I have been thinking in recent weeks about one aspect of IMO2020 which gets hidden amongst the endless discussion of availability, specifications and price. The issue of additional credit for those vessels burning compliant fuel is I believe one of the key elements of forward planning.
When the last serious market disruption happened with the OW collapse credit continued to be available due to falling crude prices. This was coupled with a change in market sentiment with suppliers scrutinising the supply chain more closely, working diligently to increase banking lines and taking credit insurance out.
We are now faced with a different potential market disruption with a potential rise of 50-60% in price due to legislative measures and the corresponding additional credit needed by owners. This is without factoring in any potential crude price spikes.
As such NSI have been focussing on a new type of contract for the market- an 'NSI credit block agreement'. It is a brand new way of looking at contract structuring and has been born out of discussing why owners are not contracting in great numbers for IMO2020. The logical reasons are:
Pricing currently is opaque
Specifications are largely unpublished
Availabilities are not yet declared
The one undisputable fact is everyone is going to need more credit.
The NSI Credit Block Agreement uses a matrix:
20,000mt per month 30/45 days credit
10,000mt per month basis 30/45 days credit
5,000mt per month basis 30/45 days credit
The differing volumes correspond to a different cost per MT for the provision of credit facilities.
The minimum tern is 12 months. The buyer is contracted to lift certain volumes and the margin is transparent i.e. suppliers invoice would be available if requested. NSI would fix the supply side and provide complete transparency as per our usual business model.
What differentiates this structure and makes sense for the buyer is as part of the terms of the contract the buyer can lift:
Any underlift on the monthly contract would be invoiced for the agreed margin $x multiplied by the number of MT.
The key is the owner is able to guarantee the availability of additional credit facilities in advance of IMO2020. Secondly, they can be sure the pricing is at 'market level' and completely transparent.
It allows management to say we have a plan and the credit is in place. This should in turn have a positive effect on financing arrangements and/or shareholder relationships.