The global sulfur cap for marine fuel goes into effect in just six and a half months. There has been significant focus on how the new rule, known as IMO 2020, could affect land-based diesel pricing, and how it will upend the market for residual heavy fuel oil. What has yet to garner much attention is how IMO 2020 will heighten credit risks across the bunker fuel supply chain.
To understand the scope of this threat, FreightWaves interviewed Jason Silber, head of New York-based marine credit reporting company SeaCred. Silber confirmed that credit-related issues – including the need to increase credit lines and to weigh counterparty risks more diligently – are rising to the fore as the January 1, 2020 deadline approaches.
“The bunker suppliers and traders I’m talking to are all very worried about IMO 2020,” he confirmed. “They’ve all heard that prices could be up to double what they are today, and when you’re talking about three million barrels a day [of marine fuel consumption], that’s going to have a huge cascading effect, even beyond the bunker business.”
The need to expand credit lines
“As far as credit, let’s say you have a big container liner company. We all know the container industry is not doing so well these days. If a liner company has 80 ships and it’s buying a half a billion dollars’ worth of fuel and all of a sudden that’s jacked up to $1 billion a year, and it’s barely treading water, that’s a big problem,” Silber explained.
“The liner companies have specifically said that they hope to push that cost off to their customers, and they may be able to do that eventually. However, in the short-term, they will need more cash to buy that fuel,” he affirmed.
“I think there’s going to be a lot of red in the container business because of this [IMO 2020] and several companies are particularly weak. Will there be another Hanjin?” he asked, referring to the spectacular collapse of the South Korean liner company in 2016. “There could be.”
Silber also said, “The large companies should be okay, but what about the medium to small companies? If you’re a small Turkish bulk operator with 10 ships and your monthly burn goes from $10 million to $20 million, where do you get that extra $10 million a month? Is a bank just going to double your credit line?”
“It’s all about risk-reward….If a company is deemed a higher risk, it would be charged a higher margin.”
Jason Silber, SeaCred
The broader problem, in a nutshell, is that “the credit lines will not be raised in line with the rise in the cost of fuel.”
This will be an issue not just for ship owners and operators, but for fuel suppliers and fuel traders. Everyone in the bunker fuel network will face the same challenge to differing degrees. “It’s a chain,” said Silber, who reported that “bunker suppliers are working on raising their credit lines right now.”
For fuel traders without their own physical storage facilities, particularly the smaller traders, the need for expanded credit access due to IMO 2020 could have severe consequences.
“If you’re a small trader and you’re taking care of four ships a week, and the price of fuel doubles and you can’t increase your credit line, you’re not going to be able to supply those four ships. You’ll be able to supply maybe two or two and a half ships. So, what are your options? Some of the traders I’ve spoken to are looking to either merge with other companies or raise more money. Some see themselves closing down,” he said.
Credit impacts on fuel pricing
The IMO 2020 credit issue will also affect the price and availability of marine bunkers for ship owners and operators, according to Silber. “Bunker suppliers are now reviewing each and every one of their customers and they are thinking of dropping some of them. I know of one particular prominent supplier that is probably getting rid of some of its riskier business so it doesn’t have to deal with potential headaches [when IMO 2020 pushes up fuel costs].
“Suppliers will look at each customer and ask: Do we know these guys? What is their track record?” he explained, adding that suppliers are also increasingly tapping credit reports from companies such as SeaCred.
Payment terms will differ depending on the comfort level. Some counterparties could remain on a 30-day payment cycle, while others will be brought down to 21 days. “Many of the suppliers are looking to rein in terms. They will want a faster cycle,” said Silber.
Larger companies and long-time customers would pay less for the bunkers than smaller companies and new customers. “It’s all about risk-reward. If you want to supply Maersk or MSC or some other large company, and grab that business in terms of market share, those companies can really call the shots, so you will be getting very little margin,” Silber said.
“If a company is deemed a higher risk, it would be charged a higher margin. That means that some of the ship operators are going to have to diversify their sources of fuel. Especially if they’re deemed a higher risk, they may have to go to sources that they have not usually gone to before,” he said.
While this differentiated pricing already exists, he said the spread between what’s paid by ‘safe credits’ and what’s paid by riskier customers is expected to increase due to IMO 2020.
Others cite credit concerns
Market participants have echoed Silber’s statements. During the first quarter conference call with analysts held by bunker supplier World Fuel Services (NYSE: INT), chief executive officer Michael Kasbar commented, “With [IMO] 2020, one of the things that not a lot of people are thinking about is credit risk – because undoubtedly the price is going to go up.”
Kasbar continued, “Some ship owners are going to be able to pass on the cost. Some maybe not so much. So, there is going to be some risk there.”
Credit risk was also cited by Anthony Odak, chief operating officer of New Orleans-based John W Stone Oil Distributor, one of the largest privately owned bunker companies in America. Odak discussed the issue during a recent podcast conducted by SeaCred.
“We are absolutely taking a closer look at all our customers. Whether they are charterers, shippers or traders, we are asking for more financials,” he confirmed.
“Generally speaking, things are just going to be a lot tighter for credit. The price of fuel is inevitably going up, so credit is going to be a real big issue that will need to be reviewed – not just by us, but by everybody.”
Odak foresees a particular challenge among smaller bunker traders in regard to their revolving credit capacity. “I think there’s going to be quite a bit of appetite for M&A in that market and if there aren’t mergers, I think there may be some folks going out of business,” he said.