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- What is Bunker Adjustment Factor (BAF)?
- What does Bunker Mean in Shipping
- Why is Bunker Adjustment Factor Charged?
- How do you Calculate the Bunker Adjustment Factor?
- What is the Difference between CAF and Bunker Adjustment Factor?
- Can I Avoid Bunker Adjustment Factor Surcharges?
- Who Issues the Bunker Adjustment Factor?
- Are Bunker Adjustment Factor Charges negotiable?
- Should BAF be Included in the Freight Rate?
- What is the Rationale behind Bunker Adjustment Factor?
- What are the Effects of Bunker Adjustment Factor in Shipping?
- What is the Advantage of Bunker Adjustment Factor to Shippers?
- How does Bunker Adjustment Factor Benefit Carriers?
- What is the Effect of Bunker Adjustment Factor on Shipping Costs?
- What is the Relationship between Bunker Adjustment Factor and Bunker Price?
- Is Bunker Adjustment Factor the same for Normal and Reefer Containers?
- How much Bunker Fuel does a Ship Use?
- How can you Mitigate Bunker Adjustment Factor Costs?
- Who Regulates Bunker Adjustment Factor?
- What is locked-in Bunker Adjustment Factor?
- How Often does the Bunker Adjustment Factor Price Change?
- Who Charges the Bunker Adjustment Factor Fees?
- Is Bunker Adjustment Factor Surcharge the Same for all Carriers?
- What is the Benefit of Understanding BAF and its Functionality?
- What is EBS (Emergency Bunker Surcharge)?
- What is the Difference Between BAF and EBS?
- Who Should pay Emergency Bunker Surcharge (EBS)?
- Why do Carriers Announce EBS?
What is Bunker Adjustment Factor (BAF)?
As you know, oil prices are very volatile.
This fluctuation in oil prices can lead to losses for carriers.
Due to this volatility, ship owners and operators are unable to calculate the consistent operating cost for ships.
To cover them, ocean carriers charge Bunker Adjustment Factor commonly known as BAF.
Fuel Adjustment Factor and Bunker Surcharge are other names that are used to refer to this BAF.
BAF is an additional surcharge. It is charged per Twenty-foot Equivalent Unit (TEU) to the ship operators.
BAF represents some of the sea freight charges that are meant to address the volatile nature of fuel prices.
Early before, the Transpacific Stabilization Agreement (TSA) was responsible for the standardization of BAF.
TSA would not only set prices and but was also responsible for coordinating the behaviour of shipping lines.
Brent crude oil was being used as the basis.
However, after the resignation of Maersk Line back in 2018 who was a key member, TSA got disbanded.
As a result, shipping operators opted to set their own bunker surcharge independently.
This was under the close monitoring of the European Commission to make sure there was no collusion happening.
When IMO (International Maritime Organization) 2020 was introduced, this no longer happens.
The BAF cost calculation has changed to a more accurate and predictable one using the introduced formulas.
These new formulas contain components with the fuel price and its consumption.
What does Bunker Mean in Shipping
A bunker is best understood from the historical events that gave birth to the name.
Steam was originally the source of power in industries, both for locomotives on land and steamships in sea transport.
The steam power was generated when coal was fed into the furnaces.
The containers used to store this coal were called BUNKER.
Now that coal was common was used to fuel steamships, the name bunker became common with fuel.
To date bunker, is used to refer to fuel used in shipping operations.
Bunkering is the process of supplying ships with bunkers.
Their bunkers come in different types and there are other classifications for the different bunker types.
A few of them are Heavy fuel oil (HFO), Marine diesel oil (MDO), (Marine fuel oil (MFO), Marine gas oil (MGO), Intermediate fuel oil (IFO) just to mention but a few.
Why is Bunker Adjustment Factor Charged?
BAF are surcharges meant at safeguarding the carriers against the volatility of fuel oil.
These extra charges are enacted by carriers on the shipping rates for purpose of counteracting fuel price increase.
Whenever there is an increase in oil prices, the carriers will be required to evaluate and do calculations for any extra costs which we are calling BAF.
This helps in offsetting any of the significant fluctuations on the operational costs brought about by the increase in fuel prices.
It is worth noting that carriers are not allowed to come up with common agreements with regard to BAF surcharges all over the shipping industry.
The European Commission back in May 2019 made it clear that any attempt in doing this would be considered a violation of antitrust laws.
Therefore, surcharges may appear the same across all carriers. But the decisions are ultimately decided by each carrier internally.
How do you Calculate the Bunker Adjustment Factor?
For you to calculate BAF, you will need to take into account the trade factor as well as the fuel price.
Fuel price is taken as the average price of fuel in major bunkering ports across the world.
Trade factor is a reflection of the average fuel consumption in a given trade taken as a result of existing variables.
The standard formula for BAF calculation is simply put as:
|BAF = Fuel Prices x Trade Factor|
Trade factor is the average fuel consumed on any given trade.
This may vary according to the following:
- The direction of the vessel
- Trade route
- The weight of the load
- The time of transit
- Distance of trade
- The container size
- The efficiency of the fuel
- How the ship is built etc.
At the moment there are no standard rates for calculation of BAF.
It appears like every ship operator has chosen to approach the new regulation their own way.
Some carriers are adding BAF on top of their ocean charges.
What is the Difference between CAF and Bunker Adjustment Factor?
Currency Adjustment Factor (CAF) is charged by carriers to enable the offset of any currency fluctuations that may affect freight rates.
This is due to fluctuations in the exchange rate that may often occur.
It serves to control or minimize gains or losses arising from exchange rate tariff fluctuation.
CAF is used to partially cover any costs incurred by a freight forwarder.
This helps the freight forwarder to be able to settle accounts with other transport entities while using different currencies.
Although each carrier independently does calculate CAF surcharges differently, the CAF amounts are usually the same.
On the contrary, BAF is meant to deal with any fluctuations in oil prices.
Both of these surcharges affect freight rates but they are not the same.
The only similarity between them is that they are meant to offer rate adjustments arising from fluctuations.
It is worth noting that the currency adjustment factor increases as a result of the United States dollar declining in value.
Can I Avoid Bunker Adjustment Factor Surcharges?
Usually avoiding BAF surcharges is not possible.
But there can be some tips on how to offset the surcharges.
If your gate in a shipment before CAF surcharges get enacted, you can be able to avoid them.
Other than this, you can only negotiate the other costs with your carrier.
This is possible because in ocean freight the room to negotiate is always there.
The power to negotiate will be heavily dependent on how much you are shipping and how big your organization is.
If your organization is small and the volume of your shipment is neither medium nor large, negotiating contracts for reduction of the total cost may not be possible.
However, it is important to note that the BAF charges cannot change.
Who Issues the Bunker Adjustment Factor?
The Bunker adjustment factor is issued and controlled by the ocean carrier.
This is because the change in oil prices directly affect them.
As a result, they issue these surcharges to control the losses and gains that may affect their expenses.
Your freight forwarder only charges you what was quoted to them by the carrier.
They are just a messenger passing on the message they received.
The operators choose to pass the variable fuel costs downwards the logistics chain.
The shippers who are the ones booking container line’s ships find themselves on the receiving end.
Normally they are not always in agreement especially when it requires them to pay more.
Are Bunker Adjustment Factor Charges negotiable?
Bunker adjustment factor surcharges are not negotiable.
They are non-negotiable pass-through surcharges.
They are near-universal since almost all ocean carriers depend on the same suppliers for their oil.
Working with one ocean carrier as compared to the other in a bid to avoid BAF cannot work.
It is something you have to plan for every time.
The dollar amount for BAF surcharges is however a typically small fraction on the total cost of the shipping dollars.
Should BAF be Included in the Freight Rate?
BAF can be charged either separately or it can also be put as inclusive in the freight charge.
This will depend on the trade route and the agreement between the shipper and the carrier.
As it is BAF depends on the behaviour of oil prices and there is no straight forward formula to its success.
Taking BAF as a concept, other than a charge, there is scope available for customers to be able to customize the concept suitable for their business.
BAF can be Fixed, Locked in or Floating.
Fixed BAF is the quantum BAF charged by carriers which are fixed and do not vary according to the market forces or even fuel price fluctuations.
This is the best option for customers who may want to know the much cost they will be charged for their shipment.
Floating BAF is the exact opposite of Fixed BAF to mean that the quantum of BAF does fluctuate based on the price of fuel.
This is an advantaged to the shipping line since they do not lose their money as the fuel price fluctuates since the surcharge is directly linked to the fuel price.
This may however be disadvantageous to customers as significant differences may mean increasing the prices of their products.
This them unfair competition in their respective market.
Shipper of large volumes of containers may prefer the Lock-In option.
With Lock In, BAF quantum is locked in with the carrier for a given period of time and this is fixed.
This happens in order to monitor the market.
They can choose to adjust their agreed terms if they prefer and agree.
This is favourable for both parties since they all stand to gain if the bunker prices rise or fall during the contract period.
What is the Rationale behind Bunker Adjustment Factor?
The Bunker Adjustment Factor (BAF) is a system that was first introduced as a result of the oil shocks that happened back in the 1970s.
The underlying reason behind this system was led by the shipping lines that were operating in freight conferences.
They could not be able to adjust their fuel prices immediately enough to make it possible to counteract the devastating impact of an increase in bunker prices.
More than forty years since it was imposed, BAF has always been a bone of contention between shippers and carriers.
The ocean carriers believe that BAF is a necessary evil that is aimed at reducing their risk to the volatility of the bunker price.
Shippers on the other side argue saying that the risk should be taken as a normal business venture.
If not so, they suggest that it be dealt with in a much better transparent manner.
In 2003 when the bunker surcharges were beginning to rise, these BAF disputes became a major obstacle to the dialogue between shippers and carriers.
The European Commission (EC) had to intervene in a bid to solve the matter.
What are the Effects of Bunker Adjustment Factor in Shipping?
Since the introduction of the new regulation in January 2020, a lot of changes have taken place.
The change was aimed at reducing air pollution coming from ships worldwide.
Earlier, ships were using use fuel containing up to3.5% sulphur content outside the Emission Control Areas.
Now, the sulphur content CAP has been placed at 0.5% by the International Maritime Organization (IMO) an agency under the United Nations.
This will see the reduction in sulphur pollution by more than 80%.
To comply with this new regulation, the carriers had to increase the shipping costs.
There are also expectations on the volatility of fuel costs for the ships to increase.
To try and harmonize all these changes, some of the leading companies like Maersk have introduced a simple and predictable BAF.
This allows the clients to predict, plan and the changes in the prices of fuel as well as how it will impact their total shipping freight rate.
This cost will be charged differently from the normal ocean freight as the fuel cost is very important and is the most volatile part of the costs of shipping.
What is the Advantage of Bunker Adjustment Factor to Shippers?
Shippers can be able to exploit the carrier variations for low-sulphur BAF mechanisms.
They can shift the booked cargo in between the different container lines in a bid to reduce the exposure to the surcharge.
To carriers, this may be a tactic they won’t appreciate.
The first priority to carriers is to recover the costs from their customers.
Analysts say that a shipper can hold a contract with two carriers.
One contract with a higher BAF and another one with a lower BAF.
They will then greatly leverage in hedging against fuel volatility.
If the prices of fuel increase, they shift a larger proportion of their volumes onto a carrier with low price variability.
Therefore, minimizing the BAF increases in price as a result of bunker fuel change.
If there is a decline in fuel price, they can move higher volumes to the carrier with higher BAF change.
This maximizes their ability to reduce prices for goods as a result of bunker fuel change.
How does Bunker Adjustment Factor Benefit Carriers?
Loading ship in Shanghai
The introduction of BAF was welcomed as a cushion that could offer a safe business environment in the Shipping Industry.
It gave them a chance to minimize the possibilities of making losses that they may not have control over.
Bunker price is very volatile.
This could mean that although at some point they could gain, the risk of losses that may come in could be extreme.
Through BAF, the formula is transparent at least for many carriers like Maersk, and the BAF surcharges are becoming predictable.
This has covered carriers by allowing them to pass over any costs associated with fuel price fluctuations down the logistics chain.
In the end, the customers who rent container space are the one who pays for the fuel price fluctuations.
What is the Effect of Bunker Adjustment Factor on Shipping Costs?
With the ongoing push for the usage of cleaner fuel, the adoption also means higher fuel prices.
The priority of BAF is to recover additional costs associated with price fluctuations on fuel.
Whatever changes are proposed, carriers will not be responsible for the price increment.
They will push them down the logistics chain and the freight forwarder will charge the customer accordingly.
These costs can be high for especially for the high-volume ships and those ships that use longer routes.
This means that more investment will be required for shipping operations.
The shipping rates are expected to rise from time to time as a result of higher bunker surcharges.
Carriers are wondering why the Bunker Adjustment Factor charges are based purely on 100% low-sulphur fuels.
This is even as more and more vessels are being equipped scrubbers.
In overall, changes in shipping costs will continue being experienced until the calculation of BAF is more transparent and easy for everyone to understand.
What is the Relationship between Bunker Adjustment Factor and Bunker Price?
There exist many fluctuations that cause serious effects on the fuel price for the shipping vessels.
The bunker is simply a type of oil. You may be tempted to think that the fluctuations in oil prices do have a direct effect on the bunker price.
However, there are no correlations between crude oil prices and bunker oil.
Although all fuel and petrol oils originate from one source, the manner in which they get priced and handled is completely different.
Many other factors may create distortions in pricing thus affecting the bunker oil prices.
These factors include:
- Speculation of prices in the crude market
- Refining priorities and the capacity constraints
- Inherent challenges for vessel operators when storing or hedging fuel
Today the common practice is that carriers will determine BAF charges and the shippers will then add the surcharge on their own base freight rates.
Is Bunker Adjustment Factor the same for Normal and Reefer Containers?
No, the BAF for reefer cargo will not be the same.
To get the BAF for reefer cargo, you will have to calculate the BAF for standard containers (dry) first.
Thereafter, you will multiply the answer with a factor of 1.5.
This is meant to take care of the electricity consumption on the reefer containers.
This is taken as an average.
As is the case, reefer containers are special containers with special customizations much of which consume electricity.
The factor of 1.5 is introduced to take care of this special nature of the reefer containers.
How much Bunker Fuel does a Ship Use?
The amount of fuel that a ship can use will be determined by two factors. They are:
- Size of the ship
- Engine capacity
The two are determined by the trading route in which the ship operates as well as the speed of the engine.
For example, the largest container ship can accommodate approximately 4.5 million gallons of fuel oil.
It is known as the CMA CGM Benjamin Franklin. This is then converted into volumes.
By our example, we have approximately 16,000 cubic metres.
The CMA CGM Benjamin Franklin can carry an equivalent of 18,000 TEUs in containers.
These kinds of ships are mainly used to move goods between Europe and Asia.
The amount of fuel used being dependent on the speed of the ship.
Majority of the ship engines are designed for highest speeds ranging from 20 knots to 25 knots per hour.
This is between 23 and 28 miles per hour. At this speed, 63,000 gallons of fuel can sustain a Panamax container ship daily.
As speed sharply drops, fuel also drops.
If a ship drops the speed by 10%, a container ship can reduce fuel usage by one-third.
Following the 208-2009 recession, the majority of the carries had to reduce their speeds up to 19mph by low steaming.
How can you Mitigate Bunker Adjustment Factor Costs?
To mitigate the BAF surcharges, you should make queries about the all-inclusive charges from port to port.
The charges are calculated as per port to port basis.
You should get all the necessary information from your forwarder.
This is in order for them to give you all-inclusive fees that can be helpful in mitigating the effects of these surcharges.
Who Regulates Bunker Adjustment Factor?
BAF is regulated by the International Maritime Organization (IMO) which is the agency under the United Nations.
It is bestowed with the responsibility of ensuring safety and security is observed by shippers.
It also helps in ensuring that there is no marine and atmospheric pollution by ships.
This ensures that the UN sustainable development goals are supported.
IMO sets standards globally for security, safety, and environmental performance of international shipping.
It ensures that a fair and effective regulatory framework is universally adopted and implemented.
Simply put, the role of IMO is to create a level playing field.
This should be in a manner that shippers don’t improve their financial positions by compromising on safety, security, and environmental performance.
This also promotes innovation and efficiency.
The measures drafted by IMO cover the whole aspect of international shipping.
This includes the design of the ship, manning, equipment, operation, construction, and disposal.
Through this we are able to achieve a secure, energy sufficient, and environmentally sound shipping sector is realized.
What is locked-in Bunker Adjustment Factor?
Locked-in Bunker Adjustment Factor is one of the three types of BAF.
This is where both parties decide to agree on a locked-in bunker price up to a given period of time.
It is a compromise between floating BAF and fixed BAF models.
It makes the locked-in option get the characteristics of a forward deal.
Any of the parties can either be advantaged or disadvantaged depending on which direction the price development may take.
The shippers can gain a surplus if the price of fuel reduces at the period of the then locked-in BAF contract.
The buyers will get a surplus for themselves in case the prices of the fuel go up.
How Often does the Bunker Adjustment Factor Price Change?
Usually, the BAF changes on a monthly or quarterly basis.
The changes are determined by the changes in fuel prices amongst other factors highlighted here.
The BAF was previously revised every quarter by the Transpacific Stabilization Agreement (TSA).
But since TSA was closed, the determination of BAF was left in the hands of the carriers
According to Maersk, their BAF tariffs change monthly if the change in fuel price is more than $50 per ton compared against the latest adjustment.
Once the carriers find it necessary to change the BAF whether monthly or quarterly, it trickles down the chain of logistics.
The carriers’ decision on when to review their BAF is dependent on the factors below:
- Fluctuations in the prices of oil
- Vessels at the various bunkering ports
- Whether their clients are looking for long or short–term rates
Based on these, the carriers can choose whether they need to review the BAF prices on a daily, weekly, monthly, quarterly, or annual basis.
Whether the liner updates their BAF fee on a basis will depend on the fluctuations of oil prices.
The vessels deployed on the various corridors and whether their customers are looking to secure short or long-term rates.
Who Charges the Bunker Adjustment Factor Fees?
The bunker adjustment factor surcharges are determined by shipowners under strict guide and monitoring of the European Union.
This is because they are the ones who are directly affected by the volatility of the prices of fuel oil.
The charges are set based on the losses and gains arising from the fuel price fluctuations.
It ensures that all standards are met as well as preventing collusion.
Once the BAF is set, the fees are charged based on TEU on the freight forwarders who then charge their individual customers.
The fees trickle down as originally set and are universal across all carriers and cannot be negotiated.
Is Bunker Adjustment Factor Surcharge the Same for all Carriers?
This is very true.
Bunker adjustment factor remains the same across all carriers.
This is because the formula for calculation of BAF is the same.
With reference to the formula, Fuel price is taken as the average price of fuel in major bunkering ports across the world.
That is to mean, all carriers are considered and the average price they paid for fuel is taken.
When the BAF is calculated, it will be the same for all calculations done under the same trade factor.
Let us take distance for example as a trade factor.
All carriers covering that distance will arrive at the same BAF.
What is the Benefit of Understanding BAF and its Functionality?
Understanding BAF and its functionality can help importers and exporters be in a better position to get better future analysis of what is related to their freight.
In doing so, they will arrive at the cost of their supply chain better and even more accurately.
What is EBS (Emergency Bunker Surcharge)?
Emergency bunker surcharges represent the extra measures taken by carriers.
They are implemented in a bid to cover themselves from the costs associated with the rise in prices of fuel.
Like already mentioned before, fuel is consumed is determined by the speed of the ship.
Therefore, the logistics industry is dependent on people and fuel as the forces behind its operation.
Sadly, though, the volatility of fuel is a major thing in the shipping industry.
The prices of oil change overnight and sometimes so drastically.
This is a game-changer and it affects everybody involved.
For carriers to protect themselves from any such unexpected increases in the cost of fuel, they charge the EBS.
Without this most carriers can make huge losses as the cost will directly affect their cost calculations, the margins and even increase the losses.
Many carriers have followed this path of introducing the emergency bunker surcharge.
As it is in the shipping industry, such costs trickle down to the shipper and this can be frustrating.
There is always a backlash from some shippers, wondering why liners cannot accept the cost as a normal cost of running their business.
They expect them to take responsibility for the changes in costs.
The emergency surcharge has now become an independent charge as a result more and more carriers improving their rates of transparency.
What is the Difference Between BAF and EBS?
TheEmergency Bunker Surcharge (EBS) differs from the Bunker Adjustment Factor in two elements.
The Bunker Adjustment Factor will cover a freight shipment from the fluctuating costs of fuel. This is mostly made in advance.
On the other hand, the Emergency Bunker Fee is an emergency fee charged to cover for any unanticipated upward change in bunker prices.
This is normally introduced at the last minute.
EBS prices may vary according to an increment in fuel rates.
Also to consider in EBS is the type of container and the trade lanes through which the freight will be moving in.
The EBS may be different since the carriers can decide to have it implemented only on specific routes or on certain types of containers.
The EBS is based on a last minute decision when the earlier predicted change in fuel prices become lower than the actual.
As a matter of urgency, the shippers then introduce the Emergency Bunker Surcharge to cover those differences in operation costs.
Who Should pay Emergency Bunker Surcharge (EBS)?
There has been an ongoing debate over who should bear financial obligations on the linear costs of operation, like the bunker fuel prices.
Should it be the carriers or the shippers?
This has led to the need for a more transparent and a long-term solution on the Emergency Bunker Surcharge.
Shippers are suggesting that liners take much of the responsibility for the cost increases.
They have gone ahead and criticized the information, suggesting that they exist to cover carrier losses other than fuel.
Even with the frustrating unexpected Emergency Bunker Surcharge, ocean carriers lack any influence or control on the cost of fuel.
It is only fair for ocean carriers to pass part of the burdening operational cost to their clients.
This means that with all the occurring changes, the customers bear the cost.
Why do Carriers Announce EBS?
There are several reasons why carriers are announcing EBS. They include:
- High prices of fuel
- New emissions standards
- Reduced spot rates
i. High Prices of Fuel
The fuel prices are rising all across the world supply chain.
This has even led to demonstrations and even strikes in some of the sectors.
ii. Newly introduced Low Sulphur Emissions Standards
According to IMO, the main goal for this regulation is to significantly bring down the amount of sulphur oxide produced by ships.
This should have major environmental and health benefits globally.
Especially to those who reside in the coastal areas and the ports.
iii. The Decline in Spot Rates and Financial Losses
There is a rise in the bunker and the vessel charter costs together with weaker freight rates.
There is also a continuous side pressure coming from the shipment of new containerships and all these on the margins of the carrier.
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