; you won't take advantage of a drop in spot premiums; you typically have to nominate in good time so if you aren't sure of the vessel till late, your supplier may have the right to charge you a high spot price instead of the contract level.

Before entering into a bunker supply contract, consider three questions:

1. How long do you want the contract to last
2. Are you able to commit to the volume in a specific port
3. Are you happy to purchase at a price formula that may deviate considerably from the spot price?

How long do you want the contract to last?
This depends on the reason for the contract. If you have a certain voyage you need to make repeatedly, it might make sense to smooth out the spikes in the spot price and enter into a contract. Often suppliers won't want to sign a contract for more than 6 months, as they are exposing themselves to an increase in spot premiums. If you need a contract for longer (some container lines buy on contracts for up to 10 years), its normal to renew the price every 6 months but keep all other terms the same.

Can you commit to the volume?
Most suppliers will insist on minimum volume commitments for a contract, as giving a zero volume commitment is just a free option for the buyer (e.g. when spot premiums rise, they use the contract and when spot premiums drop, they buy on spot). If you are getting zero volume commitments for an extended period (up to 6 months), beware that this might be because the price formula is too high. You should double check market levels with your broker to ensure you're getting the best price.

Buying off a price formula
Before negotiating anything, you should check all your historical buying levels in that port and compare them to the historical Platts prices. Although this might mean digging out a lot of historical data, it will give you a great indication of where your spot buying has been and which way (if any) the market is trending. Clients of BunkerEx (www.bunker-ex.com) get this analysis on their buying free-of-charge, every few weeks.
Having done this, you now have a good indication of your number to beat. For example, if your historic spot price in Rotterdam works out to "Platts 3.5% Rotterdam Barges + £2.50/mt", then you know any contract below this level is probably a good deal for you in the long run.

What to benchmark against

For the major ports, there are two main choices of what to use to benchmark your contract price formula: the main swap price or the Bunkerwire quote (e.g. MOPS 380cst or Singapore Bunkerwire. Both are Platt's quotes, but are very different).
We suggest using the main swap price, as Bunkerwire quotes can endure wild swings and large spikes. Underlying swap levels have far greater liquidity and so tend to be less volatile. Additionally, most of your suppliers will probably be purchasing their supply using the main swap quote, so can give you a more competitive level as there is no need to build in any risk premium for themselves. Lastly, if you are looking to hedge your contract into a fixed price, using the underlying swap will give you a much better correlation.

Other ways to buy

It is also possible to purchase on a fixed price contract, however as there are so many considerations with this we will cover it in a separate article.

If you would like any specialised advice or help on any of the above buying methods (spot, contract or fixed price), please get in touch with us and one of our experienced brokers will be happy to help. Visit us at www.bunker-ex.com or email us at brokers@bunker-ex.com.