2020: The New Golden Age of Broking?

by Paul Hardy, NSI
Friday October 13, 2017

2020 ushers in a new dawn of three tier products and multiple tier pricing. For the buyer this creates a three fold problem. Firstly, how do I source  low sulphur fuel oil instead of more expensive distillate? Secondly, how do I wade through the due diligence and compliance issues the change in legislation throws up? Lastly, if I have fitted scrubbers will avails of HSFO be constant and prices stable? This perfect storm makes the need for a broker ever more pertinent.

If I am a supplier with limited avails of low sulphur fuel oil who do I most want to sell to? The answer is obvious, either to owners or to super traders (who can aggregate volume). The losers - small and medium traders. Why would a supplier give away profit margin of a scarce commodity without volume/security of payment? A brokers role will be to maximise the owners footprint in the market and to obtain the 'good stuff'.  A large broker with direct volume will become very attractive for a supplier.

Within the broking market there are also two tiers. There are a number of small companies who work with a small portfolio of clients doing what is essentially 'finance broking'. There are then the larger broking houses which work on structuring contracts and savvy spot market purchases for blue chip ship owners. The large broking houses with the better portfolios should in my opinion thrive and the smaller ones struggle to find credit for their clients due to large price hikes.

In terms of work load our jobs will become more complex and time consuming. This is due to the due diligence and compliance side of the business. We are in the perfect position as a market neutral entity to evaluate on behalf of an owner/charterer the supply options open to them as 2020 approaches. This means we in turn need to forward plan and discuss cargo purchasing options, infrastructure planning, quality etc with our supply partners.

Pricing is going to be the largest headache. For a number of years we have had a period of relatively transparent prices. 2020 will make this pricing once again more opaque due to the different blends/avails of low sulphur fuel oil.

On the one hand it makes sense to sign long term contracts in advance to secure supply. On the flip side how do you judge whether the pricing is competitive when there is limited information to compare with? This again is an area where a broker can help by finding out the 'true economy' of low sulphur fuel oil. We can also help with contract structures that will allow fixing prices a number of months in advance taking away uncertainty from the client.

In summary, my reading is those companies with the strongest portfolio of blue chips will thrive under the new conditions. I see though a more bleak outlook for the smaller trader 'financiers' who will be faced with an increased need of internal funding and higher credit exposure.

A good small broker can do a worthwhile job for their owners by finding the necessary credit for them. A good large broker should see an increased need for their services providing they have done the necessary due diligence in advance of 2020. The first 12 months after 2020 might well also see a shift from spot to contract for the large lifters and will be down to the expertise of those designing the structures as to their success.