Gus Majed, the CEO of the Paratus Group, addresses the risk management gap in the global bunker fuel and freight markets.

The global bunker fuel market, consuming approximately 3.5m barrels per day, alongside the global freight market, with a staggering 900m dwt in dry and wet tonnage, plays a critical role in the world economy.

However, beneath this massive scale lies a significant risk management gap, with only 3-5% of market participants equipped to handle the complex dynamics of fuel and freight price volatility. This leaves a vast majority—95% of participants—vulnerable to market fluctuations, primarily due to their lack of access to necessary hedging tools and expertise. This imbalance raises pertinent questions about market dynamics, corporate structures, and the future of risk management in these essential markets.

Market dynamics and risks

The disproportionate expertise within the global bunker fuel and freight markets can be attributed to the highly specialised knowledge required to manage these risks effectively. The minority who succeed in mitigating fuel and freight price risks are typically sophisticated traders and operators with in-depth market insight and advanced trading capabilities. These entities are adept at leveraging derivative hedging strategies to safeguard against volatile price shifts., a skillset that is neither widely available nor easily acquired.

Conversely, the remaining 95% of market participants, often corporate entities domiciled as special purpose vehicles (SPVs) in offshore jurisdictions, face significant challenges. Many of these entities are set up to own and operate individual ships or fleets, primarily to isolate financial risk. However, their corporate structure and the nature of their domicile often exclude them from accessing sophisticated financial instruments, such as derivative hedging. The lack of in-house expertise further exacerbates their vulnerability to price risks, leaving them exposed to market volatility without adequate safeguards.

Corporate structures and jurisdictions

The corporate structure and domicile of these entities play a critical role in their risk management capabilities. SPVs, particularly those based in offshore jurisdictions, are typically established for tax efficiency and asset protection rather than operational sophistication. They often lack the necessary scale and resources to implement comprehensive risk management strategies. Additionally, the regulatory environment in some offshore jurisdictions can be less stringent, with fewer requirements for transparency and risk management, which may contribute to their inability to access essential financial tools.

Regulatory and financial barriers further compound these challenges. Many banks and financial institutions are reluctant to extend derivative hedging lines to SPVs due to perceived credit risk and regulatory concerns. Without access to such hedging instruments, these entities remain exposed to significant market risks, which can have cascading effects on their financial stability and the broader market.

An insurance-based solution for risk intermediation

Effective risk management in the bunker fuel and freight markets requires specialised trading and operational knowledge. This includes a deep understanding of market trends, price drivers, and the ability to execute complex financial transactions. However, the scarcity of such expertise among the majority of market participants highlights the need for accessible solutions.

The insurance industry, recognising this gap, has developed an innovative insurance product that democratises access to risk management tools. By offering a risk intermediation solution tailored to the unique needs of these market participants, there is now an ability to bridge the gap between sophisticated traders and the wider market. This not only increases access to expertise but also provides a safety net for entities that previously had limited options.

Banks and clearers often contribute to the challenges faced by many market participants by imposing strict collateral requirements and credit evaluations, which many SPVs or shipping companies cannot meet. An insurance-based solution offers an alternative by underwriting the risk and providing coverage that effectively mimics the protective benefits of derivative hedging. Such insurance products can be better placed to support the broader market, offering a more inclusive approach to risk management.

The emergence of these innovative solutions represents a significant shift in the market. They not only address the immediate needs of underserved participants but also contribute to the overall stability and efficiency of the global bunker fuel and freight markets. By mitigating risk across a broader segment of the market, these innovations can reduce the potential for market disruptions and enhance the resilience of the shipping industry.

Future implications in a net-zero world

As the global economy transitions to a net-zero future, the ability to manage fuel and freight price risks will become increasingly critical. If a significant portion of the market remains unable to manage risks effectively, the global shipping industry could face heightened instability. However, increased access to risk management tools, facilitated by innovative solutions, could reshape the competitive landscape, enabling smaller participants to compete more effectively and sustainably.

Regulatory and policy considerations

Regulatory bodies have a crucial role to play in ensuring that all market participants have the tools and knowledge necessary to manage their risks. By fostering an environment that encourages transparency, education, and access to financial instruments, regulators can help bridge the gap between sophisticated traders and the broader market, ensuring a more stable and equitable global shipping industry.