Squeezing the Bunker Barrel Negating High Cost and volatility : Shifts in Procurement Strategies Wade DeClaris Senior Vice President of Business Development World Fuel Services, Inc. BunkerWorld Forum -Nov 2006
Ship owners and Suppliers Trends : Ship owner trends Focus on core marine businesses Market consolidations Uncertain freight markets drive uncertainty and higher risk Need for market visibility as more shipping is involved in the public sector Desire efficiencies and cost savings Continual outsourcing of noncore functions Supplier trends Focus is upstream it more profitable Refiners operating at capacity Refiners focus on upgrading refining for light ends vs. expanding capacity Desire efficiencies and cost savings Rationalize downstream marketing costs Global Independents need capital to expand needed assets and manage cash flow
Why are prices up and more volatility Increase demand in China and India Globalization of Markets Hedge Funds Lack of Refining Capacity to meet demand Political Uncertainties Weather related disruption Opec Quotas Now Russia trying to influence supply and price? Legislation of Greener Fuels?
Volatile Market Conditions How Much Market Volatility is there?
Freight Rates USD per Day $250,000 $200,000 $150,000 $100,000 $50,000 $0 Jan-00 May-00 Tanker Earnings (VLCC/Suez/Aframax Average) Bulker Earnings (Cape/Panama Average) Container Earnings (Trans Pacific/Asia Europe/ Trans Atlantic) Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06
$78/BBL $470/MT $420/MT $370/MT $320/MT $270/MT $220/MT $170/MT $120/MT Rotterdam 380 CST Singapore 380 CST New York 380 CST WTI Crude ($/BBL) Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Nov-06 Q1-07 Q2-07 Q3-07 Q4-07 $68/BBL $58/BBL $48/BBL $38/BBL $28/BBL $18/BBL
Volatility Marine IFO 380cst $325 $320 $315 $310 (Oct 05 - Sep 06) Average High & Low Differential $98 $100 $98 $96 $20 $15 $10 $5 $- Daily Price Movement Ave 1.1% $3.71 $3.20 $3.11 $3.13 $3.65 Rdam Hou NY LA Spore $305 $300 $295 $92 $92 $92 $89 $94 $92 $90 $20 $15 $10 $5 $6.34 Weekly Price Movement Ave 2.5% $8.03 $8.17 $8.90 $6.77 $290 $- Rdam Hou NY LA Spore $285 $280 $275 $322.41 $319.99 $291.56 $304.09 $317.96 Rotterdam Houston New York Los Angeles Singapore $88 $86 $84 $20 $15 $10 $5 $14.75 Monthly Price Movement $18.01 $16.56 Ave 5.2% $17.34 $15.31 $- Rdam Hou NY LA Spore
How to deal with this volatile market Bunker Price Risk Exposure Ship Owners now recognize they are exposed to significant Bunker Price Risk Strategy Important to define a strategy to manage this exposure Manage Risk Exposure Manage risk exposure in order to position assets to achieve their highest possible returns
Procurement Strategies are about Managing Risk Price Risk Financial & Commercial Risk Operational Risk
In the News!!!! Which is Correct? Some Airlines Turning to Fuel Hedging Again MONDAY, SEPTEMBER 04, 2006 Associated press Wilhelmsen bet on bunker price rips into profits Lloyds List October 30, 2006
Risk vs Speculation 1. Risk management = the act of managing an inherent risk and a means of transferring risk away from the organization. Risk management is NOT a means of speculating on future price behavior. 2. Speculation is the act of taking more risk for a profit potential. As such, hedging strategies should never be viewed as a profit center or as a means to secure below market prices. The act of hedging is a risk mitigation tool and therefore the success of a program is not measured in conventional profitability terms. To do so demostrates an immature view of the subject...
Price Risk Management Trends Shipowners recognized with high prices and volatility they have significant risk. No risk program is only speculating Hedging is strategic and not transactional Use of derivatives by shipowners has increased over the last three years by 200 pct. New solutions in the market place on contract pricing blending in hedging tools and physical supply
Operational Risk Trends True cost of bunkers is being evaluated by Shipowners. Quantities are being micromanaged Quality vs. Lowest Price Avoiding delays vs. the lowest price Securing supply contracts in major ports Flexibility of onboard operations to handle alternative greener fuels
Financial and Commercial Risk Trends Shipowners want creditable and reliable counterparties as long term partners Shipowners want and need transparency with vetted supply partners Terms and Conditions are being vetted and negotiated Shipowners want to understand true market related performance and scorecards Shipowners want to maintain positive cash flow and preserve the profits of the good years
Conclusions Shipowners have realized that they need to manage many risk. Shipowners need to set strategic plans to manage Price, Operational and Financial and Commercial Risk Contractual Risk. Shipowners are looking for solutions from the market place to manage these risk and execute their strategies!