One positive catalyst of the economic and regulatory changes that the shipping industry has experienced over the past few years is the transformation in the relationship between fuel suppliers and their customers. While we continue to work in a commodity-based industry, the value that customers want and need goes way beyond the basic sourcing and delivery of products alone.
Yes, price and quality remain critical purchasing factors, but customers need counsel and advice on the myriad of issues and challenges that now surround the process of fuel procurement. From better managing and controlling costs through effective hedging and risk management, to identifying an appropriate strategy to tackle regulatory changes, as well understanding the technical challenges of switching to low sulphur-based fuels and distillates. With the implementation of a roadmap for regulation over the next 10 years that sees the transition from heavy fuel oil to cleaner fuels that will serve to radically recalibrate the nature of procurement, the importance of a strong and close relationship between shipowners, operators and their fuel suppliers has become paramount.
It is an opportunity for fuel suppliers to show customers their true value, based on demonstrating a complete understanding of the industry, globally as well as from a more localised market perspective; and, most importantly, highlighting to customers how the challenges they face within the industry can be overcome. It is a principle that OW Bunker passionately believes in; it drives our business and all customer relationships.
The environmental and regulatory challenge is a good example of this. While the revision in July 2010 of MARPOL Annex VI – which saw the mandatory use of fuel oil in Emission Control Areas (ECAs) with a sulphur content of 1.0% – caused consternation in relation to supply from certain elements within the industry, the reality is that it is a wholly manageable change, particularly for suppliers like OW Bunker, who have the global scale and purchasing strength to ensure access to plenty of quality product to meet the increase in demand.
However, by 2015, when the sulphur content in ECAs moves to 0.1%, shipowners and operators will be faced with a number of potential challenges. Firstly, from a technical perspective, managing the switch from heavy fuel oil to low-sulphur fuel oil and distillates, if not handled properly, can cause engine damage and subsequent downtime, as witnessed in California since the regulatory change (to 0.5% sulphur content) in 2009. Secondly, it is not an industry secret that the cost of distillates exceeds the current price of heavy fuel oil – currently by as much as 70%. And while there has been much talk within the industry – particularly amongst classification societies – about using LNG, the reality is that there are still many questions that need to be answered about the potential of supply and associated costs, as well as the issue with regards to the location of storage facilities in relation to bunkering ports and global oil hubs.
The pressure on developing effective risk management strategies for fuel procurement, both from a financial and operational perspective, is therefore significantly increased. The onus must be on the fuel supplier to help alleviate these issues for shipowners and operators. It requires a partnership-based relationship that is founded on a complete understanding of the customer’s business, their trading routes and the nature and mode of supply that is required to operate. Any risk management strategy must be multi-faceted, incorporating a range of hedging instruments that account for the volatility of oil prices and the differing costs of heavy fuel oil, LSFO and distillates based on when and where the customer requires specific products. And from a technical perspective, suppliers must be wholly engrained within their customers’ operations to ensure that the quality of products is maintained and that the technicalities of switching between different fuel types does not impact vessel performance.
The reality is that despite the significance of the changing dynamic of the industry, it is a transition that is manageable. But only if it is based on taking a strategic approach to fuel procurement, and embracing a relationship between shipowner and supplier that is founded on values of transparency, trust and professionalism.
With over 30 years’ of experience, and an unprecedented knowledge and understanding of the industry, OW Bunker is dedicated to providing its customers with this level of service; founded solely on improving efficiencies within their operations, as well as profits, and working with them to provide solutions to the challenges that they face..
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