The following blog post was prepared by Apurva Mali in his personal capacity and shared with Manifold Times. The opinions expressed in this article are the author’s own and do not reflect the view of Dubai-based commodities trading firm Ennero where is he employed as Trading Manager.
My journey in the shipping and oil industry over the last 15 years has allowed me to view Risk and Risk Management from different standpoints; from serving as a Marine Engineer/Deck Officer on Maersk ships, studying risk management modules in Cass Business School, writing credit reports for Platts and currently trading bunkers in the Middle East, which are vastly different work profiles. The one common factor is managing risk surrounding the vessel (ship) sailing in the high seas of the world.
Out of the nearly 5 years spent in Singapore Polytechnic and on vessels training to be a certified Maritime Officer, a large portion of our learning was about managing and controlling risk. We lived by the phrase, ‘Safety First’. It is a culture which was imbibed in your conscious and in your sub-conscious. The world’s largest and most successful shipping company, AP Moller Maersk, has had the motto since its inception ‘No Loss should hit us which can be avoided by Constant Care’.
The driving force here as a seafarer behind managing risk is to ensure your own personal safety, those of your co-workers, the vessel (ship) itself and the environment around you.
Several past accidents/incidents have forced this ‘reactive’ shipping industry to be more ‘proactive’ and look for prevention and risk management, avoidance is better than dealing with the aftermath of an accident. The introduction of ISM code ensured there was a checklist for the smallest of tasks performed onboard ships, including one for peeling potatoes in the ship’s galley (kitchen).
Soon after I started in Dubai as a somewhat-young Bunker trader, I discovered managing risk went hand in hand with earning big profits for your employer. Like a rash driver speeding ahead, but also concerned about the dangers that lie the road ahead.
Collapse of the then world’s largest bunker trading outfit O.W. Trading in 2014 had raised several key questions about managing bunker credit risk and the model of selling on credit terms itself, although the approach largely remains unchanged. After all, if one building collapses due to poor construction, they don’t stop making buildings.
Credit Risk Management (CRM) is the key to any bunkering business working on credit terms. As bunker trading companies assume the role of quasi-banks and lend large amounts of money ($$ Billions) on unsecured terms for their fuel purchases (Buyers often rotate that money to buy other stuff too), understanding and evaluating the risk-return scenario fairly accurately is one of the Keys to Success, for a pure back-to-back trading company.
We are all a function of our past experiences and influences. Below are some of my own thoughts and opinions on managing credit risk in the bunker industry in my capacity as a bunker trader, derived from own experiences.
My time at Platts has trained me to gather large amounts of information about the counter part in a short span of time, and then sift through that pile of information to get the most relevant and accurate information, to arrive at a credit rating. What it did not train me for is how individuals and companies behave when granted open credit terms, which I could only learn by actively trading in bunkers.
Out of the various quantitative and qualitative data available on counter-parts, Market feedback is one of the most essential elements in evaluating credit, although it often comes with a large amount of ‘noise’ which can have conflicting and confusing information.
To give this a better context and focus, this discussion is mainly about entities which are ‘perceived’ as medium to high-risk, most of them are not insurable by credit insurance companies and lack genuine financial information. This is the typical profile of a small to medium sized ship owner/operator forms a large percentage of bunker buyers especially in the Middle East and neighboring regions, and, also to an extent, around the world in the shipping industry. These entities are often a nightmare for a credit manager and an exciting opportunity for the One-Dollar Bunker trader, who is used to working on limited margins as little as One dollar per metric ton.
It is possible for a bunker trader to be blinded by the profit margins and the $$ signs, but an experienced trader understands the importance of trading responsibly and acting upon the often- obvious warning signs. The short-lived feeling of a high experienced from making a profitable deal, can end up in several weeks of chasing payments and possibly going the legal route and vessel arrest.
The role of CRM within large bunker trading companies is performed by a specialist in form of a Credit Manager. Traders are the first line of defence and should be accountable for managing their own risks. Their risk-taking can affect their own PnL, their organization, and in extreme cases could trickle over to other counter parts, as was the case with OW Bunkers.
In reality, most traders view risk management as a Red Signal or blockage preventing them from achieving their targets and their dreams. The risk/credit managers don’t own the risks. They own the process of managing risks including establishing limits and monitoring those limits etc. It’s a second line of defence after all.
So is CRM an art or a science? It has been observed within and outside the shipping industry for credit risk rating to be both subjective, i.e. depending on one person’s opinion, also objective, taking all the relevant facts and data available or often it is a combination of both.
Moreover, CRM is a responsibility for a trader who must treat it responsibly and understand that certain brash actions can affect the whole organization. After-effects of OW in terms of legal cases and ship-arrests are still being felt today, 4 years after its collapse.
Most traders can structure a trade with the counter-part and the supplier, but not all have the ability to analyze the risk and manage the risk in a manner that ensures their own and their shareholders’ financial survival in the markets when things go wrong. And lets face it, things in the shipping industry often go wrong.. An oversupplied fleet, Prolonged depressed in freight rates, sanctions, currency fluctuations, off-spec fuel, low Sulphur regulations increasing credit exposure by 50% are just some of factors which will increase credit risk on the Road to 2020..
Risk cannot be eliminated, it can be measured, evaluated and monitored, the car driver (trader) is much better equipped to deal with the dangers that lie ahead, while the backseat driver (Risk Manager) continues to advise on the Dangers that lie ahead on the Road to Fortunes and Disasters..
Readers who are interested to reach out to Apurva Mali may contact him at the following address: email@example.com
Published: 28 September, 2018
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