Low-sulfur BAFs offer shippers path to hedge exposure

Low-sulfur BAFs offer shippers path to hedge exposure

Hapag-Lloyd will review its BAF mechanism quarterly, but if the bunker price fluctuations are more than $45 per ton, the review will be made monthly. Photo credit: Shutterstock.com.

Shippers may be able to exploit carrier variations in low-sulfur bunker adjustment factor (BAF) mechanisms and shift booked cargo between container lines to reduce exposure to the surcharge, according to analysis by SeaIntelligence.

Carriers won’t appreciate the tactic, as they expect to add $10-15 billion to their annual fuel bill after the International Maritime Organization’s (IMO’s)  low-sulfur fuel mandate kicks in on Jan. 1, 2020. Based on expected differences in price between current bunker fuel with a 3.5 percent sulfur content and compliant 0.5 percent fuel, Maersk Line and Mediterranean Shipping Co. expect their extra fuel costs could exceed $2 billion, while Hapag-Lloyd estimates that using low-sulfur fuel will add about $100 per TEU of additional cost.

Recovering these costs from their shipper customers is priority number one for the carriers, and several have revised their BAF formulas to reflect the new low-sulfur fuel environment. Carriers with BAFs currently in place include Maersk, MSC, CMA CGM-APL, Hapag-Lloyd, Evergreen, and Ocean Network Express (ONE).

SeaIntelligence wrote in its Sunday Spotlight on a conceptual level, BAF formulas are all the same — BAF equals fuel price, multiplied by a trade factor derived from fuel consumption, capacity, and volume. But the actual trade factor varies, which means that for the same change in fuel price, the changes in the BAF amount are not the same.

As such, the differences in BAF formulas — in particular the difference in sensitivity to bunker fuel prices — is a source of opportunity to limit the upside risk of fuel price increases, while at the same time maximizing the potential benefits of bunker reductions, SeaIntelligence said.

Maximizing leverage

The analyst posits that a shipper holding a contract with the two carriers with the highest and lowest change in BAF will have the greatest possible leverage in terms of hedging against bunker volatility. If the fuel price increases, they can shift a larger proportion of their volumes onto the carrier with the least variability, minimizing the BAF price increase due to the bunker fuel change. If the fuel price declines, they can instead shift volumes to the carrier with the highest change in BAF, maximizing their price reduction on account of the bunker fuel change.

Shippers tell JOC.com, however, that in many instances the window to shift volume from one carrier to another could be too narrow to take advantage of changes in low-sulfur pricing formulas. For instance, Hapag-Lloyd said it would review its Marine Fuel Recovery mechanism quarterly, but if the bunker price fluctuations were more than $45 per ton, the review would be made monthly. That would leave little time for shippers to shift booked cargo from one carrier to another.

In its analysis, SeaIntelligence examined the Asia-North Europe and trans-Pacific trades to see exactly how much the BAF being levied increased for each of the carriers in the event of an increase in fuel price of $100 per ton. Shippers using the spot market would not be affected, as the base rate would increase along with the BAF, but contracted shippers with a fixed base rate would feel the impact.

SeaIntelligence found that a contract cargo owner with Hapag-Lloyd would incur a $39 per TEU BAF increase when the bunker price increased by $100 per ton. The same customer contract with Evergreen, however, would incur a BAF increase of $64 per TEU, an effective rate differential of $25 per TEU compared with Hapag-Lloyd. The only way to change this would be to attempt to force a renegotiation of the underlying fixed base rate in the contract.

It was the same on the trans-Pacific, but BAF variability wasn’t consistent even within a single carrier. On the eastbound trans-Pacific head haul, for example, Hapag-Lloyd offered the least volatile BAF and CMA CGM-APL offered the most volatile BAF, while on the back haul, MSC’s was most stable and Hapag-Lloyd’s was the most volatile.

Ultimately, this variability in BAFs among container carriers presents an opportunity for shippers, SeaIntelligence said. “Granted, the difference in the variability of the BAF makes it more complicated for the shippers, but this is exactly where a shipper can leverage this for their own advantage,” the analyst noted, pointing out that a shipper moving 1,000 TEU on the Asia-Europe head haul could see a total cost difference of $24,800 when the bunker price increased by $100 per ton. And on the flip side, the cost reduction would be the same should bunker fuel prices decline.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.