IMO bunker charge confusion spreads – but what next?

Many shippers and forwarders have contacted me following my comment in early January about the confusion created by inconsistent, post-IMO carrier fuel charges.

This is clearly an area of concern and an increasing problem for shippers, whether contract shippers or spot shippers.

For the benefit of other shippers and forwarders reading this short briefing, I would like to share (anonymously) a few comments from some of your peers:

“I am not so much confused but more completely lost as to how to establish a strategy regarding the incoherent actions of carriers. We are shipping mainly from Africa, where we are considered as return cargo, but still I expect that we shall be lumbered with a BAF increase by the end of March.”

“Some carriers are increasing their BAFs, by different amounts; some carriers who had agreed to fixed all-in rates are adding a BAF; one carrier has broken up its initial contract rate and requested that the new ‘BAF component’ should be increased.”

“It seems like each carrier has approached the situation a little differently, so it is very difficult to figure out until these negotiations are completed. To make matters more complicated, they all seem to have different names and abbreviations for the new fuel chargers so it gets very confusing. Further, some carriers are rolling these new costs into their rates while others have put them on top of their ocean rates. As a side note, all these costs vary from one carrier to another as there is no agreed fixed amount per TEU. Lastly it appears that these costs will be adjusted on a monthly basis as the price for the fuel changes and marketing/competitive conditions come into play.”

In a commentary published by the Journal of Commerce, Klaus Schnede, manager, North America Marine Category at Eastman, said: “We are not anywhere close to fully understanding the financial impact [of the IMO 2020 rule] to any of the parties. We only know that cost will go up, but not exactly by how much.”

Fuel charges and fuel price increases

In a cost analysis of spot market surcharges carried out for one of our chemical industry customers, Drewry found that new fuel charges introduced in January by carriers from the Mediterranean to the US Gulf ranged from $10 to $290 per 20ft container, depending on the carrier. On most lanes, the average increase was about $150 per 40ft container, but with big variations between lanes and between carriers.

For logistics procurement executives, an increase of $150+ per teu for spot shipments is an issue. It could potentially destroy their transport spend budget and damage their professional credibility as buyers.

In January, several carriers found the low-sulphur bunker prices had risen significantly in recent week and announced higher fuel charges. For example, Safmarine’s tariff changes on fuel charges represent “an increase range between $50 and $200 per 40ft”.

On the ground, carriers have been keen on implementing their new low-sulphur bunker charges to raise revenue and cover their own fuel cost increases, as you would expect.

However, we also know that either the bunker charges or the all-in freight rates have been negotiated down, particularly on backhaul trade routes, when shippers have a lot of negotiating leverage. Drewry has heard of difficult and absurd discussions between shippers and carriers, where the implementation of the new, higher post-IMO BAFs charges is combined with reductions in all-in rates (due to market pressures), resulting in negative base freight rates.

Conversely, we have clearly seen increases in Asia-to-US and Asia-to-Europe spot freight rates in January, based on the World Container Index assessed by Drewry.

Forwarders contributing to the World Container Index and Drewry Forwarder Benchmarking Club say that the increases are largely due to the cargo rush before Chinese New Year, but also reflected higher IMO 2020 BAF charges. We will know after Chinese New Year how much of the increases have stuck.

What next?

So, how can shippers and forwarders address this confusion?

Drewry sees short-term and medium-term developments and actions ahead.

Short term, due to the disparity of post-IMO charges and their higher and higher values, we see more and more shippers deciding to take control of Bunker Adjustment Factors and introducing their own bunker program. Drewry has been busy helping shippers doing just that already in the past few months.

Also short term, we believe that carriers will probably tweak their bunker charges so that they are less far apart – and remain competitive. Whether they will retain the new IMO 2020 charges in very weak markets remains to be seen, but the carriers’ priority is to ensure recovery of a high proportion of the additional fuel costs on the high-volume, headhaul trade routes. We will know how much carriers have recovered and how much of the costs carriers have “eaten” when they publish their 1Q financial results. (The Drewry Container Forecaster predicts 75% recovery.)

Medium-term, we expect that more questions will be asked by shippers and more transparency will be expected from ocean carriers and forwarders. Why should the bunker charges be based 100% on low-sulphur, when an increasing number of vessels are equipped with scrubbers (using cheaper fuel) and with LNG or dual-fuel engines? Can ocean carriers and even NVOs take on the risk of bunker price volatility on some of the trade routes and offer fixed, 12-month rates inclusive of fuel once the bunker market has settled?

But it will take some time until the market and the contracts and bunker clauses settle down and remove all of the current confusion. In the meantime, be prepared to act quickly to address these major changes.
Source: Drewry