Credit has become the taboo topic of the bunker industry since the announcement by the International Maritime Organization that a 0.5% global marine sulfur cap will be introduced from January 1, 2020.
After running on easy credit from the banks, as purchases are typically paid for several weeks after delivery, credit lines will need to be increased significantly once the majority of shipowners have to stump up extra cash for pricier, cleaner fuels. But that could test this relationshipdriven bunker business to the limit as financing options dwindle. Bunker buying is typically conducted on an open credit basis, and buyers with limited credit lines will struggle to open letters of credit and will need a trading house with risk appetite to shoulder the financial risk. This will be a real push for smaller outfits which could be squeezed out of the market and may see the industry undergo a wave of consolidations.
The financial struggle of international physical supplier Aegean Marine Petroleum provides a timely reminder of what may come. Aegean, one of the world’s largest bunker suppliers, said it may have to write off $200 million of accounts receivable earlier this year and was downgraded by Platts marine division Ocean Intelligence as a result. What followed was a $1 billion financing agreement with energy trading group Mercuria which gave the trader a large stake in its future and is seen as an opportunity for the New-York listed company to revitalize its fortunes. Ultimately we could see a stronger industry with a more stable cash flow upon the implementation of the sulfur cap as the increased costs create its own set of winners and losers amid the increased consolidation and reduced competition in the industry.
Take for instance a voyage for an 18,000 TEU vessel from North Asia to the UK at 17 knots, which would consume roughly 124 mt/day of bunker fuel, at a bunker cost of around $400/FEU. With fuel costs set to soar in 2020, Platts Analytics estimates a spread between 0.5% and 3.5% bunker fuel of $425.00/mt and marine gasoil will likely be around $450/mt above high sulfur fuel oil initially in 2020, before easing over time. That will double the price of fuel and thus the number of existing bunker players are expected to thin as operating costs skyrocket.
Ocean Intelligence’s Jason Silber says that these higher costs will wreak some havoc as the price of bunkers accounts for around 60-70% of operating expenses and raises the question as to where the extra financing will come from. Certainly some of the bigger operators in the industry are playing down the issue and it would appear that it’s the smaller operators that may suffer the most, even if some will have greater flexibility and others may benefit where they dominate supply in small ports.
Bunker buyers are typically offered credit lines up to a certain limit and sellers are unlikely to increase these limits purely because fuel prices have increased. Nonetheless this year some bunker suppliers have been jolted by the high freight rates and the Aegean scare and have reduced credit lines to between 14 and 21 days to minimize risk. These events could well be a harbinger of what is in store after the 2020 fallout.
Source: S&P Global Platts (Eleni Pittalis, Associate Editor, EMEA Fuel Oil)