Bunkers - if you wait long enough, everything becomes cool again
Bunkers - if you wait long enough, everything becomes cool again
It's been a funny old 18 months for CFO's and principal in the bunker sector.
Industry watchers spent most of 2019 watching bunker traders and suppliers announce ever greater and more complex banking facilities, from an ever-widening range of providers, as these players sought to position themselves as the safest pair of hands for the inevitable spike in average bunker prices post IMO 2020 and a resultant credit “gap” emerging between the credit haves, and the credit-have-nots. As the year progressed, the information arbitrage available to the better informed allowed far-sighted traders and suppliers to book the best margins for years.
As it happened, COVID-19 and oil price volatility proved sufficient to cause the long-awaited spike to fall flat on its face in 2020, with the resultant exposure of fraud at well-known oil traders (including those with exposure to the bunkering sector), causing a perfect storm of weak demand, jittery credit insurers and even more jittery trade finance banks, which had their own regulatory, technological and social challenges to face. Formerly highly-liquid companies, which prepared ahead of the anticipated credit gap, became overbanked – a position most would have given their right arms for not six months before. A second wave of COVID-19, and the reduction of lending by key trade finance banks (or their complete withdrawal from the sector) has rendered the rest of 2020 essentially unpredictable (as carefully stated in essentially every annual/interim report boilerplate out there).
You would have thought that with so many large players going bust and so many financiers exiting the market, a new normal would emerge with better margins. However, demand is still weak, and bunkering still suffers from being a commoditised sector that appears to offer little reward for scale for scale’s sake. With finance and insurance now more expensive and selective, CFOs and principals appear to have difficult choices on their hands. At the risk of missing key elements, here’s our top three:
Back to basics
Roll back the clock by 25 years or so, and return to a self-financed, self- or uninsured model, relying on supplier credit, bank overdraft facilities and, occasionally the principal’s own bank account. This has the advantages of putting CFOs and principals back in control of their own business, able to work with who they want to, with lower costs and giving away no margin to financiers and insurers. Choke on the downside that they will have to work within their own financial capacity, and no growth at all costs. A number of smaller players appear to have chosen this way forward, leveraging close relationships with buyers/suppliers and low overheads to secure enough margin to support the business and (one would hope) build up a cushion to allow for careful expansion and the absorption of bad debts.
Seek to maintain or grow market share by investing in compliance and/or securing alternative forms of finance. In the wake of Hin Leong and GP Global, those banks prepared to remain in the bunker space (and there appear to be numerous banks, some perhaps better known for ship finance, willing to step in, as more well known trade finance “names” retreat) are going to be placing significantly more emphasis on compliance at all levels of the bunkering business, with key banking sectors already seeking to create digital registers of inventory finance and preparing for the potentially higher due diligence demands of Basel 4. Much of the financing interest to date appears to be focussed on physical suppliers, with these perceived to offer lower overall risk. Traders, or those unable or unwilling to go down a potentially high cost and time consuming compliance road, can look for alternative lenders, with market participants already reporting approaches by trade finance funds with little obvious experience in the bunkering sector. Reports suggest that the facilities extended by such funds tend to come at a higher spread, with a continued requirement for credit insurance cover. At current market conditions, the addition of, say, a further USD 2 per tonne of finance costs to mid-sized overheads may leave little room over gross trading margins. Longer-term solutions such as private placements or specific structures such as Germany’s Schuldschein are also available, but often come with inflexible terms and significant obligations – not for the faint-hearted in the currently volatile markets.
It is more than likely that, in the wake of the collapse in demand and oil prices, the very significant banking facilities secured by some of the larger physical and back-to-back traders will be underutilised at this time. This is a fairly nice problem to have, after all, demand and prices could come back, and better to have this facility in hand rather than fighting to secure it from a more nervous financial sector, but these facilities aren’t free and banks are not there to commit allocation which remains consistently unutilised. Some of these more liquid groups have been able to free up capital in support of an expansion of market share or moves to consolidate the disparate bunkering sector. The latter consolidation may be key to improving the traditionally weak margins seen in the sector, and you can argue that there are many players in the “tier two” which would be good fits for the overbanked.
The trouble with today’s market is that it is so unpredictable. Self-financing seems a great idea until oil prices double, and credit limits are maxed-out. Assuming bunker buyers will remain stubbornly price sensitive, we’ll be back to the arguments of 18 months ago, with people trumpeting their financial firepower, perhaps secured from a slightly more exotic list of financiers. However, underpinning all of this change will be a need for exceptionally tight risk management – the self-financiers desperate to allocate scarce capital appropriately, and not to imperil the business, and the middle and upper tier seeking to prove to increasingly sceptical financial and insurance markets that that they truly understand the risks they are taking, and are compliant with the shopping list of requirements of banking post-COVID.
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