Bunker Buyers Are More Aware of the "Hidden" Risks of Undercapitalized Suppliers: WFS

Balancing the risks presented by different players is not always straight forward.

Over the last 18 months, bunker buyers have developed a better appreciation of the risks in dealing with an undercapitalized supplier, according to World Fuel Services (WFS) chairman and CEO Michael J. Kasbar.

"These risks often remain hidden until an economic downturn exposes them as has the recent shock to the oil markets," he said during the company's recent earnings call.

The 2014 collapse of oil prices has seen bunker prices sink to their lowest in over a decade, with major ports such as Singapore, Rotterdam, Houston, and Fujairah all witnessing IFO380 prices fall from $600+ per metric tonne (pmt) as recently as July 2014, to under $150 pmt in recent months.

Not only has this enabled smaller players access to much larger volumes of product than their credit lines would previously have provided, the resulting increase in competition has been a significant contributor to tightened margins.

As Aegean Marine Petroleum Network Inc. [NYSE: ANW] (Aegean) President E. Nikolas Tavlarios noted last year during an earnings call, the sustained low pricing had enabled competitors to "aggressively offer incremental sales that will always be beyond their credit capacity" that had created "a tighter margin environment that has made an impact across the industry."

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Widely reported financial troubles across dry bulk and, to a lesser extent, container markets means that in conjunction with low margins and increased competition, suppliers are having to deal with an ever more complicated credit picture.

Indeed, a number of players have told Ship & Bunker that credit terms, rather than price, is increasingly becoming the deciding factor in who buyers get their bunkers from, with the increase in competition meaning some players are being encouraged to push out those terms, potentially beyond their usual comfort levels.

This also seems to have resulted in a growing level of market chatter over players' outstandings, with the recent rumours of supposed difficulties at Bunker Holdings, which the group has heavily denied, a case in point.

Nevertheless, as Adrian Tolson, Senior Partner, 20|20 Marine Energy told Ship & Bunker: "It indicates the pain the industry is feeling and continues to feel, although likely most of this pain is more with the traders and not the physical suppliers."

For its part, Kasbar says that the fact that for 2015 WFS grew its bunker sales almost 27 percent year-on-year is a sign that buyers are turning to those players with the lowest perceived risk.

"While the current fuel price environment lowers the financial barriers to entry into the bunker market we have nonetheless successfully grown our market share over the past year and foreign bunker purchasers have increasingly recognized the value of World Fuel as a preferred financial counterparty capable of insulating their companies from performance and default risk," he said.

The problem, as highlighted to Ship & Bunker, is that it is very difficult to know exactly what the relative risk levels are, and it is certainly not as simple as big player vs a small player, or trader vs physical supplier.

"The reality is some ship owners are in a very bad state, and so traders, along with some physical suppliers, will be teetering on the edge," Tolson told Ship & Bunker.

"Seems to me that caution should be shown all round."