Analysis of controlling and reducing bunker cost in shipping transportation (Part III) : hedging against bunker price fluctuation

• Main Author: Shen, Nan.
• Other Authors: Chew Ah Seng, David
• Format: Final Year Project
• Language: English
• Published: 2009
• Subjects: DRNTU::Engineering::Maritime studies::Maritime management and business
• Online Access: http://hdl.handle.net/10356/16269
• Institution: Nanyang Technological University

Shipping, from past to now, has always been considered as one of the most volatile industries in the world. Parties involved in this business, shipowners, charterers, and cargo owners for example, are all constantly facing substantial business risks. Apart from frequent changes in freight rates and vessel prices, the fluctuation of operating cost also contributes to this shipping viability. Operating cost, voyage costs included, consists of cost items such as bunker, manning, repairs and maintenance, stores and lubes, insurance, administration, broking commission, port charges, tugs, canal dues and so on. Among these items, bunker cost dominates. According to Stopford (1997), bunker cost accounts for 50% to 60% of the total cost, base of the running expenses of a vessel. What’s more, while the fluctuations of other operating items are more or less predictable as they usually change in line with inflation, bunker cost is constantly falling and rising in an unforeseeable manner. As a result, for the purpose of achieving proper risk control and healthy cash flow status, bunker cost becomes the most important variable to manage. In a weak market, the bunker component is usually paid full attention due to their dominance of the cost side. In a flourishing market, however, this component is often ignored by market players, as the focus at that time is more on the revenue side. This represents a dangerous pitfall that may diminish the potential profits during the good times. This study stands in the shoes of shipowners, and aims to provide them with practical methods to hedge against bunker price fluctuation. Instead of giving deep and complicated investigations into the root of the hedging principle and theorem, this studyprovides a practical guideline for the shipowners who are seeking to utilize the bunker hedging practices and incorporate them into their overall risk management strategies. First of all, fundamentals of bunker fuel and world’s bunker market are presented to provide the basic background information. Then a deeper insight is taken into the volatility nature of bunker price, based on historical statistics and recent market information. Following that, bunker’srole in shipping transportation is presented, engendering the necessity to hedge against bunker price fluctuation. The objective of this study and related literature review are then presented. The main part of this study touches onthe specific hedging tools against bunker price fluctuation. Basic working principles of the tools are explained, together withrelated examplesanalysis, and peer-to-peer comparison. Given the huge up-and-down bunker market movements nowadays, successful and failure cases of hedginginstrument usage are presented, with proper investigation into the causes. Following that, future bunker price development is predicted, based on the analysis of various factors such as oil market, inventory and so on. Future corresponding actions are thenrecommended accordingly. Lastly, a conclusion is drawn to summarize the findings of this research study. It is also recommended that other tools of controlling bunker price fluctuation risk, such asbunker escalation clauses, emergency bunker surcharge and long-term bunker purchasing contracts, should be used in combination with the hedging instruments covered in the report. The shipowners will therefore enjoy an overall good protection from the fluctuating bunker price.