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The adoption of physical hedging as an instrument for managing risk will play a key part of risk management strategies in 2010 and beyond, according to Morten Dehn, General Manager, OW Bunker Risk Management.

Speaking at the Platts’ Managing Oil and Energy Risk conference in London, Dehn said: “The physical hedging of bunker fuel purchases enables customers to buy products on a forward basis, and is a definitive and easily auditable hedging instrument that provides cost stability.

"Following the economic downturn, we are now operating in a new era of responsibility, where companies have to exercise an appropriate level of conservatism. They must caution themselves against unnecessary risk taking, even if the appetite for risk returns as the markets begin to recover. Physical hedging provides this stability as part of a comprehensive risk management strategy that incorporates a mix of tools and instruments.”

Physical hedging allows customers to fix and lock in the price of bunker fuel in a specific port where they know they will be purchasing products, whilst still being able to lift in any port in the world, and maintain the use of the contract.

Morten Dehn stressed that the key to an effective risk management strategy is ensuring that it is embedded into the infrastructure of an organisation, it’s corporate and financial processes, and the day-to-day operations of the business.

“There has to be a planned and formulaic approach to risk management and the implementation of an holistic strategy that becomes a way of corporate life. There must be a clear understanding of a company’s risk exposure, its appetite for risk as well as its motives for managing risk. And most importantly, any risk management strategy must incorporate a variety of tools, instruments and analytical processes that provide balance and stability against the increasing elements of risk that organisations now face, from basis and time risk, to volume, and especially counterparty risk.”

"As bunker fuel becomes an increasingly higher valued requirement for ship operation, OW Bunker sees the interaction between the customer and the risk management solutions provider becoming more critical, where the relationship moves from being perceived as a supplier, to one of partnership," OW Bunker said.

Dehn added: “The nature of the relationship must be consultancy-based, founded on a complete dedication to maximising operational and financial performance. This can only be achieved if there is a total understanding of the customer’s business and their corporate strategy in conjunction with an in depth knowledge of the market, its complexities as well as its continually changing dynamics.”