Robin Meech has been closely involved in the debate to reduce marine emissions over the past two decades undertaking analysis for the IMO, the EU and Environment Canada related to refining regulations. He has been involved in scrubber technology for over ten years and is the co-author of the recently published report "Outlook for marine Bunkers and Fuel Oil to 2030" which provides a detailed analysis of our sector and investigates the introduction of a global sulphur cap.
There is little doubt that sellers' margins have increased over the past year or so. There is evidence from the publicly available recently reported financial results of WFS, Chemoil and Aegean. There is also collaborative, anecdotal evidence from discussions with both suppliers and purchasers.
What also is apparent is that there is no clear identification of how much the various factors are increasing margins. They will be different for different suppliers and buyers and in different types of trades.
When prices were sky high, over $550/tonne, suppliers were constrained on working capital - rapid receipt of funds was paramount to maintain turnover, now containing the credit risk is far more important. Most suppliers established bank terms during the period of very high prices, and most have managed to hold their positions and are under less pressure now prices are below $450. When they go up again then rapid payment will again increase in importance.
Credit insurance is becoming inhibitively expensive, if suppliers can find it and existing cover is constantly being reduced. The risks are becoming greater the longer rock bottom freight rates are the norm. In all sectors this situation is likely to continue for more than three years. There are more bankruptcies to come.
The following are being reported as reasons for an increase in suppliers' margins:
1. The suppliers see a riskier future - the cloud of bad debts hangs over them constantly and there is a mentality to grab profit where they can - the benefits of long term relationships are less valued. After all, the customer may not be around for the long term.
2. There is less competition - some market participants talked of a 'cartel'. Not that anybody admits to this but although global sales are down 10% year-on-year, levels of competition are, surprisingly, lower than a year ago.
3. Suppliers are always trying to maintain at best, but preferably increase revenues. With tonnes sold reduced then there is greater pressure to raise margins on the deals done.
4. Credit terms are hardening. Twenty-one days is becoming the norm in an increasing number of markets. Purchasers are looking for longer term deals and are willing to pay for augmented credit. This increases margins, which is not, with current relatively low interest rates, a factor in increasing the supplier’s working capital very much, but represents the supplier’s perception of the cost of extending the period of the risk.
5. Delivery measurement is being tightened up in the larger markets - there is less scope to 'steal' product and hence profit has to be made legitimately. This is a minor issue now but will grow in the future.
6. Supplier costs are increasing:
a. Delivery of low sulphur fuel is predominately in smaller stems increasing costs and hence required margin;
b. Due to credit issues generally stems are more likely to be smaller - purchasers stem more frequently - although there is a lack of quantitative data on this. Also smaller stems make the per tonne cost of product testing higher;
c. With more product specs with low sulphur and various distillates logistics costs are higher;
d. Those with credit insurance are finding it more costly to maintain cover.
7. Bad debt provisions are being increased as quickly as possible pushing suppliers to grab margin while they can.
There is something of a siege mentality - nobody can see things getting better for the purchasers - few suppliers sleep comfortably - it's risk versus reward as always but the down side is a bankrupt customer leaving a multi-million dollar hole in the supplier's bank balance.
Each supplier has a minimum margin under which he will not do business - the days of negotiating for an hour over $0.50/ton are over, at least for the foreseeable future. Buyers are more likely to be apprehensive about being accepted as a customer and more likely to agree to a deal.
Can values be attributed to the various reasons for larger margins? Probably not, but the credit risk issue is the most influential and critical. Few would argue with a notional average of $5/ton within a range of $2/ton to $10/ton. With the expectation of continuing very low freight incomes in most sectors, the risks can only increase.
The larger suppliers will prosper at the expense of the smaller companies for three reasons:
- they can cope with a bad debt more comfortably;
- they have proportionally greater working capital reducing inhibitions of sales;
- they achieve greater economies of scale on overheads, risk management and market coverage.
It is of note that Letters of Credit are rare in the bunker business, but the norm in cargo trading. There does not appear to be the same increase in margins in cargo trading, which is comparatively credit risk free, and which adds weight to the fact that credit risks are increasing margins by at least $5/ton.