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Bunker players roil over credit, oil prices as Russia-Ukraine war rages
8th March 2022 10:03 GMT

Elevated bunker fuel prices, a manifestation of soaring international crude oil prices due to a raging Russia-Ukraine war, have raised concerns about tightening credit in the Asian bunker fuel market, with buyers and suppliers turning cautious as sanctions bite Russia and freight rates surge.

Prices of the benchmark FOB Singapore Marine Fuel 0.5%S cargo assessments reached $968.33/mt March 7, staying at an all-time high for eight straight weeks since Jan. 11, according to Platts data by S&P Global Commodity Insights, which first begun assessing the grade Jan. 2, 2019.

End-buyers are more likely than ever to defer bunker fuel requirements amid geopolitical uncertainty and crude oil price volatility, said a source from a Singapore-based shipping company.

The bunker market largely runs on credit and the availability of pre-existing credit lines was a critical factor for smooth operations in the prevailing market dynamics. Marine fuel sellers essentially act as financing houses for ship operators, which are dependent on credit for their working capital and liquidity.

Transparency of deals has become more crucial in the processing of credit amid sanctions on some Russian banks following the invasion of Ukraine, according to sources.

“For smaller bunker traders, it's (credit limitation) a big problem … Smaller traders have smaller customers. Smaller customers don't pay on time often,” a bunker trader said. “This is bad for everyone, not just bunker traders, but also for suppliers and customers (shipowners)."

Suppliers have turned their back on Russian business and oil products, with shipping firm Monjasa and bunker company Peninsula among companies that have halted business with Russia after the invasion.

 

Consolidation to accelerate

 

The current market dynamics has created the perfect storm in the global bunker industry, likely accelerating consolidation as the purchasing power of independent bunker suppliers, particularly the smaller ones, wanes.

The bunker industry has been no stranger to consolidation in the past, due to squeezing margins amid intense competition and the industry's transition to new fuels.

“Stronger financials of oil majors would mean less reliance on credit lines,” a Singapore-based bunker supplier said. "To finance fuel oil cargo and ex-wharf purchases, independent bunker suppliers, however, are more likely to exhaust their existing credit lines and cash flow issues may arise.”

A synergistic alliance could immensely benefit a smaller supplier in terms of scale and cost, as fuel prices soar, helping soothe shipowners' concerns about suppliers with ready access to credit lines and insurance, the supplier said.

Downstream bunker demand could be affected if there is less oil to offer, according to the supplier, therefore, it was imperative that upstream suppliers exposed to Russian oil products reevaluate feedstock procurement strategies.

“Singapore is a low sulfur fuel oil blending hub, where upstream suppliers source cargoes originating from various parts of the world," a second bunker supplier said. "It is not ideal for buyers to overstretch credit lines or dig into cash reserves as these are time-consuming operations.”

 

Exercising caution

 

Financial intermediaries and counterparties are unlikely to extend credit beyond the awarded existing credit lines to mitigate the risks of defaults, particularly after oil companies in the region collapsed amid the pandemic, traders said.

Loan impairments led to restructuring across the banking sector in 2020 and the subsequent exit of ABN Amro from the trade and commodity financing space. The year also saw the collapse of Hin Leong Trading, one of Asia's largest oil traders.

“It is all well and good having these various payment terms and credit days, but you all must do the due diligence on knowing your customer," Andrew Scorer, freight analytics lead at S&P Global Commodity Insights said. "This comes with a cost not only from an IT perspective but also the increases in resource costs."

“The risks of non-compliance of all these tightening and varied anti-money laundering regulators around the world is substantial, we are talking in the billions,” Scorer said.

Strengthening prices of Singapore-delivered LSFO has led most shipowners to purchase bunker requirements via spot trades, rather than fixing quarterly or monthly term contracts, according to sources from shipping companies.

Skyrocketing insurance premiums for tanker charters, especially around the Black Sea region, have also lifted the cost of oil transactions, market sources said.

“Embargoes on Russian oil exports could be avoided for now as that would throw markets into disarray and drive further inflation of prices," a second Singapore-based trader said, adding that high crude oil prices were already affecting fuel oil cargo supplies.

Banks are “more reluctant” to process Russia-origin oil exports as sanctions bite Russia, the trader said.

Local refiners of bunker grade LSFO at the Middle Eastern bunker hub of Fujairah are more likely to import feedstock from South Sudan, minimizing the threat of supply-side disruptions, according to traders.

Although market sources expect surging freight rates to affect economics and trade financing, downstream suppliers are generally unperturbed by the Russia-Ukraine conflict, despite the risks of disruption to fuel oil supplies, they said.


Bunkerworld .,
8th March 2022 10:03 GMT