|FREIGHT RISK & PRICE MANAGEMENT|
|ABOUT US||WRITING||CALCS and INDEXATION||ECONOMICS
THE JANUARY 2012
TANKER FFA REPORT- EXPECTATIONS DASHED
NOTE TO STUDENTS: Many students,
especially from the U.K. and Greece, visit
this page- tell your
relatives to call us please. We are happy to answer any questions
regarding your family businesses. We are also able to discuss
calculations utilized in shipping bankruptcies, on a confidential
WITH ALL THE TURMOIL IN THE BULK AND TANKER
SHOULDN'T YOU BE CALLING ON bdp1 Consulting Ltd TO HELP PLAN FOR WHAT'S
To discuss how we can tailor our confidential services to suit your company's individual needs, please call 516 606-9088 or email bdp1 at conconnect dot com We create programs for freight and fuel buyers/ sellers, as well as dissect shipping bankruptcy calculations- always happy to talk.
Top Line: Any crystal ball out there is cloudy, because freight markets are at the intersection of multiple derived demands crossing numerous industries with non-synchronous economic micro and macro cycles. Unless you are a ship owner, paid to take risk, the best thing you can do is just hedge and escrow it all out.
Company values in volatile markets? Building and then sustaining value depends increasingly on a company's ability to take more risk and manage it better than the competition. Managing increased freight risk through growth is clearly one of the defining business challenges to creating company value, or shareholder value for public entities. One central objective of many risk management programmes is improving the probability that cash flow is sufficient to finance value-creating strategic plans with internally generated cash. Even in a private company, shareholder value increases, since external cash is more expensive than internally generated cash. Since most shipping companies are private, self financing means less intervention and required disclosures, but in a more transparent world, volatility is not a good thing, even if you are not a listed company. For listed companies, ouch!
Effective risk management
requires both a micro and macro understanding of freight risks across
an enterprise. And it demands that a corporation understand which risks
it can tolerate, and which risks it should transfer. To properly manage
risk, companies need to know the nature and magnitude of their freight
and energy price risk on a company - wide basis. Given the complexity
of many shipping businesses (including
private companies)- or large end-users or processors of freight
services including an energy component -this is not a simple task.
Without a systematic process to
identify all risks facing an organization, quantifying their severity,
assessing their frequency, and measuring their impact, it is virtually
impossible to manage them. Because many companies lack such a
systematic risk analysis process, bdp1 Consulting has created economic
models-- including bespoke enterprise-wide freight price risk
Many ship operators or charterers are both buyers and sellers of many different freight products at multiple locations, varying volumes, over different timeframes. Often, some purchase cost risks offset other sales price risks, but not exactly- as those caught on the wrong side of FASB 133, or Section 1129 of the U.S. Bankruptcy Code can attest. These interrelationships are complicated and change constantly. Furthermore, operational problems can create unexpected imbalances that result in price risks. In this age of shipping and commodity company combinations and mergers, you may need to look at your company's whole risk portfolio spectrum.
Many companies simplify and manage only the obvious risks. While this approach seems to make sense on the surface, it can actually do more harm than good. As many clients have found, a risk analysis that addresses only part of a company's portfolio is inherently flawed. This is because hedging only some risks can destroy internal offsets, thereby increasing the risk exposure of the company. Correlations among all risk factors need to be quantified and taken into account.
How does all this corporate-speak apply to private family-owned businesses? Even if you are private, you have increasingly regulated and tier capitaled bankers looking into your books...or perhaps your counterparty is a listed or otherwise regulated and scrutinized company. You need to put yourself into the place of your business partners and finance providers.
Our economic and market models enable shipowners (and cargo interests) to both forecast their future earnings (and shipping costs) and then to evaluate the associated risk-to-earnings assuming no risk mitigation strategies or positions are taken. It then quantifies how risks can be altered if different hedging programmes are implemented and chartering strategies are undertaken. In addition to understanding the company's risk exposure, management needs to delineate the company's capacity to retain risk, the costs and benefits of assuming risk of increasing magnitude, and its overall risk preferences.
First, it is important to identify when financial risk will cause economic losses beyond the first-order effect of the price change. When there are added impacts, hedging can be cost effective. This is because the market prices hedge instruments based only on market probabilities, and hence those prices do not take into account other adverse effects. For example, a price risk can cause not only a loss in income, but also a drop in credit rating and increase cost of capital. In such a case, the total effect of the price change was more than a first-order effect. Ouch!
And second, it is important for a company to discover its Board's risk preferences-or appetite for risk (or develop them in the case of various cowboy outfits)-- and to incorporate them into the freight hedging programme. For example, if the Board does not want the company to forego the upside earnings potential of a favorable price movement, swaps or freight derivatives may not fit as a hedge device. Risky? Yes, but....
bdp1 Consulting Ltd. examines clients' business plans, budgets, capital structure, credit rating, and debt covenants to assist in assessing clients' risk retention capacities. We also have a process for discovering and quantifying risk preferences to create a corporate risk profile which ensures risks are managed according to the Board's criteria.
Finding the optimal risk management solution and executing it properly are equally critical to success. Just as is the case with risk analysis, bdp1 Consulting Ltd. has developed its own methodology to provide clear, proven guidance. bdp1 Consulting Ltd. assists companies to develop hedging strategies that are effective. With bdp1 Consulting's economic models, hedge positions can be combined with unhedged risks to assess the risk mitigation effects and the impacts of freight costs and revenues.
Aditionally, bdp1 Consulting
Ltd can work with premier insurance brokers to assist
clients in the complete implementation of risk solutions. Our alliances
with top brokers provide our clients w/ unprecedented access to experts
who know shipping and to capabilities offering a wide range of
financial risk management services- the bottom line- we can tie these
strategies to maritime insurance programmemes.
You can't beat the market...
Hedge portfolio selection can be challenging. Not only are there many potential hedge instruments and combinations of instruments from which to chose, their prices are ever-changing. In addition, clients' market views change nearly as often, and the underlying purchases, sales or inventories being hedged are also changing. As a result, many companies layer hedge position upon hedge position and hope that "things will average out."
Without a proven methodology, companies cannot be sure their hedge portfolios will be effective in mitigating their risks to the degree and in the manner desired. Nor can they be sure their hedge position will maximize their expected return, given the level of risk taken. What about asymetrical and asynchronous distributions of freight risk?
Because many companies lack a proven methodology to ensure optimal hedge positioning, bdp1 Consulting has developed optimization models. Our Optimizers enable us to show how and why a particular combination of revenue or cost fulfillment instruments are superior to any others, no matter what the client's risk management objective or risk policy constraints. If the optimal solution utilizes exchange-traded contracts, bdp1 Consulting Ltd can assist clients by providing one-time, ad hoc, or on-going advice on how to position the portfolio. If the solution also includes over-the-counter instruments, bdp1 Consulting Ltd, through its strategic alliances, can provide additional execution capabilities.
In today's business climate, minimizing counterparty risk may be more important than obtaining the lowest bid for a particular transaction. Therefore, clients need access to skilled professionals who can provide the needed expertise to complete each transaction successfully. bdp1 Consulting can work with large financial interests, as selected by our clients or from various institutions with whom we have alliances, to tailor custom risk management analysis and implementation packages for the freight markets.
To discuss how we can tailor our confidential services to suit your company's individual needs, please call 516 606-9088 or email bdp1 at conconnect dot com
SIDEBAR- In addition to practical work building hedging programmes, Barry Parker has lectured at Oxford, through the Drewry programmes in 1987 and 1988. A year later, Barry Parker lectured at the Chicago Board of Trade's (CBOT) Spring Research symposium- shortly after the Panama Canal was briefly closed. Around the same time, he wrote an article that appeared in the CBOT's Journal of Futures and Options Research. He was honoured to be presenting in the same programme with his Advisor from his Advanced Study project (10 years prior) at the Wharton School, Dr. Hans Stoll. He was part of a USDA event at the University of British Columbia in 1990 as Iraq was invading Kuwait. In 1999, Mr. Parker lectured as a Visiting Professor at the World Maritime University in Malmoe, Sweden. He has been a participant in education symposia for the agricultural industries, at North Dakota State University and the Northern Crop Institute, and at the Institute for Agricultural Development (IADI) in Memphis, Tenn on many occasions.
How come no ship
finance info on this website? We have
removed our ship finance page because ship finance is not web friendly.
We work very discreetly but extensively on economic and transaction
models, but we recognize that finance requires a personal touch and a
Hermes tie (not available online). But we are called upon to develop
freight and energy hedging strategies (as discussed above), and
engineer and reverse engineer financial packages for shipping.
Link to Barry Parker article on futures trading that appeared in Fairplay Magazine in 1987
Phone 1 516 606 9088 email: bdp1 at conconnect dot com