Adrian Tolson, senior partner at bunker consultancy firm 20|20 Marine Energy, has described the trend as “disintermediation” – the removal of intermediaries such as distributors or brokers that formerly linked a company to its customers.
“The bunker trader model is definitely under pressure as buyers are starting to lose confidence in that channel. Shipowners are going direct to the sellers,” Tolson told Seatrade Maritime News.
Major container carrier CMA CGM, for instance, has inked a pact with national oil major Total for providing the shipowner with a range of fuel solutions, in particular on meeting the stricter fuel sulphur regulations come 2020.
“We will be seeing more of such partnerships between major shipowners and oil companies,” Tolson believed.
He added that shipowners have no qualms in seeking out the best deals to secure their fuel supplies on the back of the protracted weak market with low earnings, coupled with the need to comply the upcoming IMO regulation on needing to burn bunker fuel with a maximum sulphur content of 0.5%.
The bunker trader model has also smeared its reputation after the sudden collapse in late-2014 of OW Bunker, formerly one of the world’s largest bunker trading firm, due to fraud and risk management losses. Tolson said while this is likely to be a one-off incident, it “sealed the deal” for disintermediation that was already under pressure back then.
“If you look at the margins performance of the traders in the market now, they are atrocious to say the least,” he pointed out.
The present leading bunker trader World Fuel Services (WFS) reported reduced margins for the six months ended 30 June 2017 as it posted marine fuels revenue of $16.28bn on gross profit of $66.6m, compared to year-ago revenue of $11.28bn on gross profit of $78.8m.
Aegean Marine Petroleum, a physical supplier gradually transforming into a bunker trader, reported gross spread per metric tonne of bunker fuel declining 27% from $26.6 in 2014 to $19.5 in 2016. The spread further dipped to $16.3 in the first quarter of 2017.
Another major bunker trader Bunker Holding stated in its 2016/17 financial statement that while the group has been facing strong industry headwinds, several of its competitors have also been impacted and forced to scale back over the year.
In order for bunker traders to remain profitable, they will have to “take position” by buying or selling short, according to a bunker trader from a sizable trading house. Bunker traders relying solely on the “back-to-back” trading model can only survive if they have supportive long term customers but expectations of supernormal profit are non-existent.
Another Singapore-based bunker trading executive noted that there are still a good number of spot bunker stem enquiries on a daily basis, but hardly any of them have translated into a firm deal.
“Even if we can fix a stem, there are no margins left for us,” the trader said. She explained that ex-wharf sellers such as oil majors and cargo traders are now selling at similar prices particularly after the implementation of mass flow meters in the Singapore market, leaving virtually no premiums for bunker traders to command.
While physical suppliers with their own bunker tankers can still content to accept low barging fee of $1-2 per tonne, traders typically need to charge around $5 per tonne of barging fee in order to make a margin, making their selling price uncompetitive to cost-conscious buyers.
The need for bunker traders will come largely from small to medium sized bunker suppliers who are short of working capital and need to rely on traders for extension of open credits. The flip side is that big trading houses are only willing to extend their credits, which are in the first place tightly controlled, to reputable suppliers and on a very selective basis.
Tolson said: “Traders clearly still have a credit role to play and that is very important especially for small and medium-sized suppliers to bridge their working capital requirements.”
However the advent of fintech – online exchange, brokerage, procurement – could replace the financing role of traders, with e-market platforms like ClearLynx and Inatech gradually making their names in the marketplace.
“If the financing role that traders are taking on right now can be replaced, then they are in trouble,” Tolson said.