SEOUL (Dow Jones)–Hanjin Shipping Co. (117930.SE) will maintain a oil hedging ratio of 30% of bunker fuel purchases this year in order to be less vulnerable to fluctuations in fuel prices, a company official said Thursday.
In 2011, Hanjin hedged 20%-30% of its bunker-fuel consumption, much higher than the previous year’s 10% level, to minimize the impact of oil price volatility.
The recent surge in fuel prices could impact the company’s business, said Cha Dong-joon, head of business management at Hanjin Shipping. A change of $1 per barrel in West Texas Intermediate crude prices would add or cut an estimated $700,000-$1 million in the company’s monthly operating profit, Cha said.
Hanjin drew up its business plans for the year based on an exchange rate of KRW1,100 to the U.S. dollar, and $635 per ton of bunker oil, up from the previous year’s estimate of $625 a ton.
“Given that oil prices are soaring in the short term, Bunker-C oil is likely to average at $635-$700 a ton this year,” Cha said, adding that the company may have to revise its plans according to market conditions.
When Hanjin hedges its fuel requirements, it purchases fixed-priced physical cargoes and derivative instruments like swaps and options in bunker futures markets such as Singapore, Rotterdam, and Long Beach in the U.S., which sell bunker fuel at cheaper prices than spot markets.
Looking ahead, he said, “the second quarter will be the most difficult time of the year as competition with rivals will get tougher on oversupply of new vessels.” However, slow demand for shipping services and high oil prices can be expected throughout the year, said Cha, adding that the company will seek cost reductions and route reshuffling, particularly in the container business.
South Korea’s largest container carrier by sales swung to a net loss of KRW823.86 billion ($730 million) in 2011 from a net profit of KRW289.63 billion a year earlier, as oversupply drove down freight rates.
Hanjin earns 80% of its revenue from the container business and the remainder from bulk shipping.
-By Kyong-Ae Choi, Dow Jones Newswires