Understanding Market Dynamics Ebony Smith World Fuel Services Corporation March 19, 2014 Disclaimer • • • • • • • • • Important Information World Fuel Services Corporation (“WFS Corporation”) is a Florida Corporation listed on the New York Stock Exchange. WFS Corporation is the parent corporation of both World Fuel Capital Limited (“WF Capital”), a United Kingdom corporation, and World Fuel Services, Inc. (“WFS, Inc.), a Texas corporation. WFS Corporation and its subsidiaries and affiliates may be collectively referred in this presentation as “WFS”. WF Capital approved this communication for distribution in the UK only to Eligible Counterparties and Professional Clients (as defined under the UK Financial Services Authority’s rules). In the United States, this communication is directed to Eligible Commercial Entities and Eligible Contract Participants (as defined in the US Commodity Exchange Act). 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The trademarks and service marks contained herein are the property of WFS Corporation. This communication may not be reprinted, redistributed or sold without the prior written consent of WF Capital. 2 Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Annualized Volatility Bunker price (Avg Spore, Hou & Rdam) 40% 35% 2011 2012 2013 30% 25% 20% 15% 10% 0% 1/3 1/18 2/2 2/17 3/4 3/21 4/5 4/20 5/5 5/20 6/6 6/21 7/6 7/21 8/5 8/22 9/6 9/21 10/6 10/21 11/7 11/22 12/7 12/22 5% Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Who has bunker cost exposure • Typically, ship operators are very sensitive to changes in fuel prices due to: – Fuel expenses comprises a large portion of total expenses – The inability of ship operators to quickly or fully pass along price increases via higher freight / charter rates • Ship operators are “short” fuel and have inherent price risk. Somebody has to buy bunker Charterer COA with BAF COA without BAF Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Owner Present & Possible Future Sulphur Content Scenarios Global Cap 2013 3.50% 2020 0.50% Baltic Sea & North Sea ECA 2013 1.00% 2015 0.10% 2015 W. Coast Norway US & Canada ECA & Puerto Rico/ U.S. Virgin Islands by 2014 1.00% 2015 0.10% California State & Port LSFO legislation to be further reduced in 2014 Except for France, Mediterranean countries not interested in an ECA Japan study group reviewing the possibility of a national coastline ECA. No discussions underway for South American ECA Hong Kong has plans to apply to IMO to designate its port and the surrounding pearl river delta (PRA) as an ECA. to apply “Ringleman” smoke test in port and limit MGO sold in the port to max 0.05% sulphur by 2014 Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Holistic Risk Management Approach Fixed Forward Physical Financial Derivatives Holistic Risk Management Approach Physical Stockpiles Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Alternative Pricing 2 Categories of Fuel Hedging Strategies: • Incorporated within delivery of physical fuel also known as “embedded” or FFP • Includes forwards and alternative pricing • Easy to administer • Perfectly effective • Derivative contracts on oil products • Includes futures, swaps and options • Financial settlement of derivatives offsets price movements on physical • Margin call sensitivity & accounting consideration Physical Hedging Financial Hedging 7 Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Bunker Hedge Challenge/Issues to hedge effectively Swap Port Timing •Settles monthly average while you buy bunker spot price •Hedge Accounting set-up •Basis risk – basis can change significantly •Multiple choices of bunkering port • Vessel schedule on bunker cannot be planned ahead of time Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Basis Spread vs. Paper traded Market $200 Rotterdam Houston Balboa Spore Seattle Cartagena Buenos Aires $150 $100 $50 $(50) Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 $- Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Market Risk Basis Spread vs. Mops 380 Cargo $60 Singapore 380CST $50 South Korea 380CST Shanghai 380CST $40 $30 $20 Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Feb-14 Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 $- Jan-12 $10 Fixed Forward Physical or Price (FFP) Can easily compliment derivative hedging programs • Physical forwards can be used to replace or supplement derivative hedge positions • Care should be taken to avoid “double hedging” quantities • Many hedgers utilize a holistic approach to managing fuel price volatility. Physical Forwards Financial Derivatives Holistic Risk Management Approach Physical Stockpiles 11 Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Alternative Pricing Fixed Forward Price (FFP) Benefits • A Fixed Forward Price (FFP) is a price agreed for a physical delivery that is beyond the normal spot market timing for offers which is typically 7 – 10 days prior to a vessel ETA at a particular port. • Instead of being exposed to spot market movements between now and the future delivery, with an FFP the buyer has a fixed price for an agreed volume and time period. • FFPs can be for one bunker supply or multiple supplies. • FFPs can be arranged for one port with options to supply in other ports. • They are not “swaps” under Dodd-Frank derivative regulations • They are perfectly effective • They compliment paper hedging strategies • They can lessen hedgers regret Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Single bunker transaction FFP Single bunker transaction, fixed in advance. Inquiry date 17 Dec 2013 ‘Tanker # 1’ Singapore bunkers only Mar 20 2014 1,000 mt 380 cst Suppliers typically offer 5-7 days prior to ship ETA Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. Flexible FFP • A WFS product whereby we structure an agreement for a FFP but with optionality on ports. • The customer can choose from a range of port options which are priced separately within a pre-agreed notice period. The price for each port will vary but will be firm at the time of fixing and will not change with the market. Period : Quantity : Ports + Fixed price: June – August 2014 3000 mt / month 380 cst Singapore $720.00 mtd Busan $740.00 mtd Shanghai $760.00 mtd Notice : Customer to provide agreed upon minimum notice of port and quantity for each order. Copyright© 2012 World Fuel Services Corporation. Proprietary & Confidential. All Rights Reserved. THANK YOU [email protected]