Chamber president to investigatefuel hedging
Taming rising fuel prices is an international challenge, but Bahamian businesses may benefit from next week’s meeting between Khaalis Rolle and a Morgan Stanley commodities expert from New York to explore hedging alternatives.
It is only one among a number of avenues being explored to address fuel prices, said Rolle, who is both chief marketing officer(CMO)of Bahamas Fast Ferries(BFF)and president of the Bahamas Chamber of Commerce and Employers Confederation(BCCEC). Smaller freight carriers like Bahamas Fast Ferries are trying their best to absorb the added costs, while larger carriers reflect fuel price volatility in their billing more quickly. The hedging alternative may be a new consideration for Bahamian businesses.
“We are going to talk about what the global options are for us, not only in the transportation industry, but in general, for hedging in The Bahamas,”Rolle toldGuardian Businessyesterday, wearing his BCCEC chief cap.”I don’t believe that as a country we have ever really gone down that route and looked at it as a viable option for us.”
Rolle said that in The Bahamas, hedging, especially in the commodities markets, was often considered a sophisticated tool only available to multinational companies. Fuel hedging is generally used by large fuel consuming companies to manage price fluctuations by locking in costs through a commodity swap or option contract. While hedging reduces the risks associated with the uncertainty of fluctuations in price, it could result in a company paying more, or less for fuel. Airline companies frequently use fuel hedging to manager their costs.
Wearing his CMO hat, Rolle said that his company was also meeting with several local banks to see what practical measures could be implemented to allow for some hedging of fuel costs.
According to Rolle, Bahamas Fast Ferries spends millions on fuel annually, and although every effort is made not to pass fuel cost increases on to customers, at some point it may be inevitable.
“We can’t eat up the price increases indefinitely, but we try to hold for as reasonable a period of time as possible. If it has the ability to compromise the viability of the business, then we look at ways to share the cost,”Rolle said.
The ferry business may be mostly associated with passenger transportation, but according to Rolle cargo and vehicle transportation accounts form a significant portion of the company’s business. He said efforts are made first to reduce operational costs, then to look at efficiency strategies, such as reducing vessel speed to save on costs.
“(Bahamas Fast Ferries)promises you that we are going to get you there during a certain timeframe, and that’s been the hallmark of our business, being on time and delivering exactly what we promise,”Rolle said.”But there comes a point when you can’t do any more reducing, and the price of fuel continues to climb. Then we will evaluate how we share that burden.
“When you see us increase ticket prices, it’s because we have exhausted every possible option.”
Another local carrier, Betty K Agencies Ltd, is also trying to avoid passing increases on to customers.
“Right now, fuel costs are up 25 percent from last month but, unfortunately we are trying to build our business back, and we have to eat that additional cost for the time being at least,”Jack Sands, president of the Betty K Agencies toldGuardian Businessyesterday. The’building back’of his company was a reference to the loss it suffered from a fire which destroyed their Nassau offices and warehouse on February 14.
Hedging mechanisms may be more difficult, or impossible for smaller shippers to undertake on their own. The complex contracts demand up front spending as well as ongoing administrative costs, according to Rolle. Asked if he was in talks with any other businesses about sharing costs and benefits cooperatively, he said that no such talks had been had yet.
Fuel is generally the largest component of the costs of freight shippers. The industry standard for crude oil future contact prices is West Texas Intermediary(WTI), which closed at$101.73 per barrel yesterday, up around 14 percent since the average price for the first week of the year.
Larger carriers in the region are more responsive to movements in fuel costs, using the WTI contract prices to determine the’bunker surcharge’or’bunker adjustment factor’to offset fluctuations. The bunker is included in bills of lading.
A local expert on the industry said the WTI is a useful tool that gauges average future fuel prices, considering aspects such as supply and demand and global political developments. Short of having a commodities specialist on staff it provides a logical analysis of what fuel prices are likely to be. It also gives customers a point of reference in understanding why the bunker is either increasing or decreasing. The expert said industry standards called for clients to be notified in advance of any changes to the bunker and ensured they not only shared the burden when prices increased, but took benefits when they decreased.
Fluctuations in fuel prices will impact transportation costs for tourists and Bahamians, the energy cost of conducting business in The Bahamas, and on all goods imported into the country, including food. According to the U.S. State Department, imports to The Bahamas stood at roughly$2.6 billion annually.