Is your supply crystal ball cloudy?

July 1, 2003 By    

It has been interesting to visit with propane marketers this past winter and at supply seminars that we put on throughout the country. Propane marketers are looking for solutions to their supply, logistic and risk management problems based on this past winter’s experience and what their suppliers offer.

Even some of the best-intended supply plans went bad this year. The supply chain into the marketer’s 30,000-gallon storage tank broke down due to over promises and under delivery of services. In some cases it was the lack of capacity to meet local and regional demand.

Marketers now are looking for suppliers to give them new ideas and perform on the services for which they contracted. They realize they are buying in a volatile and complex energy market, and hunches made with previous year’s crystal balls don’t work anymore.

Here are 10 ideas to consider when contracting your supply, logistics and risk management services for the year ahead of us. They may help you save time, money and frustration in the years ahead.

1. Wholesale suppliers are continuing to push the buying and storage risks back on the marketer. If possible, buy the “physical strips” of propane in the over-the-counter market. This will save on the timing of cash flow and eliminate storage costs. Strip buying is available at the major trading hubs and should be a piece of your supply plan, provided there aren’t allocation issues for using this method.

2. Purchase your physical propane on an index to Mont Belvieu, TET or Conway. Make sure your supplier provides you with a “fixed differential” from your indexed supply point to the supply point where the propane is lifted by the transport company. The basis differential “blew up” on many marketers this past winter and now is the time to work with your supplier to eliminate that differential risk.

3. Make sure your supply contracts are specific on the winter/summer supply ratios that you will receive at each supply point. Make sure these ratios make sense and are achievable. Also, be sure to clarify the ratios for alternate delivery points to your primary supply point.

4. Houdini Rule: Have an exit strategy in any contract you enter into – supply, logistics, storage and financial tools. It’s good business and may eliminate surprises when you need to unwind a deal or consider rolling over a contract.

5. Too many propane marketers try to time the market or buy the bottom. Experts don’t try this in real estate, other commodities or equity markets. They have the discipline to buy in targeted purchase bands that match up with the timelines of what they are trying to achieve in their marketing or financial plans. Know the right tool to use no matter what propane price level you are in.

6. Many propane marketers ignore the fine points of supply economics and miss opportunities to tweak deals to improve those economics. Make sure you understand the delivered-in economics from each supply point you plan to use in the future.

7. Understand the turnaround and maintenance schedules of your supply points. Many propane marketers don’t plan for alternative supply for those times and it often costs them more money. This should be set up when you are putting together your supply and risk management plans.

8. Line up your railcars, transportation and secondary supply points now. There will be tight supply markets in parts of the U.S. this year, and logistics and transportation will be leased to capacity within the next few months. Availability of transportation, infrastructure and cost of delivering propane to your 30,000-gallon tank will get scarce and more expensive as the year unfolds. Be prepared to pay a small premium this year to ensure that you have that secondary supply and transportation lined up for the winter.

9. This year’s energy supply and demand parameters are different than previous years. This year’s propane price level and the costs of hedging and physical pre-buying are also different. The dynamics and timing of the factors that will determine propane pricing in 2003-04 are different than the last few years. This is a good window of opportunity to layer in a portion of your propane supply or hedging tools. The volatility, trading activities and understanding of factors impacting the energy markets in 2003 make even the best crystal balls outdated.

10. Utilize pre-buying and financial risk management tools as insurance to protect your gross margins and support your marketing programs. Don’t think of these tools as investments for profit. Your supplier and risk manager may or may not be the same company. The key is finding a reputable and reliable supplier/risk manager that you trust and know will be there when your gross margin insurance has a settlement.

Crystal balls, hunches and your marketing buddy might work on sports but are not for supply buying. Marketing plans, supply plans and risk management plans working together eliminate the need for crystal balls.

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