The Changing Nature of Benchmarking

Paul Hardy, NSI. Image Credit: NSI

Over the last decade as prices became more transparent benchmarking of bunker buyers and brokers performance was a relatively simple task. For the most part the focus has been on the discount achieved to particular indexes whether it is Platts / Ship & Bunker / Clearview or others. Secondly, the timing of the enquiry in the market has been monitored along with claims ratios/operational performance of particular suppliers.

IMO2020 will throw away the rule book when it comes to benchmarking. Firstly, prices will become more opaque. We have recently seen the first attempt at pegging 0.5% Sulphur fuel oil prices by Petroleum Argus whose methodology is an arbitrary blending formula. They should be commended for attempting to bring some clarity but, we all know depending on the blending components the pricing is anything but linear for future 0.5% Sulphur product.

Availability is the elephant in the room. I have written extensively about this over the past 12 months but it remains the biggest challenge. We move from a market where the products people want to buy are by and large readily available, to one where only those with a heavily detailed plan can be sure they can buy what they want.

The status quo which has seen a race to the bottom in terms of securing low price HSFO whilst maintaining service and quality at acceptable levels is no longer viable. The issue becomes more one of logistics and how you control the flow of a scarce resource from the refinery to the owner's vessel. It is clear from discussions with owners that many have not fully grasped this challenge. One that has is Maersk and their taking of storage to enable the smooth logistical flow must be commended. I made a speech at the Baltic Exchange in February in which I tongue in cheek summarized the best thing a ship owner could do was invest in bunker barges. Whilst it was a throw away line the point was 'those in control of the logistics will be in control of the market'.

Coming back to benchmarking I will pose a question for post IMO2020 buyers and brokers. Who has done a better job?

1. A buyer who has secured all product at $3.00pmt under the benchmark pricing but has only lifted 70% LSFO 0.5% and the rest MGO
2. A buyer who has bought 90% LSFO 0.5% but has averaged $2.00pmt over the benchmark.

On the quality/compatibility side:

1. A buyer who has bought $3.00pmt under the benchmark pricing but has received a number of compatibility issues.
2. A buyer who has bough $2.00pmt over the benchmark but reduced compatibility issues to a minimum.

On the jurisdiction side:

1. A buyer who has bought $3.00pmt under the market but only 60% of volume in the main bunker hubs.
2. A buyer who has bought $2.00pmt over the market but 85% in main bunker hubs.

Lastly, a buyer with vessels fitted with scrubbers:

1. A buyer who has contracted volume in advance and secured the product at a premium over the spot market.
2. A buyer who has beaten the benchmark on the spot but has had to buy MGO for 20% of liftings.

Of course we all hope to both secure the product and beat the market but it might not necessarily be possible or even preferable in certain circumstances. 

The question is what does success look like? It is clear it will be a combination of operational planning to make sure tanks are empty, avoid comingling risks whilst maximising liftings in the right port. This coupled with securing product in key locations under contract, ability to hedge such contracts and optimising use of working capital will all become more important.

The question is, as market participants what can we do to plan and optimize bunker strategy? At NSI our whole strategy over the last 12 months has been to plan for the change in market conditions and we have invested time, money and effort in our www.2020planning.com platform. We have also analyzed where our weaknesses are in the changing environment and hired people who have the skills to raise our game. Most notably, the recent employment of Mike Donaldson-Badger from BP Shipping and opening of our Dubai office. His skills are both as an expert in planning and operations as well as an in depth knowledge of the supply chain. Please contact mike@nauticalsupply.co.uk to discuss operational planning and individual vessel strategies for IMO2020.

I believe we are best positioned to guide our clients in the future market having a unique logistical overview, experience in planning and operations, expertise in contract structuring and hedging and a highly skilled and extensive broking resource.