Bunker trading houses shouldering more financial risk in stronger market: sources
Bunker buyers with limited credit lines will struggle to open letters of credit, particularly with bunker fuel prices so high, and will need a trading house with risk appetite to shoulder the financial risk, sources said.
“With big volumes and high prices, suppliers are less flexible and want to reduce their risk — trading houses take on this financial risk,” a trader said.
“This is often the case [for smaller companies], especially with the way bunker prices have shot up recently.”
Bunker buyers are typically offered credit lines up to a certain limit and sellers are unlikely to increase these limits purely because fuel prices have increased, sources said.
This kind of scenario will become increasingly prevalent upon the implementation of the International Maritime Organization’s 0.5% sulfur cap in 2020 as buyers switch to cleaner, more expensive fuels, sources said.
Market participants in the Mediterranean expect an increase in the number of bunker buyers requiring a trading house to shoulder the financial risk with the market so strong at the moment.
“With the strong market we will see an increase in the amount of people using traders,” the trader said.
In order to protect themselves, these trading houses are often selective about who they give credit to, preferring to provide credit for counterparties or customers who they have worked with before.
Even if ICE Brent futures sink, the Mediterranean fuel oil market has been more balanced this month amid a lack cutterstocks to produce finished grade RMG 380 for the bunker market. Therefore until cutterstocks, used to blend down the viscosity of fuel oil, become more available to the market this tighter and higher priced RMG market will persist into June, Mediterranean-based traders said.
Buyers in the Northwest European bunker market say that in the current period of strong prices, it is very easy to max out on credit.
The price of 380 CST bunker fuel at Rotterdam was assessed at $419/mt delivered Monday, up $27 since the beginning of May.
“There is no correlation between higher prices and credit lines,” one buyer said. “If you max out your credit line with a supplier you have to go to a trader and ask if they can sell to you — suppliers are not willing to take the risk.”
There is likely to be an adjustment to increase credit if the market continues to strengthen. However, relatively new companies yet to build a reputation in the market may struggle to get much leniency, sources said.
“It may depend who you are in the market — if you pay your bills and never default on a payment you’re more likely to be taken on,” a second buyer in Europe said.
Some sellers have tightened up their credit repayment terms in recent months, amid the tougher market conditions, which are usually 20-30 days.
The situation is similar in the African bunker market, with suppliers often choosing to “put a trader in between [the counterparties] to limit the risk,” a source said, adding, however, that this situation is not only present in a strong market. “The actual [bunker] price doesn’t really have any influence, we are just looking at the total exposure.”