Shippers are paying twice as much for bunker fuel than they were two years ago, and there are signs that they could be paying even higher fuel surcharges for container shipping this year, as ocean carriers continue to phase-in their added costs for new, cleaner low-sulfur fuel.
The average price of bunker fuel increased 130 percent from 2015 to 2017 to about $390 a ton in Rotterdam, New York, and Shanghai, after hitting a three-year low of $170.05 in January 2016, according to IHS Markit, parent company of JOC.com. The price of a barrel of Brent crude in the United States rose 12.8 percent in 2017.
And although IHS Markit expects prices per ton to hover between $300 and $350 through 2018, bunker analyst Breakthrough Fuel predicts “gradual upward pressure on prices through 2018.”
The uncertainty comes as the bunker fuel market is still adjusting to the soon-to-be-defunct Transpacific Stabilization Agreement’s (TSA's) ceasing of calculating fuel costs in July. Some analysts also said the market is already being affected by the pending restrictions on sulfur emissions. New rules by the International Maritime Organization that allow bunker fuel to contain only 0.5 percent sulfur take effect in 2020, which some analysts believe could increase the volatility to the price of fuel as the date gets closer and growing demand for low-sulfur fuel outstrips supply. IHS Markit forecasts the new, low-sulfur fuel will cost between $500 and $650 per metric ton by 2020.
Bunker fuel prices often track the price trajectory of crude oil, but at different levels of increase. Brent crude oil rose by 34 percent to $64.14 from 2015 to 2017, including a 17.5 increase in 2017 and a 12 percent hike in the fourth quarter.
Crude oil prices spiked in the fourth quarter of 2017 due to supply cuts, demand growth, and geopolitical supply uncertainty, according to IHS Markit. Despite the demand increases and OPEC supply cuts, world oil production in 2018 is forecast to surpass demand for the first time since 2015, likely putting downward pressure on bunker fuel prices.
Carrier Hapag-Lloyd recently gave an indication of how fuel prices can impact shippers when it informed customers on two occasions about price adjustments.
The Hamburg-based carrier announced Jan. 25 that it would update its Bunker Charge (BUC) and Low Sulphur Fuel Charge monthly, instead of quarterly as at present, from March 1, “due to the strong bunker price development.” Four days later, the carrier announced a series of increases on its routes from East Asia and the Indian Subcontinent to the United States and Canada, ranging from increases of between $57 and $81 to the West Coast and $90 to $127 to the East Coast, depending on the size of the container. On Thursday, the carrier also told customers that it would levy a $45 Emergency Bunker Surcharge on trades from Europe and the Middle East to the Indian Subcontinent on all new contracts taking effect March 3 or later.
Hapag-Lloyd, announcing the change in cycle date from quarterly to monthly, said, “this change of the update cycle is necessary, due to the strong bunker price development.” The carrier added that “we reserve the right to change the update cycle anytime in the future.”
In response to a question by JOC.com on what led up to the change in calculation cycle from quarterly to monthly, the carrier said, “the bunker market price is steadily increasing, which stresses the need for bunker cost recovery.”
“In fact, bunker prices have more than doubled since January 2016 for both MFO [marine fuel oil] and MGO [marine gas oil],” the carrier said. “The monthly BUC calculations are key drivers in enabling Hapag-Lloyd to continuously supply customers with an excellent service.”
Chas Deller, a consultant for Drewry Supply Chain Consultants, said he was not surprised to see Hapag-Lloyd switch the frequency of its fuel price calculations from quarterly to monthly within days of the “cessation” of the TSA. The switch enables carriers to adjust more rapidly to price rises at the end of the month, rather than wait until the end of the quarter to adjust their prices accordingly.
The fact that the price of IFO 380 bunker fuel, the most commonly used fuel in the industry, is rising, also made the carrier’s decision unsurprising, Deller said, adding that he was speaking for himself, not on behalf of Drewry.
“It is now advantageous for ocean carriers to adjust monthly, not quarterly in arrears as before,” he said.
To help guide themselves through the volatility, shippers need a good grip on what portion fuel accounted for in their past contracts, and they should be able to benchmark future fuel increases to help increase transparency in how much they are paying for fuel, said Matthew Muenster, senior manager for Applied Knowledge, internal research and insights team for Breakthrough Fuel.
“At Breakthrough, we encourage shippers doing the contracting to think about how are you trying to make your fuel costs more transparent,” he said. “Because uncertainty will prevent a shipper from making an efficient decision.” In the past, the TSA pricing provided shippers with a benchmark cost against which to compare any increases, but that no longer exists, he said.
Deller also said shippers should look closely at whether they strike a contract that includes fuel costs, or if those costs are kept separate, and make sure they fully understand what they are signing.
“It’s going to be an important talking point I think for carriers and customers in this next 60 to 90 days, where that number should be,” Deller said last week on a JOC.com webinar on Container Shipping Outlook.” Shippers may say “should I include it in the rate, can I fix it for 12 months along with the rate, can I have an all-in rate?”
“But if you do all that, make sure you understand what’s in the water,” he said. “What’s the line in the sand? When fuel goes from $400 a ton down to $320 dollars a ton, do I get a discount or does my rate stay the same?”