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TRANSPORTCEO - 05/06/2018
Drewry believes it would be a good time to devise a new fuel cost system.
Shippers are right to be angry about emergency fuel surcharges levied by carriers. Now would be a good time to devise a new system for bunker costs that protects both parties.
For many of us, fixing a nagging problem is often left to the last minute when matters reach crisis point. Container shipping, it seems, shares this affliction. The imposition of “emergency bunker surcharges” by carriers to address rapidly escalating fuel costs has been met with scorn by shippers, who accuse lines of dirty dealing and the surcharges as being a “legacy from the cartel era”.
"Containership operators need to ‘fess-up’ by taking responsibility and greater control of their costs rather than announcing vaguely explained short-notice unrecoverable surcharge costs on customers," said Chris Welsh, the soon retiring secretary general of the Global Shippers Forum (GSF), a shipper lobby group.
Drewry agrees with the GSF that a better pricing system is required, but it also despairs that the situation had to reach the cliff edge, in fact go over it, before it got airtime. Where were the calls for transparency when fuel prices were low?
There is no doubt that higher fuel costs are hurting carriers. Bunker costs have increased by about 20% since the start of the year with IFO 380 priced at $424 per tonne in Rotterdam as of Thursday 31 May, according to Ship & Bunker. Over the same period Drewry’s World Container Index, which tracks weekly spot rates inclusive of bunker on eight ‘East-West’ trade lanes, has mostly been on a downwards path (see Figure 1).
This combination of lower all-in rates and higher fuel costs is a toxic pairing for carriers, many of which have published financial losses for the first quarter. Similarly poor, if not worse results can be expected for the second quarter. In response, the world’s three largest carriers, Maersk Line, MSC and CMA CGM, between them controlling approximately 45% of the containership fleet, issued emergency fuel surcharges to supplement their existing fuel levy mechanisms.
Others have since followed, which is hardly surprising given that none are immune to the rising cost and low-rate environment. With a blanket adoption of the emergency measures it seems highly likely that a number of shippers will have to budget for higher rates in the very near future.
However, pleading poverty is not a good enough reason for carriers to justify these measures. After half a century of doing business lines should by now have a workable system to deal with increases in external costs like fuel and not have to impose new surcharges.
Before the demise of liner conferences in late 2008, individual carriers could leave the onerous task of setting BAF to the Far East Freight Conference (FEFC) or Trans-Atlantic Conference Agreement (TACA). The fuzzy calculations used by some conferences irritated shippers to the point of despair. In one sense, conferences did the dirty work for carriers and gave individual lines the confidence that customers could not accuse them of being any worse than any other line.
In the post-conference era, at a time when IFO costs were much steeper than today at nearly $700 per tonne (see Figure 2), carriers had to devise their own formula to establish bunker surcharges. The methods varied, but in general the new systems for recovering BAF were separated from the base freight rate and linked to a common fuel price indicator with trigger points for adjustment. Some shippers inserted ceiling clauses into contracts for protection, but in general the move to a cost-plus pricing strategy meant that carriers were more in control of their revenue streams than they were before.
In theory, under the new method IFO price fluctuations should be profit-neutral for carriers as the additional cost or saving from higher or lower bunker prices was meant to be passed on to customers.
Which begs the question: why don’t the BAF mechanisms established when fuels costs were much higher work today? There shouldn’t be any need for emergency top ups if the same formulas were still being applied universally.
That is one for carriers to explain, something they have thus failed to do. Drewry suspects it is because during a period of relatively low fuel costs carriers simply allowed too many shippers a free-pass on BAF by agreeing to all-in rates without any fuel adjustment mechanism. Now that IFO costs have surprised them by rising sharply they have been exposed.
The new emergency surcharges will only really affect the small and medium shippers that don’t have the luxury of additional fuel surcharge exemptions in their contracts that most of the big BCOs should have. However, if IFO prices were to continue to rise towards the levels of mid-2008 then carriers would have to consider stopping the VIP treatment for big shippers.
Drewry considers that carriers generally only recover between 50-80% of their fuel costs via BAFs because of the predilection to win over high-volume customers with BAF-free contracts. As such, while we expect lines to hardline the emergency surcharges on smaller spot market shippers, that won’t completely compensate them for the higher costs.
Aside from additional ancillary charges, shippers might also suffer as a consequence of further increases in fuel prices: higher unchecked costs could potentially lead to carriers pulling ships and services from operation, while the scope for faster transit times will be greatly diminished.
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