“Bunkering is without a doubt the most opaque market there is. At least when a fixture is done in shipping, the detail gets reported out there pretty quickly — sometimes before even the charterer and the owner know. But in this market, no one knows the ‘fixture’ of bunkers. The only way you even know two data points in the same port is if you have two ships loading in that particular port with two different suppliers”.
– Nicolas Busch, founder and CEO of Navig8/Integr8
This is the first of a 3-part series where we explore techniques and concepts when establishing the bunker price in a port.
Where do you get your bunker prices? Do you trust your source? Do you know how the price was constructed?
In opaque commodity markets, calculating the spot price can feel more art than science. In this article we will cover the fundamental concepts that go into composing a bunker price.
The Basics
Lets start with the basics. A bunker price must always be for a specific day, fuel grade and port. This combination is a market. Internally, suppliers and traders set new prices every day (whether they make them public is another matter).
A common misconception is that – if a buyer sees a price on Monday, sees no change, and then wants to buy on Thurs – that the price is still valid. It is not. Prices change every day, for every port around the world – whether your pricing source updates daily or not.
In any market, the ideal way to calculate the spot price is to first have an authoritative log of previous transactions from which a predictive statistical model can be built. For example, Zoopla, the UK property portal, provides customers with an online home valuation tool. It can do this because all historic property transactions are available from the Land Registry.
Unfortunately there is no such universal system for bunkers. The best sources are large trading houses which can see up to 10% of global transaction volume. They only broadcast averages into the market, hiding all of the valuable data that goes into constructing their numbers.
The best possible attempt is to take as many authentic sources as possible, consider the nuances of each source and create a model based on this.
Below we explore some of these nuances.
Organization Types
Different types of companies issue prices into the market or public domain:
- Supplier – this is the gold standard for bunker prices. Usually provided in response to a specific bunker enquiry at a specific port, and valid for 10-30 minutes. Supplier prices seldom make it into the public domain and are mostly seen by traders as well and the most credit-worthy buyers over Skype, Whatsapp and email.
- Trader – the next best pricing source. Traders constantly see many supplier prices for many ports and have a good consolidated view of the market. Some traders issue prices into the public domain. Trader prices are different from supplier prices because they typically add a margin of $2-$10/mt to cover their financing and credit risk costs, and because their price will be formed based on the observed prices from multiple suppliers in a given port.
- Broker – similar to traders in terms of quality, but with much less volume. Brokers don’t take financial risk, and therefore see a smaller slice of the market.
- Publisher – the most mysterious, but most easily available pricing source. Publishers are not active market participants. When suppliers, traders and brokers put a price out, they expose themselves to the buy side – for good or bad. Publishers don’t have buyers they need to remain accountable to. For the same reason, publishers are more susceptible to inflated numbers being reported by the sell side of the market. The component numbers and timestamps, along with their methodology, is often opaque.
Price types
- Indications – ‘Indics’ are provided to the market at large by suppliers, traders and brokers. They are usually $0-10/mt above fixed prices and based on a typical quantity of 500mt IFO, 50mt MGO, and a 4-7 day ETA. The impact of avails will be factored into the price, but the credit worthiness of the buyer will not. Sellers have some accountability to stick to their indics, but in reality not for more than an hour. Indics are necessary for the planning stage, prior to price negotiation.
- Opening Offer – The first offer during a negotiation reveals where the sell side thinks the market is at. The buyer will often remove sellers from the negotiation who are above the ‘majority cluster’, as they are perceived as out of touch with the market price. Unlike indics, opening offers have a known vessel, ETA, quantity and buyer. In a real enquiry, the average of all opening offers received from sellers generally matches the indic if the indic is relatively fresh provided credit, quantity and ETA are all fairly standard.
- Blended – Publishers don’t provide indics or opening offers. They only show blended prices. We recommend distinguishing between indics and blended prices, because blended prices follow a consistent price construction methodology (whether that methodology is in the public domain is another matter). For example, at the most basic level its an average of the days prices in a port, though much more sophisticated methodologies exist.
What about actual fixed prices?
We do not recommend including fixed prices into price modelling. Put simply, its comparing apples and oranges. Fixed prices include a negotiated discount, of which the component reasons are hard to know and statistically tough to normalize. It is far easier to normalize pre-negotiation prices.
The journey from opening offer to fixed prices is usually between 1-4 back-and-forths, with the price getting negotiated down $0-10/mt. The primary influencing factors are competition, the buyers appetite to push down or wait vs the sellers appetite to resist or wait. Secondary factors are time to ETA, number of suppliers in a port, number of traders competing, buyer credit worthiness, payment terms, availability of fuel, barge schedules, oil price volatility and recent fuel quality concerns.
The other practical reason is that fixed prices are rarely seen in the public domain. Only the winning seller and buyer sees them, wheres most participants would get an idea on the opening offer. Understandably, sellers are also sensitive because it reveals their margins.
Divine Theory vs Messy Reality
The further one moves from suppliers, the more component prices go into forming a single price. The problem is that the granularity behind the component price information is often not included – only the price. All detail behind that price is lost.
The good news is even though this situation is not perfect, it’s good enough to build predictive models which can be used to safely make commercial decisions. In Part Two, we discuss how to think about single prices vs price ranges, outliers, and how the timestamps of prices matter.
For more information on bunker prices, market dynamics or what we offer please contact us:
Email: [email protected]
Tel: +44 (0) 203 874 7740
Website: www.bunker-ex.com
Office: New Broad Street House, London EC2M 1NH