Bunker traders and dry bulk operators: a critical partnership facing increasing risks…

The last 12 months have flown by, and while shipping has continued to find workarounds to mitigate the increasingly significant external pressures faced, there has been a definite shift in the focus of risk managers.

 

It could be argued that, as of 1Q 2024, credit risk pressures were alleviated to an extent by strong conditions in all segments, while the premiums for taking on compliance risk within the bunkering sector had largely normalised.

 

While the compliance market is now waiting with bated breath for impacts from President Trump’s strategising in this area, credit risk, on the other hand, has come under renewed focus, with a wide range of sectors showing extended receivable days, and counterparty defaults and fraud reported by even the largest traders.

 

While larger scale players have robust balance sheets to fall back on, smaller operators in certain segments have experienced a more challenging period. Dry Bulk operators in particular have experienced a volatile few years, enjoying a post-Covid boom bringing significant profits, expansion headcount and charter obligations (particularly with regard to long-term Japanese tonnage), and sizeable dividends. A number of new companies have also entered the market, financed by investors keen to benefit from the exceptional returns.

 

This boom has been followed by a period of almost consistently falling rates since 1Q 2022, with the market in 2023/2024 undermined by unexpected volatility such as the Red Sea and Panama Canal restrictions, and a weak northern hemisphere grain season. Margins fell throughout this period for many, as operators pivoted to more conservative strategies while simultaneously preparing for other liquidity demands such as EU-ETS. This prompted reductions in fleets and headcounts, and the search for alternative forms of liquidity, including receivables financing, private equity, and, via the bunker sector in particular, supplier credit. However, some operators have struggled to adapt their cost base and portfolios to this market, and have opted for more drastic measures, such as default.

 

 

Throughout this period, the dry bulk operators have seen their cash flow supported through credit offered by the Bunker sector. The latter sector has enjoyed a similar trajectory, albeit slightly delayed, with a boom year in 2022, followed by compliance-related contraction and expansion, and a series of new traders and suppliers entering the market.

 

A gradual return to historical bunkering margins for many in 2023 was followed by a flatter, less volatile oil trading environment, with weak demand from a relatively liquid client base exacerbated by a higher level of competition from newer players with often lower operating and finance costs. While certain traders have looked to cut costs, our research suggests that others have become more aggressive with terms and pricing in order to maintain revenues and market share. Half-year financial filings suggest gross margins fell further still in 2024, to closer to 2%, with discussions with our sources and clients during IE Week suggesting little respite has been seen so far in 2025.

 

 

Operators and bunker traders share some similarities. Both are liquidity dependent, asset light, and personality driven businesses used to working around a thin margin. However, we can say that gross margins in the bunker sector have dipped below the median we have traced, and while bunker traders have always allocated a portion of their portfolio to higher risk/higher reward clients, this has been balanced by demand from higher credit quality, higher volume, buyers that, despite their thinner margins, helped with inventory strategies, balancing debtor books, financing and insurance terms etc. What happens when those dependable accounts are so liquid and competitive that the premium they pay to cover credit risk, reliability, prompt availability and quality isn’t enough to keep the lights on? Are traders left with a focus on extending credit to higher risk entities?

 

Certainly there is strong anecdotal evidence that the search for margins and volume appears to have prompted something of a relaxation of credit terms, with our research suggesting a greater prevalence of 60 to 90-day terms being extended to operators who may have been considered higher risk. While potentially beneficial to both parties, such terms can tie up working capital and can give less warning of an impending default as operators seek similar terms elsewhere.

 

While the bunker sector has, with a few notable exceptions, avoided significant defaults, the same clearly cannot be said for dry bulk operators. Given this, any increasing reliance on one sector by the other warrants monitoring. The bunker sector can, in some cases, fall back on credit insurance, and the backstop of ship arrest, but there are wide variations in the ability and willingness of market players to insure default risks and absorb the associated costs, whether they be legal, financial, opportunity, or relationships, when margins are so slim.

 

So what can traders do to navigate the increasing risk presented by these prevailing dynamics?

 

KYC: Clearly not all operators and bunker traders (or any other market participants) are equal…

• some have experienced management and investors, who have been present through multiple industry cycles
• collectively, a range of different strategies are employed, including hedging, insurance, financing, and pursuit of different business streams that can support bunker trading in weaker markets
• all offer significantly varying degrees of transparency (not just in terms of filing accounts, but also in the fundamentals of day-to-day business and strategy)

KYCC: Understanding significant differences in risk appetite and portfolios

 

Communication: Keep talking

• Use the human intelligence resources available to you; don’t rely on documentation. In volatile markets, positions change rapidly

Stress testing:

• What can the trader recover? By the time a default occurs, assets and companies have often evaporated
• Will relationships be impacted negatively by the recovery process?
• Can traders survive a widening of default risk?

Monitoring:

• Keep an eye on wider market trends. As an example, the table here shows the percentage of companies rated by Infospectrum as higher risk (out of circa 5,000 companies), amounting to one or two a week by 2024; we anticipate this may increase in 1H 2025

 

 

Have we assessed any of your counterparties recently?

 

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