CREDIT IN THE BUNKER BUSINESS Pitfalls, Problems, Techniques And Solutions
Conference told shipowners are being given "extraordinarily generous" credit terms for bunkers.
The average bunker stem in today's shipping industry is around 700 tons per ship with a current value— at $85 per ton— of some $60,000. On an average fleet size of fourteen ships, a shipowner would make around 100 stems a year and therefore purchase some $6 million worth of bunkers per annum or $500,000 a month.
Speaking on "Credit in the Bunker Business; Pitfalls, Problems, Techniques and Solutions" at the ARA International Bunker Conference in Rotterdam, Mr. Stuart Kenner, managing director of the Oxford-based marine financial analysis and credit assessment company, MRC Business Information Group Ltd., said that the vast majority of this purchasing was done on an unsecured credit basis.
The world consumption of marine bunkers was around 142 million tons of product a year and although suppliers gross margins were typically only $2 - 3 a ton, "high five or even mid six figure credit on 30 days or longer" were often given.
This was so despite the fact that both exposures and risks had increased for the suppliers while costs had risen for shipowners thereby making them less profitable and therefore higher risk entities to sell to. "Given this," said Mr. Kenner "the ease with which such large credit exposures are granted on such generous terms to the shipping industry is extraordinary." The enormous cost to the supplier of a bad debt spoke for itself.
Credit, said Mr. Kenner, was not so much about credit control as about risk assessment and risk management.
This required relevant, reliable information, intelligent interpretation, experience and having in place a properly understood system with clear criteria for making credit decisions.
Armed with these attributes, suppliers could expand their business by selling to buyers which less informed or less organized competitors might shy away from, while still being able to hold back when the risk was higher than they wished to accept.
Effective credit, he said, starts before, not after, the event and as such was a positive tool not a negative one.
Suppliers, he said, needed to recognize that credit management was now a vital function which needed to be identified and allocated a clearly designated line of authority and a defined set of procedures for giving credit, controlling it, and dealing with the consequences if things went wrong.
All bunker suppliers, said Mr.
Kenner, were in a risky business and therefore needed to know how to assess that risk. Every individual supplier had a different scale of what risk he could bear and therefore each supplier needed to decide for himself whether his policy was to be ultra cautious, just plain conservative, willing to take a few chances or "to hell with it, give it a go".
No one consciously took on a bad debt. "So, first decide where on this scale you fit in, then find out whether the risks you are actually facing are in the category of one you are prepared to face." Mr. Kenner said: "Obviously a six-month-old one-ship owning company in a poor nation is a higher risk than an old established 20-ship owner in Western Europe. However, this is very much NOT the only criterion— the big old owner is precisely the one you are least likely to spot if it starts to get into trouble." It was exactly this kind of company which was likely to have built up a big exposure. "All customers need to be assessed on a regular basis, not just new ones," said Mr. Kenner.
Other factors to be considered included: if the buyer has a financial problem will its owners support it?
are meaningful accounts available?
what is the domicile of the buyer?
does the company have cash or assets and if assets are they fully mortgaged?
what is the buyer's track record, does it generally pay its bills on time? what is its commercial morality? how good is it at communicating with the supplier if a payment problem arises? is the company well managed and how prepared and able is it to cope with the unexpected?
In the event of non-payment and as a last resort, bunker suppliers should also be aware of the power they hold in "that unique, clinical and destructive weapon, the ship arrest" and the fear it generates.
Companies without access to maritime liens, such as container lessors, were green with envy at this tool.
"Shipowners (when the buyer was a charterer), charterers (in the reverse case) and cargo owners were truly terrified about whether a nasty bunker supplier would arrest a ship for someone else's debt," said Mr.
Given proper communications on both sides and the employment of persuasive intelligent argument and sound credit management systems, suppliers should be able to minimize their risks.
But as a last resort, the ship arrest did remain a powerful tool which bunker suppliers should not hesitate to use— if they have to.
For additional information, contact: Peter Brierley, Stratics Consultants Limited, 37B High Street, Chislehurst, Kent BR7 5AE, U.K.
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