The world-wide financial crisis began to hit the shipping industry around September 2008, bringing to an end a legendary period of spectacularly high freight and enormously high trade volumes.  As with the aftermath of an atomic explosion, it will take time for the full extent of the damage to be realised, and many of the repercussions are still feeding through and will continue to do so for some time.  Even now, few commentators believe the bottom has been reached, though some see crumbs of hope and we are beginning to hear comfort phrases like 'bottoming out' from some sources.   Any good pessimist will tell you, though, that while there may be a few positive repercussions (like the forced weeding out of the bottom of the market in many sectors), it is would be dangerous to underestimate how deep the recession will bite.   Watching the flood of new ships about to be delivered into an already overcrowded market is like looking up from a valley at a huge wall of snow that is just about to fall in an avalanche – there is nothing you can do except watch as the inevitable unfolds.

The lack of trust and the consequent freeze of credit,  led to payment terms tightening up across the whole supply sector, and lending being pared right back, in some cases to levels where it became virtually impossible to trade.   The tactical effects of some of the massive financial packages and money-printing orgies from world governments may be beginning to show but in the one hydrocarbon market where open credit is a basic lubricant that has allowed the whole shipping industry to function until now, the issue of delivering product before being paid remains a major issue.  It is not helped by seeing payment periods stretch and shipping companies go to the wall as they are overcome by high costs and low revenues.

Is it possible to discern any underlying patterns or structural changes in the bunker industry in the face of the world wide economic shock?  Is it indeed possible to begin to piece together any sense of how the shipping industry in general and the bunker sector in particular are going to be re-shaped by the current process? The whole picture may not be visible yet, but there are some indications already.

In the last quarter or so of 2008, there were some seven shipping company, with no region as the obvious epicentre: Industrial Carriers Inc (Ukranian owned) was based in Greece; Parkroad was Korean; Atlas Shipping was Danish; Unicorn Shipping was Turkish; Sedomare and Britannia Bulk were UK based and Svithold Tankers was Swedish.  

Hardest hit were charterers, especially those caught with long term fixtures set in the boom times and suddenly faced with collapsed freight, but Britannia was a ship owner (albeit highly leveraged).  There is also a list of companies (large and small) rumoured to be in trouble and reported (widely) to be paying their bunker bills late.  Already in 2009 we have seen some twenty shipping companies showing serious signs of stress, some have already gone.

A general collapse in the movement of raw material commodities fed through to a major reduction in the production and export of finished products and, along with falling consumer spending and lower demand for goods in the developed world, brought the pain already felt in the bulk markets to the container sector.  Even some state owned carriers have been rumoured to be in trouble.  And still there is not mush sign of improvement as rates struggle along at very low levels.

Naturally, few bunker traders or suppliers openly admit to having being hit by any of the recent bankruptcies, but rumour is rife and a number of big names have been linked to what are likely to have been very large losses.  Even the big Danish bunker trader/suppliers have not been immune to rumours that they are facing serious problems (though they strenuously deny this).  Virtually the whole bunker sector is still on the back foot at least, some with that back foot almost in the grave – with a few notable exceptions that perhaps herald the pattern of the future for the industry.

Just to take two examples briefly of companies whose approach, structure and policies seem to be allowing them to not only ride out the storms, but also to derive added strength.  Aegean Marine Petroleum Inc, Greek controlled but NYSE listed, and the private Gibraltar owned Peninsula Petroleum.   Each exemplifies a basic trading strategy that has proved successful in the past and is now even more showing its value.  There are other operators in the bunker sector who have exemplified similar profiles and strategies, but these two are examples of type.

Aegean has increasingly world wide coverage and has built up on the basis of creating a firmly independent financial basis and a broad customer portfolio.  It has liquidity, good credit and breadth of coverage, which has generated internal strength to enable it to continue to trade at levels where many independent suppliers can no longer compete as they depend on external trade finance that is increasingly just not available.  The company has also developed an impressive barge fleet which increasingly gives it control over its whole delivery chain.

Peninsula, a considerably smaller operation than Aegean, and privately owned, but still with increasingly world-wide presence in Europe and Asia particularly, has secured its position by very carefully maintaining the dynamic balance between prudence and risk taking.  The key factors in its success to date, and the likely foundation of its continued success are: highly professional and effective credit management; a long term commitment to full credit insurance coverage for its entire portfolio (which has seen it able to tie in to eye-wateringly low premiums nowhere available in the market today), and the strict maintenance of adequate levels of liquid cash.

Both these successful bunker operators share certain critical success factors.  The primary ones are recognising the importance of high quality market intelligence and the recognition that with fluctuating markets it is essential to retain sufficient cash to cover gaps in trade finance.  Traders who work solely in the traditional manner, borrowing to fund supply and living on the thin margin between cost of product and sale price will be increasingly threatened and may well be a dying breed.  Companies whose strategy leads them to build quickly to the level of critical mass, never to stretch out their hand further than they can pull it back, and to maintain access to sufficient working capital funds independently of external lenders, and who refine their market intelligence processes to the level where they can minimise bad debt, will find their businesses most likely to survive.

But what is the most urgent critical factor facing the bunker sector at the moment?  Among all the problems that face traders and suppliers at the moment, one looms out as the most significant.  Counter party risk.  If your customers go bust before they pay you, you are in serious and possibly terminal trouble.  Companies that adopt what was the traditional approach to credit management in the bunker sector – really understanding the dynamics of their customers’ business, and the effects on them of all the various factors that play on their viability – will find themselves in the safest place.  As long as you can do business with customers you know will pay you, you have a fighting chance of survival.  In this scenario, intelligent, responsive, accurate and (above all) fresh and up to date market and company intelligence are absolutely crucial.

We are likely in any case to see considerable consolidation of the bunker supply market in the coming months, as smaller players are bought up by the likes of Aegean (who acquired small Canadian independent ICS in July 2008), or simply disappear.  The survivors will be the ones who balance daring and caution, and secure their cash supply.  To eliminate counter party risk entirely is impossible and would be counterproductive, but to assess and manage risk to increasingly refined levels of accuracy is essential.  One can already begin to see the signs distinguishing the survivors from the failures, but we are hardly even at the beginning yet of a process that will likely see a radical restructuring of the shipping industry and its supply sector such as has not been seen within living memory