World Bunkering >Articles > Risk management > Credit risk: vigilance required

When freight rates are high and cargo is abundant, bunker suppliers and traders can generally be comfortable extending credit to their clients. Generally, too, the “bad boys” – the habitual slow payers, those who frequently and with dubious intent initiate quality and/or quantity disputes – are well known in the industry and afforded prices consistent with their performance. However, when cargo volumes decline and freight rates collapse, the need for extra vigilance in assessing the liquidity of shipowners and operators is brought very sharply into focus. At the end of 2008, companies which had previously and justly enjoyed a good reputation suddenly found themselves strapped for cash and found it difficult to maintain their earlier high standing.

The collapse of the world economy towards the end of 2008 left many shipowners over extended. Newer ships were suddenly unable to yield income sufficient to cover the mortgages on them. With a collapse in demand for shipping came a fall in the value of ships. Ships ordered in the good times and now under construction became comparatively expensive liabilities. Many good, sound and far from old vessels became unemployed and were put in lay-up. By late 2009, there were, reportedly, around 600 ships either at anchor or in lay-up around Singapore. Reduced volumes of cargo were being moved in smaller quantities and by fewer ships. This applied across almost the entire cargo spectrum.

Singapore bucks the trend

A buoyant freight market in which many shipoperators had sought to maximise cargo had led to some operators purchasing bunkers for their vessels in smaller quantities and more frequently. Suddenly, with smaller cargos to move, shipoperators were no longer constrained by the need to bunker often, limiting their bunker quantities in order to maximise their cargo capacity. They now had the opportunity of looking to bunker larger quantities less frequently and in the cheapest locations. During the IBIA conference in Singapore, delegates were surprised to be told that in spite of the world recession, Singapore had actually seen an increase in bunker volumes in 2009. This is in sharp contrast to many ports in the world, where bunker deliveries are significantly down.

Almost overnight, shipping companies which had been riding high on a burgeoning economic wave found themselves with liabilities rather in excess of their assets. In turn, banks were often reluctant to finance these deficits. Share values fell and the less fortunate within this group went to the wall. For the first time in a long time, owning “older” ships became a positive factor. Mortgages, if indeed there were any on these older vessels, would be significantly lower and infinitely more manageable in the face of dramatically reduced freight rates occasioned by the “new” economic climate. Companies with recent and expensive charters, new ships or ships yet to be delivered now faced charter fees and mortgages which vastly exceeded the potential income from freight receipts. There was now strong competition from companies which had been able to take advantage of new, much lower charter rates. The new economic climate had delivered some quite severe blows.

Caution pays off

Many companies for whom extensive credit facilities had previously been readily available from physical suppliers now found their credit being scrutinised and, in many cases, restricted. For traders, there appeared a sudden avalanche of opportunity to trade fuel to companies which had largely eschewed them previously, preferring as they did to deal only with physical suppliers. For the unwary, this bounty could and, in some cases, did become a minefield deserving of very careful navigation. For the more cautious, though, understanding their potential clients’ current financial status became crucial. Credit reporting agencies saw a sudden upturn in demand for their services as suppliers, and traders sought to keep close tabs on the financial wellbeing of customers new and old. Many credit managers were enjoying their day in the sun, empowered as some became with the ability to condone or scupper a bunker transaction. Undoubtedly, this caused traders with incomes based upon volumes of business transacted a degree of concern.

On the bright side

The news, however, was not all bad. Traders are, after all, a resourceful bunch. As the values associated with shipping fell, so too did the value of oil and along with that, the value of financial risk associated with bunkers. With physical suppliers exercising greater control over credit exposures, canny traders were able to utilise the credit lines afforded them by suppliers and provide a valuable service as a credit facilitator to shipoperators who found their regular suppliers unwilling to maintain their credit lines at former levels. This opportunity has helped traders to maintain their position and stature in difficult times. Traders who are, by their very nature, ubiquitous and well able to obtain and provide bunker knowledge and expertise have also been able to respond to the needs of clients exploring unfamiliar and possibly cheaper bunker opportunities.

Major bunker trader Dan-Bunkering takes a cautious line when it comes to risk. Managing director Henrik Zederkof says: “Dan-Bunkering is in general conservative when offering credit to clients. Our attitude has always been that we do our utmost to support customers who have been supporting Dan-Bunkering in both good and less good times.

“In relation to suppliers,” he continues, “Dan-Bunkering benefits from being a very strong financial company with a long history in the business. For that reason, we have not experienced extended problems in the last one to two years in relation to our worldwide partners, eg physical suppliers, barge companies etc.”

Established in 1981, Dan-Bunkering’s core business is worldwide bunker trading, although it also arranges supplies of lubricants and other related products and services for vessels world-wide. As well as its head office in Middelfart, Denmark, the company also has offices in Copenhagen, Shanghai, Kaliningrad and Singapore.

Dan-Bunkering says that its presence on the global market enables it to supply clients with the right quality at competitive prices at the agreed place and time at more than 2,800 bunker locations around the world.