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Saturday, September 23, 2017

Global Bunkers, 2020 and Developing Market Trends

By Joseph Keefe

Alok Sharma, Head of Global Sales at Glencore’s Inatech, provides an in-depth look at what’s coming next for one of the maritime industry’s most interesting and important sectors.

 
When it comes to bunkers, the OW crisis is still fresh in everyone’s mind, Environmental Control Areas (ECA) are very much in place and the changes mandated to come for bunkers in 2020 are also closer than one would think. From Alok Sharma’s chair as head of Global Sales at Inatech, a Glencore Company, the consequences of the first event, and the prospects of change emanating from the latter are both issues that he wrestles with on a daily basis.
 
A Master Mariner with worldwide sailing experience, Alok has worked in Marine, Logistics and Express segments both as a Senior Consultant and a Director. Prior to joining Inatech in 2012, he worked as Head of Commercial Transformation for Royal Mail and before that, Head of Sales, EMEA for Quantum, a Marine ERP solutions and consultancy provider. And, after coming ashore, he served as a Regional Manager of Commercial Operations for the CSAV Group in Germany and Hong Kong. He studied for and received his Nautical Sciences degree at South Tyneside University and graduated from London Business School MBA program.
 
Inatech provides cloud Energy Trading and Risk Management (ETRM) and fuel management systems to the shipping, bunkering and oil trading industry. A rapidly growing company, its heritage is in shipping and bunkering but, following its acquisition by Glencore, that focus has expanded to also provide integrated end-to-end cloud software products to the oil trading industry. Currently, 2,200 deep sea vessels rely on Shiptech; two of the top five bunker suppliers are clients; two of the top five ship operators are clients; and 25 million tonnes of oil per year are managed using Inatech products. In this edition of Maritime Logistics Professional, Alok weighs in on the important issues of the day.
 
Much of the pressure regarding IMO 2020 is put upon ship owners and not enough on the creation of infrastructure to support that mandate. What’s your take on all that and where does Inatech fit into that equation? 
I have to agree. The onus is very much on the operator. They will, after all, be responsible for non-compliance and paying any fines. In coming to a decision about whether to implement the cap in 2020, the IMO hired a consortium of consultants led by CE Delft. Their report concluded that there would be enough distillates produced by 2020 to meet the increased marine demand. However, since that announcement, refiners and suppliers have played a ‘wait and see’ game to see what strategy operators are taking before committing to production and making supplies available.
 
With so many operators unprepared or undecided about what their fuel strategy is for 2020, I can see only one outcome: shortages in supply in some regions and ports and prices for distillates in those areas soaring. In such a scenario, Inatech’s products can help both operators and suppliers. Even in situations where the oil price is high, Shiptech enables operators to go out to the market and get quotes from different suppliers, helps monitor supplier quality and is designed to ensure operators buy the highest quality of fuel at the lowest price available. Bunkertech allows suppliers access to an end-to-end bunker supply management system, which makes it easier to effectively manage the supply chain and provides better transparency of costs throughout, putting the supplier in control of the process from beginning to end.
 
LNG is frequently mentioned as the ‘white knight’ for the fuel of the future, but for some owners, scrubbers will be the ticket. How much, in your opinion, will LNG have impacted the bunker market by 2020? Talk about it in terms of percentage of bunker market capture?
LNG is seen as the cleanest technology. However its success and impact within the bunkering market will depend on three things: fuel availability or existing infrastructure; fuel price; and investment in building LNG ships. With the current ‘wait and see’ approach being adopted by the industry, it is difficult to predict how LNG will impact the overall market by 2020. What we do know today is that switching to gas oil distillates costs up to $200 per ton more than traditional fuels, and that companies need to see LNG as a long-term investment. In March 2017, the complement of LNG-fueled vessels that are not LNG carriers comprises 103 in-service ships and 97 on order. The total represents a year-on-year jump of 23 percent. So, we know the market is growing. We are also seeing the infrastructure being put in place. But my feeling is that we won’t be ready to provide global coverage by 2020. There will be gaps in supply and serious price hikes.
 
The 2020 deadline involves a lot of things – among them, the shift in refining capacity to meet expected distillate demand. Are we moving in the right direction and are we moving fast enough?
We are moving in the right direction, but certainly not fast enough. Many operators are just not prepared for the changes coming in 2020. They seem to be ‘sleep walking’ into choosing gasoil and then simply having to manage the business impact of higher fuel prices. For me, this is a serious concern. However, the challenges for 2020 are not just restricted to the buyers. The decision by the IMO to go for the 2020 date was based on the belief that suppliers could produce enough compliant product; in time. But with so much uncertainty around what products operators are going to choose in order to comply with the 2020 regulations, suppliers are not reacting quickly enough and seem reluctant to commit to the levels of investment needed in order to deliver the products needed. This stand-off can only really be resolved through discussions between buyers, suppliers and producers. While certain suppliers are having meaningful discussions on a one to one basis,  key topics of supply availability can only be resolved by physical suppliers who have skin in the game. We need to see more of such discussions or /solutions on an industry level involving all parties including labs and refiners. I think we really need to change the tone and change it fast!
 
What do you see as Inatech’s role in meeting the needs of vessel owners in a post-2020 world?
To a large extent, our role will not change in a post 2020 world. The main purpose of our products are to help ship operators, bunker suppliers and physical oil traders use technology to integrate, automate and streamline processes in order to drive increased efficiency, reduce costs and achieve improved margins. For vessel owners there are two choices – increase revenues or reduce costs. In today’s competitive markets boosting revenue growth is going to be a challenge and I can’t see that changing fast. So, the only variable ship owners can truly control is costs. Fuel is still among the biggest costs, and post-2020 it could become an even larger component. Inatech’s role is to work with operators and to provide products that help them develop a strategy focused on efficiently managing fuel procurement and the related expenses as effectively as possible. That includes helping management become more aware of the added complexity that new regulations add to the bunker buying function. Technology combined with embedded best industry practices and decision-making systems is the fastest and most effective way of delivering savings. This is our role now and I expect it to continue well beyond 2020. Inatech works across three industry sectors – shipping, bunkering and physical oil trading. Shipping faces an unpredictable future: volatile fuel prices, variable fuel quality, issues around fuel delivery, the difficulty in obtaining credit and the threat of increased regulations. 
 
Bunker companies need to ensure the ship operator is credit worthy and also benchmark the potential risk of doing business with many parties. Tell us about how Bunkertech ETRM can help manage this task.
 
Credit risk/credit-worthiness is a big concern for suppliers, who have to carry the burden of cost right through the supply chain. With margins tight, the cost and availability of credit, and the credit-worthiness of customers can both have a significant impact on business. When it comes to managing credit risk, it is important for suppliers to have in place robust financial management processes and systems. Bunkertech ETRM offers bunker suppliers the specialist credit management functionality needed to give them a way to efficiently process invoices, handle credit terms, produce cash flow forecasts and manage costs. Suppliers can combine these activities with due diligence and credit-worthiness checks of potential customers.
 
The OW debacle certainly impacted world shipping, roiled bunker markets, changed how people can get credit and, just as importantly, changed the risk models for the bunker market and its stakeholders. How so and were there positive outfalls from OW?
No one saw OW coming. It happened to a large company, and the assumption was that such organizations were immune to bankruptcy. Remember, OW controlled around 7 percent of the global $150bn bunker business and only seven months earlier had undergone an IPO. It has affected the insurers’ and banks’ assessment of the industry, with bunker suppliers now struggling to secure credit capacity. I believe it is something that cannot be prevented from happening again.
 
This also represents an opportunity for the industry to reassess how it operates. For ship operators, it’s a chance to re-evaluate the entire fuel procurement process, and counterparty risk (for the first time). For physical suppliers, it’s a chance to recognize that too much of their exposure was tied to too few traders. For traders, it’s the opportunity to reassess their role and responsibility towards buyer and suppliers. For banks and credit insurance providers, it’s the opportunity to work through all the paperwork to make it watertight. However, I believe things haven’t really changed. Perhaps the ‘take away’ is that it is time for suppliers to protect their business. While new behaviors and processes won’t necessary prevent another OW collapse, suppliers can take steps to help mitigate their risk. 
 
These steps include suppliers building a better picture of the companies they do business right across the supply chain. That includes looking at the business relationships, financial liquidity (due diligence and credit-worthiness checks of potential customers), risk management processes and tightening business terms and conditions – including retention of title. Another step is to implement better credit management systems. When it comes to managing credit risk, it is important for suppliers to have in place robust financial management processes and systems. Systems that have specialist credit management functionality give bunker suppliers a way to efficiently process invoices, handle credit terms, produce cash flow forecasts and manage costs.
 
A final step is putting in place adequate protection through credit insurance.
 
Hedging: some owners in the past hedged their bunker bets against very high prices, but some also found themselves in a bad spot when market prices collapsed. Where does Inatech get into the hedging game, and what’s happening now in global markets with regard to that strategy?
Shipowners are oil consumers and need to understand that the main purpose of hedging is to mitigate the market risk. Hedging forms a part of the overall risk management policy which needs to mandate what to hedge, how much to hedge as well as stop limits, exposure guidelines etc. Flat price hedging i.e predicting the oil price will be “x” or “y” in future – is exactly as you call it – “betting” and should be avoided. There are many other strategies which can be deployed to ensure downside is protected or at least minimized– the exact strategy will depend on the market conditions and the risk appetite of the shipping company.  
 
In the wake of OW and in advance of IMO 2020, what are the biggest changes that the bunker industry has seen, and what has stayed the same? At the same time, what are the biggest challenges that lay ahead?
The biggest changes to the bunkering industry include increased competition, greater regulation, wider choice of fuels, more uncertainty and risk, development and implementation of technology, increased fuel price volatility, reduced power for brokers, more access to information and – less trust.
 
 
(As published in the July/August 2017 edition of Maritime Logistics Professional)