The trader behind the letter has not revealed his or her identity. File Image / Pixabay
A bunker trader has written an open letter warning that problems are being stored up for the industry by trading firms being forced to accept unsustainably low margins because of this year's drop in demand.
"As I sit watching a number of traders around me apparently failing ... and see the fear in shipowners' eyes facing double-payment jeopardy or, at the very best, a lot of time spent in meetings with their legal department, I can't help but not have the sympathy for shipowners that one may expect," the unnamed market participant wrote last week.
The author of the letter identifies himself or herself only as a bunker trader in a large company.
The COVID-19 pandemic this year and the ensuing economic slump have led to a sustained drop in bunker demand, leaving traders competing ever more aggressively over a shrinking pool of potential spot purchases.
This dynamic has brought about an acute narrowing of bunker margins for traders as they lower prices to continue attracting their customers. The author of the open letter lays some blame at the feet of bunker buyers for pushing for the lowest possible prices.
Anonymous bunker trader
Buyers have driven desperate traders down to margins that just don't make sense.
"Buyers have driven desperate traders down to margins that just don't make sense; levels of $1/mt don't even cover the most basic costs, but traders when forced will take it in the hope that, when that next enquiry comes around, they are the only ones that are still on good terms with the owner and can take advantage," the trader wrote.
"We are seeing traders increasingly not able to pay the supplier until they have been paid by the owner.
"Buyers should take a long look at themselves in the mirror this morning and consider what has been their role in the market decline, and whether they are really protecting their principal's interest in achieving such a low price that comes with the risk of questionable product origin, quality and now double payment."
Am I My Trader's Keeper?
The problem posed by the letter is a complex one -- on a basic level, bunker buyers will primarily be focused on achieving the lowest possible price without worrying about the margins their traders can extract. But they do also need to make sure the companies they deal with are financially stable.
We have seen periods when margins become critically low in response to unfavourable market conditions.
"The bunker industry has typically been a low margin/high turnover business for at least the past two decades," Unni Einemo, director of industry group IBIA, told Ship & Bunker by email Monday.
"It is a competitive market, but we have seen periods when margins become critically low in response to unfavourable market conditions."
Sellers and buyers are both responsible for making sure the market remains fair and sustainable, according to Einemo.
"There are many facets to this, but fundamentally, it boils down to attitudes toward what constitutes an acceptable risk in the way you do business," she said.
"Everyone should ask themselves: how well do you know your counterparties in any transaction, and is this the kind of counterparty you want to do business with?"
Banks Getting Skittish
Paul Hardy, head of business development at brokerage NSI, sees the problem steadily worsening over time.
"My reading is many traders, in order to maintain profitability and volume, are taking on a mixture of very high-volume low-margin business coupled with additional high-margin business based on personal relationships," he told Ship & Bunker.
"Greater benchmarking, KYC and risk assessment by the owner will further diminish the business model over time as the high-margin business disappears and additional pressure is placed on maintaining the heavy lifting business."
Additional strain is being put upon traders by financial institutions, he argued.
There are no winners in a market where a credit squeeze happens.
"Further sustainability is linked to the ability to maintain finance and insurance coverage," Hardy said.
"It is clear with recent market developments post IMO 2020 that banks and insurance companies are falling out of love with the bunker market.
"Everyone should be clear though, there are no winners in a market where a credit squeeze happens.
"A good trader is a very important and necessary participant in the market."
The challenge of low margins for bunker traders is not a new one, but the severity of this year's market conditions could leave a much-changed marine fuels landscape in its wake.
The key to avoiding some of these problems may lie in improved sharing of information between shipowners and traders, according to IBIA's Unni Einemo.
"There should be sufficient transparency in the market for both buyers and sellers to know what constitutes a fair price for the relevant quality and quantity of a bunker stem," she said.
"Accepting anything less won't benefit anyone in the long run."