Strategy offers a way to control fuel costs
Jul 1, 2008 12:00 PM
As Diesel prices rise, most tank truck carriers pass along the increase as a fuel surcharge. Managing those surcharges effectively has become more difficult as fuel prices have become more volatile over the past couple of years.
Fuel hedges offer a means of stabilizing surcharges and improving predictability, according to L E “Tripp” Dunman III, managing director of FCStone Trading LLC. He discussed fuel hedging strategies May 19 during the National Tank Truck Carriers Inc annual conference in New York City.
“The goal with this hedging strategy is to smooth out the peaks and valleys in fuel prices over the course of a year,” he said. “It's not intended to let people play the market or to generate massive profits from fuel price speculation.”
Dunman stressed that a good hedging program can enable fleets to cap their fuel costs. If done well, it can improve the chances of predicting annual fuel costs. “Fleets want to know exactly what they will pay for fuel through the year, and hedging lets them do that,” he said.
Fleets aren't the only beneficiaries of a fuel hedging program. Shippers also can benefit. “A growing number of shippers and carriers are getting involved in fuel hedging,” Dunman said. “They realize that hedging can be a market differentiator.”
FCStone has taken a number of steps to make fuel hedging more attractive to the trucking industry. They developed a per-shipment pricing model with a 200-gallon minimum. In comparison, typical fuel hedges are based on 40,000-gallon minimum orders.
Dunman also announced at the NTTC meeting that FCStone has launched a web-based trading program for fuel hedges. Truck fleets will have easy access to the online program, and they will be able to customize their hedging efforts.
“We're giving fleets the ability to set up fuel hedges for various amounts of their business,” he said. “For instance, they can do fuel hedges for specific traffic lanes.”
Ever higher diesel prices certainly have put hedging strategies in the spotlight. Dunman discussed some of the reasons for the soaring diesel prices. Factors include surging worldwide demand for petroleum that pushed crude oil prices into the $140-a-barrel range. The number of refineries in the United States has dropped steadily even as fuel demand has grown.
Complicating all of that is the way pension funds and other commodities traders are affecting fuel prices. “Since the dotcom bust in 2000, we've seen a steady shift of investment capital into oil trading,” Dunman said. “These traders anticipated a surge in demand for refined petroleum products.”
All of that created a lot of volatility in fuel prices. Typically, fleets have dealt with fuel price volatility through surcharges that are used to pass along the increased fuel costs to shippers.
The surcharge is a variable based on the price of diesel fuel. Calculations are based on a floor price and include the Department of Energy's national average reported diesel price. Surcharges may be a percentage of the underlying freight rate or based on cents per mile.
While surcharges enable carriers to recover fuel cost increases without constantly renegotiating freight rates, they complicate the budgeting process for shippers. The surcharges change with the price of fuel, and those changes can be very frequent.
“Using fuel hedges to return predictability to the surcharge process can give a fleet a real market edge,” Dunman said. “It could make the difference in which carrier gets a shipper's business.”
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