Minimising Risk Through Bunker Hedging

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AS THE GLOBAL OIL MARKETS CONTINUE TO EVOLVE, THE QUESTION OF WHETHER OR NOT TO HEDGE CONTINUES TO CHALLENGE COMPANIES THROUGHOUT THE SHIPPING INDUSTRY.

HISTORICALLY, many in the industry have argued that a bunker adjustment factor (fuel surcharge) is the ideal way to mitigate one’s exposure to bunker fuel prices. However, in recent years, industry best practices have evolved and a new consensus is forming which says that shipping companies must take their own proactive steps to manage their exposure to volatile bunker fuel prices, as bunker adjustments rarely eliminate a company’s entire exposure to bunker prices. There’s no question that management teams and investors alike detest the idea of having to commit staff and capital to managing fuel price risk, which is understandable.

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guestfeature However, given that bunker prices side of their customer’s hedges, which a hedging programme with the primary account for such a large percentage of most means that the parties’ best interests goal of generating revenue, it is no longer companies’ operational costs, not managing is their own, not that of their customer. hedging or managing risk, it is speculating this risk is simply no longer an option. Simply accepting the exact hedging on bunker fuel prices. The key to developing, implementing structure suggested by these parties’ is The vast majority of hedging mistakes and managing a successful bunker- often not in the shipping company’s best are the result of a poor or nonexistent hedging programme is utilising strategies interest. bunker fuel hedging policy or failing to that perform well in high, moderate and When a company makes the decision to abide to the policy. Most hedging mistakes low-price environments. This typically develop a bunker fuel hedging programme, can be avoided if the company takes the means making use of a combination of one of the main challenges is identifying time and effort to create a proper hedging instruments, including swaps, call options the potential hedging strategies that will policy and to develop and implement and collars, among others. allow the company to meet its business strategies that will allow it to meet its In our firm’s daily discussions with objectives. hedging goals and objectives. companies across the globe, there are The first step in developing a sound The shipping industry has always been several key aspects of bunker fuel hedging bunker fuel-hedging programme should a volatile and cyclical industry and the that we tend to emphasise because they be to determine the company’s risk future is likely to present the industry are often overlooked or misunderstood by tolerance as well as its hedging goals with even more challenges. While many many in the industry: and objectives. More specifically, what of these challenges are still unknown at ÇŠ 7KH VWUXFWXUHV RI EXQNHU is the company seeking to accomplish by this time, we can be almost certain that hedging strategies are crucial. There implementing a hedging programme? Is it bunker fuel prices will remain volatile are significant differences in the various to reduce cash flow volatility? To ensure for the foreseeable future. In this light, hedging instruments available to bunker that bunker fuel expenses do not exceed shipping companies will be well served fuel prices, differences that are often budget? To potentially obtain an advantage to develop and implement bunker fuel overlooked by many companies, hedging programmes to ensure especially as these relate to basis, they are doing everything possible credit and operational risk. to mitigate their exposure to volatile THE VAST MAJORITY OF HEDGING bunker fuel prices. ÇŠ ([RWLF KHGJLQJ VWUXFWXUHV the industry term for complex Clearly, developing, implementing MISTAKES ARE THE RESULT OF A and managing an effective bunker hedging strategies, often involve the sale of options, either direct or POOR OR NONEXISTENT BUNKER fuel-hedging programme requires indirect, which can lead to a disaster a significant amount of time and FUEL HEDGING POLICY if the structures are not completely expertise. Implementing bunker understood by the management fuel hedging without the required team. over competitors who do net hedge their expertise can quickly turn into a nightmare ÇŠ &RPSDQLHV HQJDJHG LQ KHGJLQJ exposure to bunker fuel prices? Only after of epic proportions, as evidenced by the must “stress testâ€? their hedge portfolio on answering these questions, as well as failed hedging initiatives of numerous a regular basis so that the performance of many related questions, should a company companies. If your company does not their individual hedge positions, as well as begin to discuss what hedging strategies have the in-house resources to properly the entire portfolio, are well understood might be appropriate for the company. carry out all required functions, it is highly in all potential price environments. These In addition, there are a number of recommended that you engage experts, tests should not only include price (market) common hedging mistakes that companies who do have the necessary expertise, to risk, but basis, credit and operational risk should seek to avoid at all costs. First, assist you. as well. it is crucial to remember that hedging Shipping companies should not solely should not be intended as a potential !""#$%&"'()*&+"$,"-.&"/(012&)"312" depend on their bunker suppliers, banks source of revenue. A well-designed 4)&,$2&1-"(/"#&)53-0,"61&)7+"829$,(),:" or trading counterparts to provide them hedging programme should provide cash 31"&1&)7+".&27$17"312")$,%";3137&;&1-" with potential hedging strategies. Bunker flow certainty, budget certainty, and ƒ†˜‹•‘”› ϔ‹”Â?Ǥ ‘” Â?‘”‡ ‹Â?ˆ‘”Â?ƒ–‹‘Â? ‰‘ –‘ suppliers, banks and trading companies the ability to lock in profit margins and/ <<<=;&)53-0,&1&)7+=5(; who provide their customers with hedging or protection against potentially rising instruments most often take the opposite bunker fuel prices. If a company initiates

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