A deep insight into bunkering business
The bunker market is characterized by high volumes and low margins. It’s challenging to deliver heavy fuel oil safely, efficiently, and in compliance. Because of these challenges, you have only one real way to improve your profitability: sell more fuel. So you must keep your bunker process moving quickly to accommodate as many customers as possible.
Bunker supply is a low margin business. There is pressure across the industry to increase efficiencies and speed up time in port.
But that’s difficult for many reasons, not the least of which because the bunker measurement process is labor and time intensive. Manual measurement techniques keep your crew tied up on a bunker as well as require lengthy onboard time that exposes you to safety risks. Additionally, these methods are fraught with opportunity for human error. And that opens you up to costly and time-consuming client disputes.
Produced from oil fields, petroleum crude oil is processed in a refinery that manufactures oil products, any one of which is referred to generically as an oil fuel. The two main oil fuels that the bunker industry utilizes are residual fuel oils, which as the name suggests are residues of the crude oil refining process, and distillates. The former accounts for roughly 85% of the total bunker fuel off take while the latter, which is more specifically categorized as marine gas oil or marine diesel oil, makes up the balance. As the latter are used to power the main engines of small vessels, our primary focus will be on residual oil, which has been the principal source of power at sea for 50 years.
Residual oil is the heaviest viscosity oil fraction of a refinery. Viscosity is a measure of a liquid's internal resistance to flow at 50 degrees Celsius and is measured in centistokes or cSt. Its viscosity will depend on the refiner and the grade of oil being processed and may vary depending on the refinery, the port and time. Residual oil can be used as is, in which case it is known as "bunker C" and is often referred to as heavy fuel oil or No. 6 oil. Alternatively, the fuel oil can be blended to the viscosity needed by "cutting back" with distillate oils or cutter stock. Blended fuels are known as intermediate fuel oils. The majority of commercial marine vessels use marine fuel oil (IFO) with viscosity ranging between 180 cSt, 380 cSt and 500 cSt with the most common being 380 cSt.
Increasing requests from clients and governments are difficult and costly to accommodate. While it’s in your own best interest to speed up the bunker process, you must still adhere to safety and accuracy requirements. This is incredibly challenging given the amount of manual work and error involved in the measurement process. With errors come disputes. And disputes cost you even more time and money.
The bunker process requires many hands on the main deck for extended periods of time. Getting from the barge, to the vessel, and up ladders—sometimes at night and in inclement weather—is a real safety issue. Every moment your people are on deck, you are exposed to risk. The consequences of an incident can be severe and this is a liability your already slim margins can’t afford.
The global marine fuel market is supplied by major oil companies, traders and brokers, independent physical suppliers, national government-owned supply companies and nonmajor refiners.
Historically, the major oil companies were the dominant suppliers of marine fuel to the intermeindustry. Their importance reflected their large, integrated operations in many locations around the world as well as a ready supply of the by-product of their refining process. For example, in the mid-1980s the major oil companies, according to Marine and Energy Consulting Limited ("MECL"), supplied 70% of marine fuel supplied worldwide. As of 2005, that number is down to 45%. The decline in market share is attributable to more efficient refining processes that convert residual fuel to highergrade fuels, thereby lowering production of residual oil and to the emergence of bunker trading companies in the mid 1980s during a period of high oil prices and a soft freight market. Although the major's importance has diminished in terms of market share, it still remains a significant supplier in the world's major ports. Another significant trend is the major's shift from supplying at the retail level to the wholesale bunker market reflecting a desire to avoid pollution and credit risk.
The primary way to increase your margins is to improve efficiencies, open availability, and deliver more fuel. But it’s difficult to improve processes that are weighed down by manual procedures. With automated direct mass measurement system, you can eliminate manual soundings to measure and bunker at the same time. By reducing the time it takes to process one bunker, you can increase the total number of bunkers you process per month. With extensive diagnostics, you don’t have to spend time shipping your meter for calibration - you can eliminate the antiquated steps at the dry dock. And because you have the accuracy of direct mass meters and full traceability, you can eliminate time spent arguing with clients over quantity disputes.
Marine fuel traders and brokers comprise a second category of suppliers, which according to MECL supplies 24% of the marine fuel supplied worldwide. Purchasing marine fuels from refineries, major oil producers, independent physical suppliers or other traders, traders sell their marine fuel to ship owners, operators or other traders. To seek high returns, traders, using large amounts of capital, take positions and hold inventory and opportunistically play movements in the market. In other cases to minimize risk, traders may enter into a back-to- back trade eliminating the open inventory position while retaining the credit risk.
Brokers, on the other hand, do not assume risk preferring instead to act as agents for the buyer for which they receive a commission from the seller. However, neither brokers nor traders control delivery of marine fuel to end-users and are therefore dependent on physical suppliers to do so.
When your crew is on deck performing soundings, they are exposed to safety risks for which you are liable. With automated direct mass measurement, your crew doesn’t need to spend an hour on deck before and after the bunker to perform soundings. You get fast and accurate quantity measurements with less human interaction. You can observe the quality of the process from a safe location. What this means is you improve safety while bunkering faster to accommodate more clients and fuel transfers.
In the recent past, the role of the broker has taken on greater importance. Corporate restructuring, budget pressure, declining fuel quality, an increasingly fragmented supply market and volatile pricing have all conspired to increase the purchaser's risk in the market. The bunker intermediary as value-added marketer has evolved in response to the purchasing community's increasingly intense demand for professional expertise to help mitigate its risk in the market to access a fragmented international purchasing market. As more and more companies outsource various aspects of their purchasing and marketing, value added services have become an integral part of the oil and transportation industries' continued push to shed non-core functions.
The remaining 31% of the bunkering market is supplied by independent physical suppliers, national oil companies and independent refiners. Independent physical suppliers, purchase marine fuel from refineries, major oil producers and other sources that is then marketed, sold and physically delivered to a broad base of end customers.
National oil companies generally operate in monopoly positions in their respective countries, resulting in the provision of fully integrated supply operations at the major ports in the country. Initially unable to compete on pricing, these companies focused solely on supplying the local market. Recently, they have become more competitive and have tried to capture the business of ocean going ships calling on their ports.
Independent refiners seek to sell the fuel oil they produce in the marine fuel market. Typically, these companies supply fuel around their refining locations where they are not only competitive suppliers but often the only significant supplier within these ports and regions.
Although marine fuel is sold at nearly every port involved in the ocean-going trade, the majority of sales are concentrated among a limited number of strategic ports where there is a high volume of ship traffic or trade. By being located near major trade routes, bunkering ports allow ships to stop for a short period of time without a major deviation from their voyage schedule. Top bunkering ports, such as Singapore, Rotterdam and Fujairah, offer a large supply of marine fuel for sale at competitive prices along with efficient bunkering operations and often serve as regional trading centers for oil products.
"If you buy fuel in the market without the benefit of expertise you are essentially speculating."1 Clearly, buying bunkers is not a shipowner's or ship operator's core business. On the other side, the core business of oil companies, refiners and traders consists of buying, manufacturing and selling fuel oil. As part of that process, they monitor prices and are in the markets daily buying and selling fuel oil. In short, not only do they know the market, they are the market. "The challenge to the purchasing community is the perfection of competitive advantage in an area outside their core business."2 Given the magnitude of bunker expense and its potential impact on profitability, the importance of purchasing cannot be overemphasized. It is in this context that the services of a broker are inestimable helping them achieve competitive advantage, through competitive equality of information, and establishing a position in the market. The former is critical to this goal and is the sole purview of the broker.
In working with his client, the broker:
Maximizes market coverage
Evaluates suppliers on their service, reliability and quality of fuel.
Generates competitive interest among suppliers
Determines the optimal timing by tracking market fundamentals
Follows-up on operations to ensure timely delivery.
Pricing of this product is clearly an art rather than a science due to both intrinsic and exogenous factors. Most critically, the bunker market at times deviates from the normal patterns of the supply and demand. "Bunker fuel is a by-product of the refinery process and subject to the workings of the fuel oil market, so supply will not always work to catch-up with demand, just as suppressed demand will not always result in falling prices. Although demand will have an effect on a market, it is often the supply side which is the most vital consideration.
Also, as a result of the first oil shock, with its commensurate price increase, refining economics were drastically changed with the focus now on maximizing the yield of higher profit products from each barrel with a commensurate reduction in the amount of residual fuel.
Together with creating a tightening supply, the effect of extracting the higher margin products through secondary processes has raised concerns about the quality of bunker fuel due to its resulting complexity. Secondary processes not only affect the energy value of the fuel, they also leave a higher concentration of residues. These issues are resolved through blending, where lesser quality fuels are mixed with lighter products to make them acceptable for use in ships.
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