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Making Money out of the Bunker Business

Making Money out of the Bunker Business Charles L Daly Channoil Consultin <a href=g Limited www.channoil.co.uk " id="pdf-obj-0-4" src="pdf-obj-0-4.jpg">

Charles L Daly Channoil Consulting Limited

Making Money out of the Bunker Business Charles L Daly Channoil Consultin <a href=g Limited www.channoil.co.uk " id="pdf-obj-0-12" src="pdf-obj-0-12.jpg">
The Bunker Market
The Bunker Market
  • Historically the bunker market was an easy outlet for the major oil companies fuel oil surplus.

  • Today refineries are upgrading very quickly.

  • Availability of good quality bunkers reducing.

  • Some Majors withdrawing from the market.

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The Bunker Market  Historically the bunker market was an easy outlet for the major oil
The Bunker Market  Historically the bunker market was an easy outlet for the major oil
How to make money out of bunkering
How to make money out of
bunkering
  • Bunker fuel selling is a mature market like retail service stations.

  • Margins are tight and the business is capital intensive. Therefore profitability depends on volume.

  • Price cutting by the bunker sellers is the norm.

  • Try selling flowers instead.

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How to make money out of bunkering  Bunker fuel selling is a mature market like
How to make money out of bunkering  Bunker fuel selling is a mature market like
Market instability
Market instability
  • This leads to quality and availability swings.

  • Some markets are starved from availability and depend on imports.

  • The supply market is dominated by large traders.

  • The most stable supply is currently RF.

  • Quality is good too, although changing.

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Market instability  This leads to quality and availability swings.  Some markets are starved from
Market instability  This leads to quality and availability swings.  Some markets are starved from
Global Emissions Changes
Global Emissions Changes
  • The pressure on emissions control will affect the bunker market.

  • Sulphur and Particulate capture is advancing through scrubbers.

  • Carbon capture is more difficult.

  • Intertanko proposed a change to 1.0% distillate.

  • What effect will this have on the bunker supplier.

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Global Emissions Changes  The pressure on emissions control will affect the bunker market.  Sulphur
Global Emissions Changes  The pressure on emissions control will affect the bunker market.  Sulphur
Trading Strategies
Trading Strategies
  • Flexibility will be the key.

  • Bunker buyers are changing their ideas too.

  • Up to 700 cSt is now accepted by large container ships.

  • Size and speed of delivery are being upped all the time.

  • Modern computerised blenders come into force.

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Trading Strategies  Flexibility will be the key.  Bunker buyers are changing their ideas too.
Trading Strategies  Flexibility will be the key.  Bunker buyers are changing their ideas too.
How to win
How to win
  • A mixture of trading skills, technical know how and rigorous cost reduction.

  • The market is highly competitive and jealousy abounds.

  • A change in credit terms must happen if bunker suppliers are to stay in business.

  • The price of fuel oil will rise in line with crude oil and carrying costs with it.

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How to win  A mixture of trading skills, technical know how and rigorous cost reduction.
How to win  A mixture of trading skills, technical know how and rigorous cost reduction.
Cash
Cash
  • Bunkering is not a cash business and can require huge amounts of working capital.

  • The only offset is if long credit lines can be obtained from the supplier (very limited scope).

  • Therefore cost control and innovative methods are essential to make money.

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Cash  Bunkering is not a cash business and can require huge amounts of working capital.
Cash  Bunkering is not a cash business and can require huge amounts of working capital.
Location, Location, Location
Location, Location, Location
  • An essential point about where sales are made is the location.

  • Is it attractive for ship-owners to bunker there.

  • What are the criteria for a good location?

  • Good locations attract competition. They are micro economic clusters.

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Location, Location, Location  An essential point about where sales are made is the location. 
Location, Location, Location  An essential point about where sales are made is the location. 
Location
Location
  • How do you determine if a location is attractive?

  • Number of ship calls per year.

  • What is the pattern of trade. Do they call regularly?

  • What was the last port of call and where will they go next?

  • This gives the data for working out potential volume.

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Location  How do you determine if a location is attractive?  Number of ship calls
Location  How do you determine if a location is attractive?  Number of ship calls
Bunker Cost Allocation
Bunker Cost Allocation

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3% 11%
3%
11%
Margin Product Costs 86%
Margin
Product
Costs
86%
Bunker Cost Allocation 11 3% 11% Margin Product Costs 86%
Major Cost items
Major Cost items
  • Barge Freight

  • Staff and Admin

  • Credit and Capital

  • How can we manage to cut costs?

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Major Cost items  Barge Freight  Staff and Admin  Credit and Capital  How
Major Cost items  Barge Freight  Staff and Admin  Credit and Capital  How
Barge Freight
Barge Freight
  • Cost of bunkers when waiting.

  • Volume reduces unit costs.

  • Modernise and use technology to cut manpower.

  • Maintenance programme saves downtime.

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Barge Freight  Cost of bunkers when waiting.  Volume reduces unit costs.  Modernise and
Barge Freight  Cost of bunkers when waiting.  Volume reduces unit costs.  Modernise and
Labour
Labour
  • Limited action here unless you employ ex- patriot staff from cheap countries.

  • The only means of increasing productivity in today’s environment is to motivate them by financial incentives.

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Labour  Limited action here unless you employ ex- patriot staff from cheap countries.  The
Labour  Limited action here unless you employ ex- patriot staff from cheap countries.  The
Working Capital
Working Capital
  • Try and get supplier credit for longer term deals. Fuel oil is long and a price taker rather giver.

  • Ensure that debt collection is rigorous.

  • Try increasing volume by price management or other incentives to customers.

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Working Capital  Try and get supplier credit for longer term deals. Fuel oil is long
Working Capital  Try and get supplier credit for longer term deals. Fuel oil is long
Capital Costs
Capital Costs
  • Volume is the only way of reducing unit cost of capital.

Example

  • Annual Cost of operations $1,000,000

  • Annual volume 1,000,000 tonnes

  • Cost per tonne

$1.0

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Capital Costs  Volume is the only way of reducing unit cost of capital. Example 
Capital Costs  Volume is the only way of reducing unit cost of capital. Example 
Cost Control
Cost Control
  • Increase volume to 2,000,000

  • Costs reduce to $0.5 per tonne. This means that if you can reduce prices by 25 cents and double your volume you can still make money.

  • Look to low cost airlines for the pricing model.

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Cost Control  Increase volume to 2,000,000  Costs reduce to $0.5 per tonne. This means
Cost Control  Increase volume to 2,000,000  Costs reduce to $0.5 per tonne. This means
Supply side issues
Supply side issues
  • If you cannot increase prices to customers.

  • You can try and reduce your cost of product.

  • Any reduction will go straight to your bottom line.

  • Every seller knows the market so how can this be done?

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Supply side issues  If you cannot increase prices to customers.  You can try and
Supply side issues  If you cannot increase prices to customers.  You can try and
Price Risk Management
Price Risk Management
  • Manage your price risk.

  • Slow sales environment means that inventory has a long residence time.

  • This could be good in a rising market.

  • How many can rely on predicting the market.

  • Long residency time increases price risk.

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Price Risk Management  Manage your price risk.  Slow sales environment means that inventory has
Price Risk Management  Manage your price risk.  Slow sales environment means that inventory has
Price Risk Management
Price Risk Management
  • By increasing volumes you reduce inventory residency.

  • This reduces the price risk.

  • Try and negotiate supplier support in PRM.

  • If you are buying 30,000 tonnes per month and selling 30,000 per month ask for average of the month pricing.

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Price Risk Management  By increasing volumes you reduce inventory residency.  This reduces the price
Price Risk Management  By increasing volumes you reduce inventory residency.  This reduces the price
PRM
PRM

If you are selling 60,000 tonnes:

  • Ask for a 15 day average pricing.

  • Alternatively, seek support from a major derivatives player who can set up a hedging programme for you. These can be expensive, but like insurance they are necessary.

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PRM If you are selling 60,000 tonnes:  Ask for a 15 day average pricing. 
PRM If you are selling 60,000 tonnes:  Ask for a 15 day average pricing. 
Backwardated Markets
Backwardated Markets
  • If the market is high in the current month and low in the forward months the market is said to be ‘backwardated’.

  • Backwardated markets allow traders to manage inventory price. Sell any surplus stock promptly and buy the equivalent forward at a cheaper price.

  • As the forward becomes the spot the price will have increased relative to the next forward position.

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Backwardated Markets  If the market is high in the current month and low in the
Backwardated Markets  If the market is high in the current month and low in the
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Contango Markets
Contango Markets
  • If the price in the prompt month is low and the forward months higher, the market is said to be in ‘contango’.

  • Contango markets allow good price management opportunities.

  • Sell the forward month as a hedge against current inventory. As the forward month becomes the spot the price will have decreased relative to the forward.

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Contango Markets  If the price in the prompt month is low and the forward months
Contango Markets  If the price in the prompt month is low and the forward months
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April May June July August

September October November

December

Contango, Flat & Backwardation Markets

340 255 Flat 170 Contango Backwardation 85 0 $/t
340
255
Flat
170
Contango
Backwardation
85
0
$/t

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April May June July August September October November December Contango, Flat & Backwardation Markets 340 255
April May June July August September October November December Contango, Flat & Backwardation Markets 340 255

Price control through

blending
blending
  • Products that are off-specification to a refinery are normally sold cheap.

    • By buying such products, the resultant on- specification blend may be cheaper than the finished product.

    • E.g. 700 cSt fuel oil plus LCO.

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Price control through blending  Products that are off-specification to a refinery are normally sold cheap.
Price control through blending  Products that are off-specification to a refinery are normally sold cheap.
Working Capital and Credit Management
Working Capital and Credit
Management
  • Invoices must be issued on time.

  • Apply interest clause for late payment.

  • Do not feel threatened by buyer resistance to pay.

  • Try and agree better terms with supplier.

  • A possible approach may be staggered payment.

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Working Capital and Credit Management  Invoices must be issued on time.  Apply interest clause
Working Capital and Credit Management  Invoices must be issued on time.  Apply interest clause
Credit management
Credit management

If you have access to more than one tank:

  • Try buying the largest cargo possible but only paying for one tankfull at a time.

  • This can be achieved by independent sealing of the tanks you do not need and issuing a title document (store warrant).

  • Then pay as you consume.

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Credit management If you have access to more than one tank:  Try buying the largest
Credit management If you have access to more than one tank:  Try buying the largest
Resume
Resume
  • High Capital cost operations rely on volume.

  • Lower unit costs can be achieved by higher volume.

  • Operating costs must be strictly monitored and reviewed regularly.

  • Maintenance must not be sacrificed for profit.

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Resume  High Capital cost operations rely on volume.  Lower unit costs can be achieved
Resume  High Capital cost operations rely on volume.  Lower unit costs can be achieved