Spike in need for credit could fuel consolidation

With an expected spike in the price of low-sulphur fuel as 2020 approaches, shipowners and bunker suppliers will need extended credit lines. For the big players, extended credit is unlikely to be a problem, but for small and medium-sized players, it might be.

The conversation surrounding 2020 has for many months been centred on the quality and availability of fuel. But what about the credit?

There is little doubt within the industry that the cost of compliant fuel will rise. The price hike means bunker suppliers may or may not have sufficient credit lines, and that they may need to pass the tightening of credit on to shipowners and operators.

Facing a confidence deficit

Whether bunker supplier or end user, the need for credit will rise – perhaps significantly – and cash flows will come under pressure for some of the industry’s small and medium-sized players that do not enjoy the same strength of balance sheet as the large companies.

“Frankly, everyone is going to be challenged. Quite clearly, there is going to be a huge strain on credit lines,” says Paul Millar, Head of Global Credit at Bomin Bunker Holding GmbH & Co.

”Our customers, the shipping companies, will be among the most challenged. They will be hit by higher fuel costs and they will need more working capital. If this rise in fuel cost is not matched by the income they receive, it will hurt their profitability, and it may turn some companies negative,” he says.

According to Millar, it may well be that fuel suppliers are not willing to give smaller and mid-sized shipping companies the extra credit needed, depending on their credit worthiness. Similarly, for small bunker traders that rely on payments coming in on 30 days, in order to pay their suppliers in 30 days, it is possible that they do not have the working capital to support the higher credit lines.

Moreover, banks have in recent years taken large losses from the shipping industry, which could result in a more cautious approach towards lending and credit.

“We will be heading towards a riskier environment. When it comes to risk and return, we will see a confidence deficit as we get nearer to 2020. These are tough times,” Millar says.

“Banks are not terribly positive about this sector. The industry will need more working capital, and the banks know that the market is a risky environment because of the general dynamics in the market: the US-China trade war, Brexit and sanctions against Iran. Banks do not like these factors. So it is, quite simply, going to be a tough environment,” he says.

Mergers, alliances and downsizing

Douglas Raitt, Regional Consultancy Manager at Lloyd’s Register in Singapore, expects to see mergers, alliances and downsizing on both sides as a result – both for shipping companies and bunker suppliers and traders.

“I think what could happen as a result of tightening credit, is that smaller bunker suppliers might call it a day. It is among the smaller players – of which in Singapore you have many – that we could see a considerable number exiting the market come 2020,” says Raitt.

“We will see consolidation among shipowners too. We are, in fact, already seeing it, and this is a trend that will continue. But the large players will not have an issue,” he says.

This scenario is also expected by Paul Millar.

“We are already seeing it. Strategies are changing. The Bomin strategy has changed from being a massive global player to what is now a more focused player, primarily in the Americas, North America, Panama, Ecuador and Germany,” Millar says.

“The main reason for this change in strategy is concern over what is coming our way in 2020. The change in strategy has been difficult but necessary. No-one likes shrinking.”
Source: By Mette Kronholm Frænde, Communications Manager and Editor at BIMCO