As the CEO of a fuel bunkering business that resold an estimated 5.5 million tons of marine fuel in 2019, Cem Saral embarked on 2020 with trepidation as the International Maritime Organisation imposed new sulphur limits on marine fuel oil. In fact, what looked at times like a perfect storm didn’t turn out so bad, he tells Damian Stewart, Managing Partner EMEA & Asia at Human Capital.
The year 2020 was never going to be an easy one for Cockett Group, the bunker reseller jointly owned by Swiss trader Vitol and South African holding company Grindrod. As one of the biggest players in the industry, Cockett typically handles around 18,000 deliveries to customers annually, in every single line of shipping, with around a third of its 160 employees based in the company’s operating headquarters in Dubai, and the rest across fifteen offices in five continents. With IMO 2020, the International Maritime Organisation’s new regulation to require all ocean-going vessels to burn only fuels with a maximum sulphur content of 0.5%, coming into effect on the 1 January last year, the industry – and Cockett’s business – was preparing for significant disruption. IMO 2020 represented the biggest change in the global shipping sector since the switch from coal to oil bunkering in the early 1900s, impacting all its connected industries.
“It was one of the largest disruptive regulatory changes for a century, for the entire oil barrel,” says Saral, chief executive at Cockett Marine since 2016. “We thought this was going to be our biggest challenge in 2020; it turned out to be the least of our problems. I’m impressed by the resilience of the industry, and by the transition. In the second half of 2019 we had a lot of worries.”
He says he always knew that transition from HSFO to the new regulation low sulphur alternatives would not happen until the last minute, simply because of the economics of dealing with ingoing and outgoing fuel variations. “It happened that way,” he says. “In November and December 2019, we saw real meaningful change – it was a quick flip in those 60 days. It was just like the financial crisis when we had a massive dislocation, and we thought the world was collapsing as well as our industry. This transition, in that short space of time, finding the right logistics capable of addressing both ingoing and outgoing fuel, matching demand to the right location, the right quality…the industry has done a phenomenal job.”
It was never a given, he insists. While it might be easy to assume the industry simply needed to come up with a new blend and put it in storage, it was a huge undertaking for all concerned. “The consumers went through a lot of pain, understanding these new fuels without ever putting a drop into their engines,” he says. “We spent three years assisting the industry and the market, and ourselves, to anticipate what was coming. I’m very pleased the transition went more smoothly than we thought it would.”
A global pandemic
Then there was Covid, which created its own brand of havoc for the shipping industry. Ironically, though, the spread of the pandemic that devastated consumer demand the world over actually helped ease the pain of the IMO 2020 transition. As demand for jet fuel and middle distillates was hardest hit, the availability of molecules needed for the highest quality LSFO & VLSFO improved considerably.
“The supply chain spent a few months quickly adapting to new regulations on sulphur limits, developing better blending practices and better onboard operating principles,” says Saral. “Then, to be perfectly honest, we were anticipating far more complex and complicated quality control issues, and we had hired additional staff to deal with that. We were prepared, and we didn’t see those issues materialising as frequently as we had anticipated. Despite that I consider this investment was money well spent, one can never be too ready for such transformation.”
The molecular availability was not a significant concern in the run-up to IMO 2020, he says, because he never doubted that there was enough refining and secondary blending capacity to meet the demand. But quality was improved by the availability of “a larger pool of blend components that couldn’t find homes in other distillate markets,” he says, which meant far more valuable distillate products found their way into the marine fuel pool.
But despite its silver lining, the pandemic still hit shipping hard. Looking back, Saral recalls: “Once the lockdown fully started coming into the marketplace, we saw a few months where the industry really felt the pressure in the middle of Q2. April and May were the real dip for our business, when we saw hundreds of container ships with schedules cancelled, oil demand significantly down, and in bulk markets – other than agri bulk – demand really fell off a cliff. You had a lot of crewing issues, manpower issues, and port issues: it’s a highly labour-intensive exercise to get fuel to end users. Again, I think our supply chains around the world did a phenomenal job.” The recovery started slowly in Q3 and has continued ever since.
To say the industry was challenged, then, is nothing short of an understatement. And Saral understands it is not an industry with a reputation for coping well with disruption. “We have always been viewed as two steps behind and resistant to change,” he concedes. “Sometimes we raise our head and show how resilient we are. But we surprised ourselves as well as industry observers.”
M&A around the corner
The next transformation that the sector could well have to endure could be a long-predicted swathe of consolidation, with some new entrants starting to come in and a sector traditionally dominated by small, niche businesses beginning to witness mergers and acquisitions.
“We have spent quite a good part of the last decade talking about the consolidation of our industry,” says Saral. “But you don’t yet see it happening with any intensity.”
He puts that down to a few things. Firstly, while there are huge benefits to trading as a large organisation globally, the geographically fragmented nature of the business still creates interesting value propositions for small players to stay resilient and available. Secondly, the buyer profile is also segmented, argues Saral, and talk of larger blue chips operating in hubs still misrepresents the scale of demand from smaller fleets.
What will drive consolidation though, is the erosion of liquidity from the commodities space coupled with a lack of trust from lenders as derisking continues to take place in the European banking system away from shipping. “It has not been a great decade for shipping,” says Saral, “and we are a secondary industry so if they don’t do well, we cannot do well.”
He adds: “I tend to think that around the middle of this decade we will see a far more visible dislocation and disruption into our marine industry mix. Come 2025, you will not be able to act on your decarbonisation strategy without investing in new talent and new enterprises, and those that are not able to sustain that will need to exit.”
Sadly, the bunker market also experienced its share of scandal in 2020, with several blow-ups, including some big names. “It’s a lesson that irrespective of your sentiment about the counterparty, you have no choice but to accelerate your KYC procedures to understand every aspect of how that business operates,” says Saral.
As someone who describes himself as a trader at heart, Saral has worked in petroleum products for more than 20 years across four continents, working at Vitol in Dubai before assuming the COO role at Cockett in 2015, to become CEO a year later.
That perspective leads him to the view that governance is not so much a bunker market issue as a commodities issue. “We tend to assume it happens in marine fuel, and part of that is true, but it’s often within a broader commodities market context. It’s not always a reflection of bad conduct in marine fuel delivery but how you get your oil into storage as part of your commodity trading.”
He adds: “What we’ve seen is that as markets have become more resilient as a result of better compliance and governance, money has started to become harder to earn. As the margins squeeze in commodities, you have no choice but to take risks, and when those risks go wrong, often people try to carry them on the books and eventually it becomes unsustainable.”
It is a subject Saral feels strongly about: “The cover-up is always worse than the crime,” he says. “I always say that the best quality of a trader – as an individual or as a company – is knowing when to take a loss, not how to make a profit. If you know when it’s time to accept a mistake and you exit, that defines your quality.”
It is his understanding of both commodities trading and marine fuels that sets him apart as a chief executive, he says. “I’m hopefully able to guide and lead the company to its core, which is as a marine fuel reseller, to focus on its core strengths of creating optionality for its clients rather than trying to pretend to be a commodity trader.”
Furthermore, he argues there is a false assumption in the industry that physical supply entities and reseller entities have much the same business models when nothing could be more wrong. “The margin generation, income proposition, risk engagement and business strategy are distinctively different,” he says. “I was able to work on both sides of the business. I know what the reselling entity should not be assuming, and I have started to steer the company in that direction rather than being shackled to the idea that not having a physical trading entity makes us somehow lacking. They are different businesses operating across the same value chain that complement each other, but they are not the same. I believe I was able to bring that perspective to the organisation.”
The bigger picture
Saral is only too aware of the key emerging trends impacting the shipping and bunker market, not least decarbonisation, sustainability, and digitisation. But as an asset-light entity that focuses its business on facilitating effective marine fuel delivery, “by connecting the parts that do not meet for a number of reasons,” he is happy for Cockett to sit on the sidelines.
“The underlying existence of companies like ours is independent of the fuels we use,” he says. “Our challenge is to upskill talent across the company to understand those trends and respond to new fuel options, because price discovery, risk generation and risk management of those products is not the same. I think that dynamic approach of active observation will be elemental to survival for at least this decade.”
On digitisation, he observes: “We will not be immune to it eventually, but we will probably be a lagging industry rather than a leader in adoption.”
As we conclude our conversation, Saral mentions his personal concerns about disinformation in the marine fuels market, citing a recent headline that misrepresented marine fuel sales trends in different ports by failing to appreciate that one port measures sales by weight and another by volume.
“So often the headline concludes something different to the actual article these days,” he says. “And we hardly read anything other than the headline because we are all busy and becoming lazier, but still those headlines easily influence our decision-making. I don’t think there is any intent towards misinformation, other than to come up with an enticing headline that may not in truth be factual.”
In an incredibly challenging year, that attention to detail has no doubt proved critical to Saral’s steady steering of the Cockett ship.