FEATURE: Bunker Industry in State of Uncertainty as Traders Brace for Russia Impact

The bunker industry is in a precarious position at the start of 2022. File Image / Pixabay

The bunker industry is in a precarious position as it grapples with roiling commodity markets in the aftermath of the Russian invasion of Ukraine.

Short-term gains are there to be made in bunker margins as the crisis sends crude prices to levels not seen since the summer of 2008 and freight demand rises, but a host of challenges are around the corner.

Positions at Russian ports will need to be unwound, alternatives to Russian-origin oil will need to be identified, and the long-discussed problem of access to credit will become an unavoidable hurdle as the industry deals in bunkers now priced at record highs.

And all of this comes at a time just after several parts of the industry went for significant expansion last year in the hope of a swift exit from the COVID-19 slump in demand.

Short-Term Margin Gains

Adrian Tolson of consultancy BLUE Insight struck a positive note when asked about the immediate impact. Bunker margins could see significant gains in the wake of the 52% gain in average global VLSFO prices since the end of 2021, he told Ship & Bunker.

"There will be windfall profits for sure, but if you are over-committed into a Russian-influenced port, then this is a problem," he said.

"Shipping should generally benefit, with more tonne-miles to avoid Russian products bringing an increased cost of shipping."

Margins have been under sustained pressure in the bunker industry for several years now. World Fuel Services saw an average margin from its marine business of $1.21/mt in the fourth quarter of 2021, down from averages of $3.21/mt and $3.20/mt in 2020 and 2019, respectively.

But the firm saw a marine profit margin of $6.93/mt in the first quarter of 2020 as the uncertainty of the IMO 2020 transition left shipowners willing to pay more to secure supply, and it might be possible for the instability of the current situation to bring similar, if less pronounced, gains.

Retreat From Russia

The most immediate challenge for the bunker industry is to quietly withdraw from business with Russia. The preliminary stages of this have been happening apace over the past two weeks, with six of the top ten bunker companies listed in Ship & Bunker and SeaCred's report for 2022 now no longer doing business at Russian ports.

The wider problem here will now be for the bunker industry to extricate itself from dealing in oil of Russian origin, as Monjasa has already pledged to do.

"The bigger impact is the loss of fuel oil from Russia," Tolson said.

"This will certainly hit the Great Belt, ARA and Istanbul, and the beneficiaries might be the Mediterranean ports, China, South Korea and the US West Coast."

Russia exports around 7 million barrels/day of crude and refined products, and the bunker market plays an outsized role in that figure. Bunker sales at Russian ports are about 7 million mt/year, but its fuel oil exports appear around the world in larger quantities.

And Russia's crude exports, notably Urals, produce a higher yield of residual fuel oil than other grades, meaning the bunker market will feel their absence more than other products markets as they are replaced with lighter crude blends.

Credit Crunch

Credit is the looming crisis for the bunker industry. The industry now needs working capital to finance $208.3 billion/year of bunker trades, taking the IMO estimate of 2020 global demand and current average prices world prices; a year ago, this figure was $116 billion/year.

The collapses of Hin Leong Trading and GP Global in 2020 left the banking industry less keen on the marine fuels sector, and current prospects for inflation will leave interest rates higher in any case. Credit will be harder to come by.

Market sources told Ship & Bunker this week that some bunker suppliers are cutting payment terms to as little as seven days after delivery, where previously this figure might have been as high as 30 days, and some are switching entirely to cash in advance terms.

"In some markets we are expecting an increased incidence of credit terms being reduced to 7 days as prices surge and ability to fund product shrinks," Paul Hardy, head of business development at brokerage NSI, told Ship & Bunker.

"This will most likely be seen in the high-volume markets.

"The interesting thing to consider medium term is what will happen if interest rates rise around the world.

"Credit will thus become more expensive at a time when available credit shrinks ad prices soar."

BLUE Insight's Tolson suggested the problem would only hit parts of the market.

The larger firms with more solid positions with their lenders may be in a position to take advantage as the smaller players get into difficulties.

"High prices will bring a credit squeeze for some," Tolson said.

"But banks will remain supportive if money is being made."

State of the Industry

The question hanging over bunker traders and suppliers is what overall health the industry is in as it approaches this crisis.

In IP Week meetings last month, mostly preceding the full outbreak of war in Ukraine, several industry sources expressed concerns to Ship & Bunker over the level of expansion the industry had undergone last year.

With worries over COVID-19 fading last year, and the Omicron variant of COVID-19 proving to have a milder-than-expected impact in Europe and the Americas at the end of the year, a wide range of bunker companies expanded in 2020. Several new companies have emerged, new offices and trading units have opened and the hiring market for bunker traders has been unusually active.

Before the current Russian crisis emerged, it looked like not all of these enterprises could prove successful in increasingly hostile credit conditions and with sluggish demand.

The question now will be, can short-term margin gains prop them up for long enough to put them in a steadier position to deal with the long-term challenges?