With the collapse in oil prices and emergence of COVID-19, should bunker players turn their focus from financing to counterparty risk?
It was not much more than three months ago when the entire focus of the bunkering industry appeared to be on how to raise as much capital as possible to buffer the anticipated liquidity demands of the expected higher pricing environment of IMO 2020. Many key players trumpeted their ability to secure funding lines as key differentiators - Bunker Holding pulling in USD 1bn and Peninsula Petroleum, USD 800m. There were other, smaller, raises as traders shook a somewhat reluctant banking sector for more capital, and the smallest and weakest of the bunker trading sector prepared to broke on deals that they could not finance.
Fast-forward three months, and those same giant facilities are in place, financing an environment where crude prices have dropped by 50%, the spread between HSFO and VLSFO has narrowed from USD 300 to nearer USD 50, and demand in certain key ports has taken a hit. No doubt smaller traders are breathing a sigh of relief that they can return to chasing business briefly lost, and we doubt the owners of those giant facilities are losing too much sleep over the extra finance costs (given an anticipated rebound in demand, and opportunities to expand market share by investing it elsewhere).
The pricing risk of the sharp fall in oil prices remains difficult to assess. While most bunker players have been trading back to back (not least as 2020-compliant fuels were so difficult to price in the run-up to the implementation of the rules), the risk impacting the physical market is more pronounced. While the smaller physicals tend to buy on spot against specific demand, the hedges secured by physicals/contract owners for their inventory positions may have been undermined by imperfect hedges and reduced inventory turnover. To those now juggling the liquidity demands of margin calls (or straight out losses on unhedged inventory), the recent outbreak of COVID-19 has added very significantly enhanced counterparty risk for both the bunker industry and its suppliers. Arguably, the focus has now switched from finance to intelligence.
Some of the larger players benefit from a global network of offices and experience, and have invested very significant sums in building up an intelligence-led "edge" that allowed them to adequately price the risk at hand, make a better return on the capital employed, and keep financiers happy, in the run-up to IMO2020. This investment should prove very useful in the months ahead, as large-scale credit lines are reviewed in light of industry concerns about key sectors with exposure to the outbreak and the oil price fall (and its impacts on scrubber investors). While margins enjoyed a multi-year spike as availability (of both fuels and credit) and pricing volatility offered greater margin opportunities, these appear to be returning to normal as prices fall and pricing/availability balance is normalised, and could potentially return to the wafer-thin margins which can be destroyed with a single bad debt. Adding to this concern are reports that key credit insurers may review their exposure to the sector. Should that prove to be the case, bunkering companies would fall back on self insurance, or avoidance. If the latter happens (and there is an argument to be made that the pressures of 2020 have resulted in a more "selective" mindset in a historically "take anything that moves" industry), there is the potential for the cascade of avoidance to generate the very default that was anticipated.
So, some big decisions to be made, personally and professionally, and that is the "Big Unknown" here. China has shown it is possible to bulldoze through a path to a somewhat normalised position, with ports and yards seeming to be returning to normal. This is unlikely to be the case for other countries, and while new platforms are regularly introduced to the market, bunkering remains a people-intensive business, whether you are trading, supplying, surveying, debunkering, financing, investigating or approving credit. We have already had anecdotal stories of credit approval systems being slowed due to key decision-makers not being present and personnel being reluctant to board certain vessels that have called at higher risk countries. A reduction in oversight on fuel quality and quantity, and counterparty risk, is unlikely to work well as the industry transitions through an already volatile period, exacerbated by COVID-19 and oil price volatility.
With so many variables in play, it is probably too early to say which bunker companies will be most impacted by COVID-19, although smaller traders with limited (or reducing) insurance and exposure to key sectors could have an increased risk profile. Our focus will be on financial strength (as of now, rather than 31 December 2018), access to capital and liquidity at the right cost, exposure, and risk management.
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