Ready to help shipping companies form their EUA procurement strategy

With the arrival of 2024, shipping entered the EU Emissions Trading System (ETS). In late January, the EU Commission published a list clarifying to which country’s authorities different shipping companies should surrender their emission rights. “This means all the information needed to commence with the trading is now at hand”, Anders Bäckström, Commodity Sales at SEB, says.

The ETS sets a cap on how much greenhouse gases that can be emitted by the industries covered by the system. With shipping included, trading of European Emission Allowances (EUAs) is now a reality for companies within the sector.

“Purchasing EUAs does, of course, add extra administration, costs, and financial risks – and it can be quite a challenging task. More and more clients are now turning to us to get help with securing the right amount of EUAs and forming a suitable procurement strategy”, Anders Bäckström says.

Giving an overview of SEB’s role, Anders highlights a few different aspects.
“As a client of SEB, you can make physical spot or forward purchases of any size, as small as 1 tonne, and have them delivered at any date preferred. In addition, we can help mitigate price risk, as well as handle the liquidity mismatch that can occur.”

Different needs for different types of contracts

Anders Bäckström underlines that the type of trading solution a certain shipping company needs is very much a question of what type of contract it operates on. For spot cargos – one-off, fixed-price shipments of goods from point A to point B – a key factor is acting swiftly.

“As soon as the price is set, the shipping company is left with a price risk on both bunker and now EUAs. Being a digital commodity, EUAs can be purchased immediately to avoid the risk of future price increases. We can help source the exact volume needed.”

“In addition, there might be several weeks between contracting a cargo and the shipping company getting paid. Shipping clients with credit lines can select a preferred future date for delivery and payment. For example, instead of buying spot we can deliver EUAs at a date that matches the payment date. This enables improved liquidity management”, Anders Bäckström explains.

As for COAs – contracts for repeated shipments, usually at a fixed price – the price risk of both bunker and EUAs is yet again left with the shipping company, but for an extended period of time. This calls for liquidity considerations.

"As how the risk occurs is somewhat similar to spot cargos, EUAs are preferably purchased when the contract is signed. But as the volume is typically larger, buying all EUAs on a spot basis would tie up a lot of cash. As a solution, SEB can offer physical forwards with future delivery at fixed price.”

“That way, the shipping company can lock in the price of EUAs but have delivery and payment when payment for the cargo is received or when EUAs are due to be surrendered.”

For some COAs shipping companies incorporate Bunker Adjustment Factors (BAF) – transferring the price risk for fuel to the charterer. Here, SEB has been thinking new.

“As we assumed that emission prices would, in a similar fashion to bunker, be regulated with an EAF (Emission Adjustment Factor) we have developed a new kind of contract to help mitigate the basis risk between the EUA purchase price and BAF price level.”

“A common BAF or EAF practice is to base the price level on an average price. As an example, the average price of EUAs between January 1 and February 1 can be used to define the price for the March sailings. We are now able to offer our shipping clients to buy EUAs at a future average price. Thereby, they can secure the right amount of EUAs at the same average price that the EAF is based upon, which means they can effectively handle the basis risk.”

Finally, Anders Bäckström adds, there are also shipping companies operating on particularly long contracts, stretching over many years, without possibility to fully move price risk to the buyer.

“To protect oneself against commodity price risks on such long contracts requires a proper hedging strategy, taking several aspects into consideration. SEB is happy to elaborate on these aspects and assist in developing a dynamic hedging strategy, tailored to your specific needs”, Anders concludes.