The benefits of working with a strong counter party
Bunker buyers could be at a loss if further bunker collapses happen in the future, without the proper business strategy in place, World Fuel Services warn.
A key moment for the bunkering industry was the London High Court’s judgment on the Res Cogitans – one of the ships that was affected by the OW Bunker collapse. The High Court ruled that OW Bunker assignee ING Bank was entitled to be paid the entire bunker bill by the shipowner – leaving the supplier out on a limb. In essence, the Court found that because the physical supplier had contracted with OW Bunker, and not the vessel operator, they had no maritime connection ship.
This has prompted some in the industry to argue that suppliers should perhaps now look to sell directly to shipowners, so they still have a maritime link if payment is not made. It has also been suggested that buyers should consider establishing more direct relationships with suppliers, so they can avoid the dangers of unknown parties in the supply chain and the prospect of being caught up in another OW Bunker web (and still being stung for double payments if the supplier pursues the case in other jurisdictions).
But, the example above is not an ideal scenario. Many bunker buyers will be fuelling ships which call at a great many ports - and within these ports they will have to shop around for the best price. They will have to work with people they do not know - and in order to do that they will need a trusted intermediary who does know all the suppliers and the particular nuances of each market, World Fuel Services says.
The company adds that a global trader can use its global network to build up a knowledge base for ports in every market, with intelligence on all the key suppliers. They will also have the capacity to work across different time zones. A risk management strategy is about identifying and quantifying all the dangers that exist in the market, and developing strategies that will protect a company from the many potential pitfalls.
World Fuel Services advices that before entering any commercial transaction, a company should have a clear understanding of the counterparty that it is transacting with. Every few years or so, alarm bells will ring in the industry when a big trader, supplier or shipowner goes under, leaving a slick of unpaid bunker fuel bills. In 2016, Hanjin Shipping’s demise caused ripples through the market, and the effects of OW Bunker’s collapse in 2014 is still being felt.
OW Bunker started 2014 promisingly with an IPO (Initial public offering) on the Copenhagen Stock Exchange; but by November it filed for bankruptcy, sunk by debts of more than US$1 billion. World Fuel Services highlights that the problem for bunker buyers in these situations is that they can find themselves being chased twice for payment on the same fuel delivery: once from the failed trader’s administrators or bank; and again, from the physical supplier. The problem for the physical suppliers is that even if the buyers pay the trader or the administrator, this money may never trickle back to them. The aftermath of the OW Bunker debacle has probably made it even more difficult for physical suppliers to be recompensed for the fuel.
Just as buyers will not know all the suppliers they should deal with; the suppliers do not know all the buyers. From the supplier’s perspective, a key benefit of working with a first-rank trader such as World Fuel Services is that they will take on the credit risk of the buyer and pay the supplier directly. World Fuel Services will also use its experience and market intelligence to spot potential credit issues, so problems can be contained and resolved before they spread.