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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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
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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.
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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
ǩ
&RPSDQLHV HQJDJHG LQ KHGJLQJ exposure to bunker fuel prices? Only after of epic proportions, as evidenced by the
must “stress test” 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
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depend on their bunker suppliers, banks source of revenue. A well-designed 4)&,$2&1-"(/"#&)53-0,"61&)7+"829$,(),:"
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with potential hedging strategies. Bunker flow certainty, budget certainty, and ƒ†˜‹•‘”›ϔ‹”Ǥ‘”‘”‡‹ˆ‘”ƒ–‹‘‰‘–‘
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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