Inside Opinion: Are Bunker Companies Adding in a Bad Debt Premium into Bunker Prices?

A friend of mine asked me recently a rather interesting question. In the current bad debt risk climate, are bunker companies adding in a bad debt premium into the their cost calculations which may be pushing up prices artificially?

It's an interesting question. As we know, most (but not all) bunker companies insure their credit risk so there is a buffer right there. Credit insurance is of course costing more and more these days as defaults take their toll, and insurers are pressured not to drop levels of cover due to the highly competitive nature of that industry.

In an ideal world we could charge more for stems to riskier customers but in reality that is not possible. Even the very risky customers are often quite competitive and to get the stem you usually have to be pretty punchy on price, because it feels like there is always someone willing to do it for a lower margin.

The real profit is made where you have some leverage - you have a supply position in physical ports or can offer LSFO in ports where others cannot, for example. The cutthroat nature of the markets means that we simply cannot charge more in line with conventional economic thinking. So the short answer is no.

But the bunker companies have ways of mitigating risk that do indeed cost money. One is to build a large working capital cushion for a rainy day. Another is to invest heavily in a credit management team. Both are eye-wateringly expensive and so are built up gradually, as profits are realised over the years.

The thinking is that once these items are in place, and for some backed up by cover from the credit insurers, the risk profile is mitigated. The price per tonne is not affected really because it is so market linked. The investment in a credit team and a capital cushion is merely regarded (by most) as the cost of continuing to do business.

The only way an increased credit cost environment affects the end user price per tonne is where some bunker companies work out every year or so exactly what it costs them to do a deal. This includes back offce costs, operating fees, bank fees where applicable and of course, credit costs.

Some of you may be surprised to know that this so-called "invoice cost" runs into thousands of dollars. Which is why it is hard to find anyone willing to do a couple of hundred tonnes of IFO for example, in a very competitive port where there is a high degree of price transparency, for one dollar per tonne margin. It just doesn't make sense.

Other bunker companies take a sunk view on these costs and are more willing to do this sort of business than others, it largely depends on the mentality of how the business is run.

So there you have it. The long and the short answer.