Bunker bulletin 2

Adopting physical hedging as an instrument for managing risk will play a key role in risk management strategies in 2010 and beyond, says OW Bunker, a leading marine fuel supplier and trader. According to the company’s general manager/risk management, Morten Dehn:

“Physical hedging of bunker fuel purchases enables customers to buy products on a forward basis and is a definitive and easily auditable instrument that provides cost stability. Following the economic downturn, we are now operating in a new era of responsibility where companies have to exercise an appropriate level of conservatism.

“They must caution themselves against unnecessary risk taking, even if the appetite for risk returns as the markets begin to recover. Physical hedging provides this stability as part of a comprehensive risk management strategy that incorporates a mix of tools and instruments.”

Physical hedging, he explains, allows customers to fix and lock in the price of bunker fuel in a specific port where they know they will be purchasing products, while still being able to lift in any port in the world and maintain the use of the contract.

Morten Dehn also stresses that the key to an effective risk management strategy is ensuring that it is embedded into the infrastructure of an organisation, its corporate and financial processes, and day-to-day operations.

There has to be a planned and formulaic approach to risk management and the implementation of a holistic strategy that becomes a way of corporate life. There must be a clear understanding of a company’s risk exposure, its appetite for risk as well as its motives for managing risk.

And, most importantly, any risk management strategy must incorporate a variety of tools, instruments and analytical processes that provide balance and stability against the increasing elements of risk that organisations now face, from basis and time risk, to volume and especially counterparty risk.

OW Bunker sees the interaction between customer and risk management solutions provider becoming more critical, the relationship moving to one of partnership.

“The nature of the relationship must be consultancy-based, founded on a complete dedication to maximising operational and financial performance,” Mr Dehn concludes. “This can only be achieved if there is a total understanding of the customer’s business and corporate strategy in conjunction with an in-depth knowledge of the market, its complexities and continually changing dynamics.”

From July 2010, the International Bunker Industry Association warns, passenger ships operating in European territorial waters could, during the course of a single voyage, be subject to three different limits regulating the amount of sulphur in the fuels they consume.

Such a situation results from a reduction (from 1.5 to 1 per cent) in the maximum allowable sulphur content of fuels used by ships operating in designated Emission Control Areas (ECAs) covering the Baltic and North Sea/English Channel. This contrasts with the 1.5 per cent sulphur limit applicable to passenger ships when operating on a regular service to or from EU ports under European law.

“Under this scenario,” explains IBIA chief executive Ian Adams, “a passenger vessel leaving Northern Europe for a Mediterranean cruise will be required, with effect from 1 July 2010, to burn a maximum 1 per cent sulphur fuel in the Baltic and North Sea and a maximum 1.5 per cent in the Med, while potentially being able to burn 4.5 per cent sulphur fuel outside EU territorial waters.”

IBIA understands that, since the rules covering passenger ship emissions are contained in an EU directive, they are not affected by any change in the IMO standard for ECAs. The only way in which this apparent anomaly can be addressed is by a revision of EU Directive 1999/32/EC, which covers the sulphur content of liquid fuels derived from petroleum, including those used by seagoing vessels.

“Without any amendment of the EU directive, shipowners, operators and their bunker suppliers will need to exercise extreme vigilance in ensuring they do not fall foul of the regulations come July, or simply play safe by opting to use a maximum 1 per cent sulphur fuel at all times,” Ian Adams warns. MP