Ever since fuel prices started going through the roof last year, container shipping companies have complained bitterly that they can't recover their bunker costs - especially in the trans-Pacific, where many are losing money and warn that they can't continue to provide service on the route unless things change.
One of the reasons for the carriers' plight is that many of their annual trans-Pacific shipping contracts with large customers roll the price of bunker fuel into an all-in freight rate that doesn't allow bunker cost increases to be passed to shippers. Many shippers have resisted allowing bunker adjustment factors to float because they're suspicious that carriers use BAFs to make up for their inability to increase freight rates.
Maersk Line, the world's largest ocean carrier, is trying to allay those suspicions and end the all-in contract rates with a new formula for determining the BAF that is simple, transparent and can be calculated easily on the company's Web site. To combat any doubt about its motives, Maersk Line is basing the formula on calculations provided by independent, third-party shipping industry sources.
The Transpacific Stabilization Agreement, the discussion group to which most eastbound trans-Pacific carriers belong, has voluntary guidelines for bunker surcharges that are based on an average of bunker costs in various markets. Maersk said shippers aren't convinced that the TSA model provides an accurate gauge.
"We saw that the model we use today, the old TSA formula, is broken," said Vincent Clerc, Maersk Line's vice president for Pacific services. "We tried to come up with something that would work." Maersk conferred with many of its largest customers to get an understanding of why the old formula was not working. "What we gathered was that our customers understand the variation of oil prices is something that can be passed on. They see it with their rail or truck providers and see it on their airfreight bill, so they understand why transportation companies try to recover it from their customers," Clerc said.
He said the current BAF is "out of whack with the real world," because as carriers have deployed larger ships, the impact of bunker costs per container has actually decreased. So a new formula needed to account for vessel capacity.
The new formula also needed to account for vessel utilization because the imbalance between head-haul and backhaul cargoes forced vessels to burn fuel carrying mostly empty containers on the backhaul. "We built a very simple equation that could account for fuel consumption, the number of days in transit, for the size of ships and the trade imbalance," Clerc said.
At its heart, Maersk's new BAF formula boils down to the figure for the change in the price of bunker fuel multiplied by a constant factor that consists of four elements: total fuel consumption multiplied by the transit time in days, divided by the total vessel capacity, multiplied by the utilization factor. The four elements are recalculated once a year at the start of the annual contract season, and the bunker fuel factor is recalculated every three months, based on the average of fuel prices in the previous 13 weeks.
Under the new formula, only changes in the price of bunker price will trigger changes in the BAF level, so shippers will only pay the variation in cost. The BAF rises when fuel prices climb, but it will decline when the bunker price falls.
The four elements in the constant factor are based on figures supplied by independent third parties. The fuel consumption for different sized ships is provided by ship broker Clarkson's; the capacity of different sized ships is provided by AXS-Alphaliner, which tracks vessel capacity; transit times for different routes are based on the carrier's schedules; and the imbalance factor is based on utilization figures provided by Drewry Shipping Consultants.
Maersk plans to implement the BAF formula separately in its various trade lanes, beginning the first quarter of this year. The carrier will include the new BAF formula in its annual trans-Pacific contracts, most of which start in May and June of this year. It expects to complete the rollout of the BAF on all its global routes and service by Jan. 1, 2009. Each of its different trades will make announcements on the Maersk Line Web site when they adopt the new BAF formula.
The cost of bunker fuel has tripled in the last three years. Fuel now accounts for nearly half of total vessel costs, which are 20 percent higher than 10 years ago. Clerc said Maersk Line is currently able to recover only about 10 to 15 percent of the cost of increases in the bunker fuel used on the trans-Pacific, while the average fuel-cost recovery on all its global services is 55 percent. The average rate of its fuel-costs recovery would be higher if it were not dragged down by the low rate of recovery on the trans-Pacific, Clerc said.
Historically, many carriers have tried to recover the cost of bunker through general rate increases, but shippers have resisted this approach - and trans-Pacific carriers, seeking to maintain market share, have agreed to absorb bunker cost increases.
Maersk said this arrangement must change. "What is important is that, over the long run, having prices that are too low on the trans-Pacific for carriers to be profitable is not sustainable," Clerc said. "I think every carrier is having the same issue, so the time of playing games by trying to disguise GRIs as bunker adjustment factors is gone."
Peter Leach can be contacted at email@example.com.
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