The marine fuels market’s changing dynamics and the importance of building trust and transparency with counterparties as shipping navigates the energy transition
In a market that has experienced increased volatility, high fuel prices, more regulation, transactional challenges and constrained credit at the same time as transitioning to cleaner sources of energy, there is no question that the marine fuels supply chain has become far more complex than it was five or 10 years ago.
The marine fuels market has seen the collapse of several major players involved with supply chain finance in the past few years who were once considered reliable counter- parties. 2017 saw the collapse of Hanjin following the discontinuation of its credit line and failure to attain funds from creditors, leading to ships being stranded at sea and huge financial losses.
A service often described as ‘pledging invoices’ was a key factor in the legal and financial aftershocks of the collapse of OW Bunker, which came to a close in 2022 after seven years. Even today, one of the most common questions when talking about risk management is invoice pledging, which reinforces the need to know how counterparts handle invoices and manage risk.
More recently, the marine fuels market has seen an increase in the number of traders acting in a single chain, which in turn increases the counterparty chain. If payment terms do not align between the physical supplier and the end customer, a small trader may require another trader within the counterparty chain to finance the deal. This creates a high level of uncertainty for the customer and increased risk for the sup- plier, as well as reducing transparency and efficiency in the entire fuel supply chain.
In addition, shipping’s green transition requires ship owners and operators to choose from a growing portfolio of products – and choosing the right pathway for each vessel will require financial and technical analysis. For some, this will be mostly related to capital access or claims and invoice handling, while for others there will be a greater focus on the transparency requirements that enable access to credit and insurance.
When combining all these factors together, it is clear to see that when the marine fuels market is volatile and undergoing significant transformation, understanding the financial health of counterparties and increasing transparency is vital in order to minimise risk and exposure. Investing time in counterparty risk assessment and working with trusted partners that can safeguard supply chain finance and find the right decarbonisation pathways in this era of market changes underpins this. But how should one approach counterparty risk management?
The best place to start is by asking the right questions. If a ship owner wants to receive the right marine fuels solutions for their fleet, in addition to capital access, technical knowledge and worldwide coverage, they must ask the right questions of their prospective counterparts and conduct the necessary due diligence. Each business is unique and will require its own strategy, but common questions to consider include: Who are you dealing with and who is the legal entity? What terms and conditions will you enter into? Does the counterparty pledge its invoices? Does the counterparty have credit insurance? Is the counterparty covered for product liability and have professional indemnity? Does the counterparty have a compliance programme? And, is the counterparty financially strong?
Forensic due diligence should become commonplace to ensure you have a detailed understanding and in-depth risk assessment of the financial strength of the partner you are working with. Increasing collaboration and transparency within the marine fuels supply chain is critical and ship owners and operators need to work with the right partners that have the knowledge, global scale and financial strength to guide them through the evolving market. This will enable them to reap the benefits of more efficient operations, a healthier bottom line, and significantly reduce risk so they can focus on the important tasks of day-to-day business.
To support the industry through these market changes, KPI OceanConnect is well positioned as a trusted, financially strong partner with a reputation for quality and integrity. Combining the technical expertise and global connections and scale with innovative solutions for new and evolving challenges, we are guiding customers and partners through the transition towards a low-carbon future.
An Article by Michalis Manassakis, Managing Director, Athens
Source KPI OceanConnect