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The plunge in low-sulfur fuel prices, down about 70 percent since January, has sparked questions among analysts and cargo owners on whether the bunker adjustment factor (BAF) mechanism truly captures abrupt changes in fuel costs or just muddies the freight-buying process. Carriers announced revised BAFs last year as shipping prepared for the imposition of the International Maritime Organization’s low-sulfur fuel mandate on Jan. 1. The formulas were complex and based on a range of factors, including trade routes, ship sizes, headhaul or backhaul trades, and load factors, quickly incurring the wrath of shippers who complained of a lack of transparency.

But as IMO 2020 kicked in, very-low sulfur fuel oil (VLSFO) soared past $700 per ton, and carriers felt the high cost of fuel was justifiably reflected in the surcharges. Prices began to slide within weeks of the IMO mandate once early supply issues were sorted. The declines accelerated in early March after crude prices plummeted when demand vanished amid the global COVID-19 lockdown. VLSFO fell to $211 per ton in early May.

Yet most carriers have decided to retain their low-sulfur surcharges despite the collapse of fuel prices. CMA CGM and Maersk Line are so far the only carriers to suspend low-sulfur fuel surcharges (LSS). CMA CGM, which suspended its LSS from May 1, has since updated a notice from June 1 that the LSS “is no longer applicable and may come back later.” The BAF, however, applicable on long-term contracts and including an LSS, was not affected and would be revised quarterly.

Maersk will set its Environmental Fuel Fee (EFF) at zero from May 1 until further notice on the Maersk Spot product and all contracts with validity up to three months. The carrier said it expects the fuel price to remain volatile and has in place a “monthly special adjustment” that will be triggered if the bunker price changes by $50 per ton, either up or down. The carrier said the trigger has been activated twice so far this year, first on March 1 following the early increase in bunker prices, and then on May 1 after the dramatic decline in prices.

Other carriers have retained their low-sulfur surcharges. Hapag-Lloyd last adjusted its Marine Fuel Recovery (MFR) mechanism on April 1 based on the price of low-sulfur fuel oil (LSFO) that was $200 per ton. The carrier has no plans to cancel the MFR, and the next quarterly adjustment is planned for July 1.

Lag in price hikes hitting bottom line

One carrier stated that because of the way the fuel price is accounted for, it typically took three to four months before it was reflected on the P&L. “In reality, BAF adjustments are being made every quarter to reflect fuel prices, which typically means that if costs go up it takes a little while before that is reflected in the rates, and the same if costs go down.”

A maritime consultant stated “it was hard to see how the BAF could survive in the current low-fuel cost environment. A well-defined BAF should be tied to the fuel cost changes, and thus if the BAF had been formulated in a way to pass through costs effectively, then it would not have been necessary to come up with a completely new formula.” The insistence of carriers in maintaining fuel surcharges despite plunging prices, and the frustrations this causes shippers, all stemmed from a lack of contract adherence and enforceability in liner shipping, a problem for both parties.

Source: JOC