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Fixed Price Risk Management is designed to give contractors the opportunity to benefit from a fixed price for their bitumen supplies from Shell for several months or longer.
Mitigating the risk of price fluctuations
As part of one of the world’s largest hydrocarbon trading companies, we distribute around 11,000 metric tonnes of bitumen products to more than 20 countries daily (equivalent to paving 350 km per day) and serve over 1,600 customers. We understand that when the price of raw materials fluctuates, it can make it very difficult for contractors to manage their project budgets. Bitumen is often the largest contributor to road construction project costs and can take up a significant portion of the planned budget.
Crude oil prices from 2000 to 2012 (source: Shell internal data, 2012)
A great challenge facing road construction contractors, therefore, is the estimation of raw materials costs and the cost of bitumen in particular. One of Shell's solutions to this issue is Fixed Price Risk Management, a price mechanism that is designed to offer contractors greater stability (compared to variable pricing) when it comes to budget planning. By entering into a fixed price supply agreement with Shell, a contractor can benefit from fixed bitumen prices for a pre-determined amount of product and period of time.
Benefits of Shell Bitumen Fixed Price Risk Management
Despite energy price fluctuations, Shell aims to provide fixed prices and a reliable supply of goods that can:
- help contractors plan project budgets more accurately
- help contractors have a higher priority of supply of high-quality Shell bitumen product.
Fixed Price Risk Management focuses on offering greater price stability, thereby helping contractors better control their project costs. In the event that the floating price for bitumen is lower than the Risk Management fixed price, the agreed volume and committed fixed price must be honoured.
Shell offers Fixed Price Risk Management in a number of countries. Examples include:
- United Kingdom:
In the UK, authorities are awarding some long-term contracts to road construction companies. This could put the road construction industry in a difficult position, since they have to plan key cost components ahead for longer periods of time. Fixed Price Risk Management can be part of a solution to these needs.
PT. Marga Maju Mapan (3M) recognizes the benefits of Fixed Price Risk Management. This construction services company – a Shell Bitumen customer since 2001 – has comprehensive experience in road construction projects, ranging from scrapping, filling and levelling to overlay works, both on toll roads and protocol/arterial roads in DKI Jakarta areas. The Fixed Price Risk Management supply arrangements offered by Shell Indonesia provided benefits to 3M.
“I am very satisfied with this RM mechanism. With a fixed price, it is easier for me to perform the core of my job – to focus on performing, supervising and maintaining the quality of my road projects.”
Suwondo, Administration and Finance Director of PT. Marga Maju Mapan