Last week a client asked ” is it a good idea to do bunker insurance ? And which is better – traditional fixed price agreement (FPA) or bunker price insurance ?
To begin with , the way I see bunker price insurance is like a options, the fixed price agreement as a futures. For bunker price insurance, You pay a certain amount premium to hedge if the price keep going up and break the agreed level, lets say USD500/MT, you can have coverage for any price go above that agreed level , say 580USD/MT, then you will be compensated on the 80usd extra from the options. After deducting the premium you paid that’s your “profit” . However if the price keep dropping , say USD300, all your lost is the premium and nothing more.
Compare to fixed price agreement , if market goes up to USD580 you will be able to purchase at same agreed contract price USD500 , yet when the bunker price diving down you still have to purchase at USD500/MT (even when market level is USD300/MT).
Thus it’s hard to say which one is better because those are 2 different tools, also we should consider the premium of the bunker insurance , if it’s too high then it miss the point as it could eat up the “saving”/ “profit” from hedging the purchasing price. I personally think its beneficial to shippers because more tools means more angle to tackle the situation of vigorous bunker price movement in the past few months.
Until next time
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