INSIGHT: Are We About to Hit an Alternative Credit Squeeze?

by Paul Hardy, NSI
Thursday December 7, 2023

We are faced with two potential credit issues as we enter the new year.

The first is shipping's inclusion in the EU-ETS. There are, of course, many specialised companies set up to trade EUAs. Most are used to dealing with large and transparent counterparties.

The vast majority of these companies will not be used to evaluating the complex and opaque structures of many shipping companies. As industry participants, we of course know and can judge with help of the credit reporting agencies which companies are higher-risk, but for these new market entrants then it will seem that there is a blanket of high-risk transactions which they will be unable to cover.

Of course, a lot of this gap will be taken up by the large trading houses, and it will be a welcome new source of income.

The issue will come with margin in what is a transparent market structure. My guess is some will be willing to do at relatively low margin, as they avoid the delivery risk and claims of conventional bunker transactions.

That said, many will be opening accounts in this sphere for the first time, so the owner that leaves it until late will most likely struggle for credit or pay a premium.

The interesting thing will be to see if this is a driver to greater transparency across the industry or business as usual.


Secondly, we are seeing a growth in biofuels supply.

This will inevitably attract cargo suppliers previously focused on inland supplies to larger, and -- you guessed it -- more transparent companies.

The lure of marine volume will be too much for some but, I believe, the thought of operating barges, sourcing conventional fuels to blend and manage credit exposure will prove too much for most.

Instead, I see a proliferation in ex-wharf cargo sales in small lots of 500-2,000 mt in the main hubs to independents, coupled with more integrated strategies by the major suppliers.

Again though, credit remains a barrier to entry for many of these new suppliers.

So what does this mean?

Essentially the largest players in our industry are in a very good position to retain their positions with right management and strategy. The economies of scale and existing credit facilities will help drive the business for these new revenue streams.

So what can we do as a broker?

Firstly, it is to remain market-neutral. As with all future fuels and business streams, we act as a filter for our owners matching buyers and sellers whose interests are aligned.

If you want to put together an ETS strategy, it is a case of finding the right counterparties at the right price, dependent upon your existing company structure and cash flow.

For biofuels it is helping those inland suppliers understand more about the marine space and to introduce them to existing players -- which we are already doing.

Our advice to our owners, though, is clear; plan early and be as transparent with new market entrants as possible.

Supply of both ETS credit and biofuels may well be constrained, and a good broker can help you find the best counterparties for you.