Fuel hedging - Is it a gamble?
Fuel hedging is not for everyone but generally is not very well understood and is viewed with suspicion by many.
For many hauliers that have robust fuel escalators they can protect themselves against the rising price of fuel by passing on the cost to their customer base (albeit with a time lag). This means that margins and bottom line are protected against any price rises in diesel. For others, this is not so easy to do, or they are nervous to implement an escalator given the risk of losing business. Very few hauliers have escalators in place to cover all of their turnover, and this inevitable makes for difficult budgeting and forecasting of results.
Many hauliers may have entered into agreements or contracts with a customer to deliver goods on a fixed price for a term. When negotiating pricing the haulier can use the relevant forward price to ensure that its margins are maintained during the period, and lay off its fuel risk with a Bank. This enables the haulier to still be able to negotiate with its fuel suppliers, but off set the possible higher fuel price with “cash for difference” contracts with the Bank.
The outcome is that the original level of profit wanted by the haulier is protected (and the budget for fuel will be accurate). It also gives peace of mind and an alternative for the customer that they will not have to bear the cost of rising fuel. For many customers, having a haulier supplier that is able to have such a facility with a Bank, and offer a fix price, can be a differentiator when choosing its transport suppliers. With tenders submissions it is worth quoting this option pending further discussion and agreement with the client.
Your accountant can advise you about the implications of fuel hedging, but the important factor to recognise is that if your fuel costs rise above the price at which you have hedged, you will receive a cheque for the difference. If your fuel costs fall below the price at which you have hedged, you will have to write out cheque for the difference. What you effectively pay for the fuel will however be exactly as you have budgeted for the period.
I will post a link for an independent article on this shortly, but i believe hedging is something that should be seriously considered and is in fact not a gamble. Timing is everything of course, but my information is that if you are going to do it - now is a good time to hedge
For many hauliers that have robust fuel escalators they can protect themselves against the rising price of fuel by passing on the cost to their customer base (albeit with a time lag). This means that margins and bottom line are protected against any price rises in diesel. For others, this is not so easy to do, or they are nervous to implement an escalator given the risk of losing business. Very few hauliers have escalators in place to cover all of their turnover, and this inevitable makes for difficult budgeting and forecasting of results.
Many hauliers may have entered into agreements or contracts with a customer to deliver goods on a fixed price for a term. When negotiating pricing the haulier can use the relevant forward price to ensure that its margins are maintained during the period, and lay off its fuel risk with a Bank. This enables the haulier to still be able to negotiate with its fuel suppliers, but off set the possible higher fuel price with “cash for difference” contracts with the Bank.
The outcome is that the original level of profit wanted by the haulier is protected (and the budget for fuel will be accurate). It also gives peace of mind and an alternative for the customer that they will not have to bear the cost of rising fuel. For many customers, having a haulier supplier that is able to have such a facility with a Bank, and offer a fix price, can be a differentiator when choosing its transport suppliers. With tenders submissions it is worth quoting this option pending further discussion and agreement with the client.
Your accountant can advise you about the implications of fuel hedging, but the important factor to recognise is that if your fuel costs rise above the price at which you have hedged, you will receive a cheque for the difference. If your fuel costs fall below the price at which you have hedged, you will have to write out cheque for the difference. What you effectively pay for the fuel will however be exactly as you have budgeted for the period.
I will post a link for an independent article on this shortly, but i believe hedging is something that should be seriously considered and is in fact not a gamble. Timing is everything of course, but my information is that if you are going to do it - now is a good time to hedge
posted by Andrew at
4:35 PM
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