SHIPPING CAPACITY AUCTIONS – CBH Group

“The auction approach is a critical step in the design and development of the CBH Group’s grain supply chain. It has given the market a guarantee of equitable and commercially driven access to CBH export facilities whilst opening the door to continuous improvement in customer service levels, capacity planning and operational cost reduction.” – Tim Collins, CBH Group Executive Manager of Logistics

Client Background

Australian ports are an essential link in Australia’s export pipeline; a pipeline that contributes enormously to protecting the Australian economy and our economic well being. Not surprisingly, the Australian competition authority ACCC has been watching closely as port operators address issues associated with equitable access, capacity allocation, fluctuating demurrage costs and demand spikes.

In what is a world first, the CBH Group, the Perth based operator of the four main Western Australian grain export ports implemented an online auction system to tackle the issue of equitable access to port capacity and to smooth out demand over the annual shipping period.

Since its introduction in October 2009, the system has transacted in excess of 5 million tonnes of capacity and $50M+ in auction premium (flowing back to exporters at the end of the year to make the auction process revenue neutral).

Client Objectives

The CBH Group is using the Tradeslot auction platform to achieve a range of commercial and administrative objectives:

Reduce the complexity of forecasting and lot sizing and fluctuating customer demand
Effectively deal with demand spikes
Improve utilisation of infrastructure
Accelerate allocation process
Create fair and equal access as well as market transparency for exporters and the Australian Competition and Consumer Commission (ACCC)

Key Facts

CBH operates the four main export ports in Western Australia (Kwinana, Geraldton, Esperance, Albany)
The first Port Capacity Auction processed close to 8,000 bids and transacted 5M tonnes of capacity
The CBH Port Capacity Auction uses a “clock auction” format – an industry first globally
The auction dramatically improves capacity allocation and reduces administrative overheads – at cost of less than 0.1% of revenue.

Tradeslot’s Role

Tradeslot configured the auction platform to match the CBH Group and industry requirements.
All bidders were trained in face-to-face sessions in the use of the auction platform.
We conducted mock auctions allowing bidders to test bidding strategies and ensure auction readiness.
Tradeslot has been managing the live auctions – including the help desk function and generation of invoices and post-event reports since 2009.

Business Outcome for Our Client

The introduction of a market based allocation system has solved a number of high profile issues. Variability in crop yields and market rates for export grain have big implications for the export facilities of a port operator such as CBH. Increased spend in infrastructure to meet peak demand in certain periods does not necessarily solve the problem. The resulting increase in cost would have to be passed on to grain exporters. Instead, the auction based allocation created a price differential between peak and off-peak timeslots and ports that spread out demand more evenly, optimising productivity of the assets and reducing the costs for the industry overall.

Process

Qualification

The Port Capacity Auction is accessible by invitation only. CBH receives the application of Exporters for capacity and issues auction rules and bidder agreements. This process ensures that participants are aware that the auction forms a binding contract on a take-or-pay basis.

Live auction

Port capacity in Western Australia is sold in monthly events that take between 3 and 5 days, with the first auction in October transacting close to 5 million tonnes of capacity. Exporters were able to bid across ports and timeslots, they could shift demand in response to lot prices and had complete certainty as to the export capacity they were obtaining.

Mock auctions

The auction is designed to reduce complexity but at the same time allow flexibility for the bidder to shift between lots as the market sends price signals. Mock auctions serve the dual purpose of familiarising with the auction format itself and of testing auction strategies.

Settlement

At the conclusion of the auction, participants receive confirmation of the capacity they secured along with an automated invoice. Payment is due within 5 working days to CBH.

Secondary market

In case participants wish to top up or dispose of capacity, capacity can be secured through an offline secondary market.

Tim Collins, CBH Group Executive Manager of Logistics

“Three things mattered most to us when working with Tradeslot: Their willingness to prioritize the project to meet our commercial requirements, the ability to quickly translate our business needs into an optimal auction design and to turn it into a solid, reliable system.”