Seaborne transport is fraught with operational dangers and business uncertainties, and risk-management tools can help mitigate the hazards. But, asks Tim Maughan, is there too much information, and how do you focus on exactly what you need?
There are plenty of shipping tools that promise to mitigate and manage risks faced by shipbrokers, shipowners and ship operators. But, ironically, the sheer amount of information can bewilder those it seeks to help. Maritime professionals need to be able to sort the wheat from the chaff, and this is not always easy.
John Phillips, managing director of Singapore-based marine credit insurance and management consultancy Awyr Las, warns that operators and brokers can actually lose money if they pay attention to the wrong risk-management tools.
He explains that shipping, which is, after all, the process of transporting a commodity over a given route, is straightforward. “We have made it far, far more complicated than it needs to be,” he says. “Risk-management tools are anything which is going to mitigate your risk, in one way or another. The most important tools here are things such as credit modelling and credit insurance; you can look at other ways to mitigate risk, such as securing your exposures against assets.”
The 30-day credit term is common, although, says Mr Phillips, some larger companies may push for 40 or 45 days – or even 75. “What keeps the vessels running is the fact that they can buy their fuel on credit, and pay tomorrow for what they are using today. It is a matter of the supply company looking at the financial justification behind that.
- Compliance risks: the laws and regulations applicable to each business, such as tax, employment, and health and safety
- Employee risks: this includes strikes and illness.
- Environmental risks: the detrimental effects of natural disasters and difficulties created by accidental property damage.
- Financial risks: dangers posed by business transactions and financial systems.
- Health and safety risks: what situations could apply, and how would they affect customers, as well as employees.
- Operational risks: operational and administrative procedures, including record-keeping and IT systems.
- Political and economic risks: the possible results of changes in government and government policy, or recessions and their impact on interest rates.
“If you can eke out an additional per-tonne rate to cover the finance cost, and you have the equity to extend those sorts of lines, then why not?” Changeable routes, ships and credit terms: the maritime sector contains substantial risk.
Training can reduce these risks, and the Baltic Exchange offers courses on Freight Derivatives & Shipping Risk Management and Advanced Freight Modelling & Trading. Modules include freight rates, bunkers, financial risks, ship price, value and credit risk. “Training can help a wide range of shipping professionals to recognise and then mitigate potentially damaging financial and operational risks before they become a problem,” says course organiser Professor Nikos Nomikos. These courses are held around the world and delivered by Prof Nomikos and Dr Amir Alizadeh from the Centre for Shipping, Trade and Finance at Cass Business School, in partnership with the Baltic Exchange.
The Baltic Exchange also offers other risk-management services, including its postings service, which goes back to its coffee-shop roots in the 18th century. While it started as a simple blackballing process, the postings service has evolved to become an active risk-management service, where members can check an online listing of blacklisted companies at www.balticexchange.com before fixing. The Baltic’s Barrie Wooderson is on hand to provide advice (email@example.com) and assist members that have had difficulties in obtaining commissions or arbitration awards.
Ask for the background of the company. One reason you see people in a mess is because they go for the cheapest rate. And that is normally not the best rate
One of the better-known risk-management tools is the Forward Freight Agreement, for which the Baltic offers assessments and a brokers’ association. Credit reports are another tool – and one that is unique to the sector, according to Mr Phillips. Four companies provide this information, including Ocean Intelligence, one of Mr Phillips’ businesses. Useful as these are, there are limitations. “There is no global transparency when it comes to corporates,” he says. “Every country has different rules for different types of companies.”
That said, “the analysts have a good understanding about what is going on,” Mr Phillips notes. “They offer a dated snapshot of a company, from the point of view of who is behind it, what it does, what it is looking to do, and what its payment performance is like. It is useful information, provided people know what they are getting and they know the limitations.”
With the diversity of risk-management tools available, brokers, owners and operators have to ensure they are looking at the right information and ignoring what is irrelevant. Is too much information available? An industry source says not. The emphasis, he says, is on investigating other parties, and doing your homework before you begin business. “You network in the market, and in less than one hour, you know who they are. You will ask for the background of the company, you will check them out – are they good enough, are they trustworthy? One reason you see people in a mess is because they go for the cheapest rate. And that is normally not the best rate.
“There is a lot of information, and you need to separate it. But the rumours in the market run so fast that if a company is in financial difficulty, it will boil in the market.”
The amount of information available can be vast, but, stresses Mr Phillips, the knack is dividing the necessary from the unnecessary. Shippers and brokers, he says, have to “use a little bit of the grey matter between their ears”.
The top ten global risks
1. Regulation and compliance
The leading business worry is that uncertainty about regulation will stall decision-making and planning
2. Cost-cutting Falling profits and national austerity programmes are forcing companies into trimming their expenditure, preferably without cutting staff.
3. Managing talent A human resources challenge, split between internal problems, such as company processes, and external factors such as competition for top employees.
4. Pricing pressure Mature markets and slow organic growth, combined with the continuing recession and declining and ageing populations, are creating fears for many organisations.
5. Emerging technologies Rapid development creates risk from the unforeseen effects of new approaches and the challenge of choosing what to adopt – and when.
6. Market risks Commodity price instability and financial market volatility are making careful monitoring vital.
7. Expansion of the role of government Seen as a difficulty particularly in the US and China, intervention has alarmed many businesses.
8. Slow recovery Expectations of economic recovery have risen, but most organisations remain wary of the effect global risks can have on their operations.
9. Social acceptance and corporate social responsibility The impact of public reaction to corporate behaviour should not be ignored
10. Access to credit Reports of lending difficulties have declined since the height of the financial crisis, but uncertainty remains in many areas.