On Bunker Adjustment Factor (BAF)

Disclaimer: This is not a quantitative analysis, but rather an opinion piece reflecting the perceptions and opinions of the Sea-Intelligence management team, as expressed by the author.

Author: Bjorn Vang Jensen, VP Advisory Services - Global Supply Chain




My good friend Hans-Henrik Nielsen raised the issue of fuel surcharges today, and I tried to comment, but ran up against the character limit. So here’s a piece on the Dark Arts of the Bunker Adjustment Factor. I’m sure much debate will follow, and I look forward to it!

Some history: The Bunker Adjustment Factor, or BAF, one of hundreds of add-ons that have been or are in use in the container shipping industry, has its origins in the Oil Crisis in the early 1970’s. 

Back then, carriers were largely organised in freight conferences (legal price-fixing bodies), and the fear was that with the rapid and huge changes in bunker costs, this system would not allow carriers to adjust base rates quickly enough to make up for the massive impacts fuel increases had on their profitability. 

Hence, the BAF was born, a bastard child in the shape of an add-on that could be published monthly, and applied (at least in theory) by all conference members. 

That was 50 years ago, and the bastard child has grown into either a model citizen or a menace to society, depending on whether you ask carriers or shippers.

Fundamentally, there is nothing wrong with the idea that cargo owners should pay a fair price overall for the transport of their goods; one that allows the carriers a reasonable net profit on the transaction, protects them from above-average changes in their cost picture, and allows the cargo owner insight into the calculation of the cost. 

But that’s the problem in a nutshell: There is no insight, beyond the most superficial level. We are told to trust (and blindly pay in accordance with) the opaquest of calculations, but we don’t, and we won’t. BECAUSE they are opaque, and because what is not opaque at all is the fact that carriers charge wildly different BAF for the exact same shipment. Same container size, same load/discharge ports, same ship, same week. 

And don’t even get me started on the forwarders!

Already here, most of us will start to, ahem, question the methodology, and wonder (but not for long, because we know the answer) whether there may be something we don’t know that they do, and whether there is just the ever-so-slightest chance that some extra cream is being skimmed somewhere, and that it’s quite unlikely to be skimmed onto our plates. 

As if that weren’t enough, in the eyes of many shippers, the bastard child grew into an outright career criminal, metaphorically speaking, with the introduction of the “trade factors” in the late 2010s.

This was based on the notion that on a given trade, cargo flows vary on the head-haul and the back-haul legs, and shippers should pay their fair share of the carriers’ overall costs of maintaining what they so poetically call “our continued high levels of service” (ha!)

Never mind that carriers have already priced repositioning cost into their base rate. Never mind that no cargo flow on any trade is pure in-out, but that a container that moved profitably into the US might well go on to move profitably on to Europe from there. Those unimportant little details somehow disappear, the only certainty being that shippers are at least partially double- or triple-paying. 

But even without the trade factors, which add a convenient extra layer of opacity, most bunker formulas I have seen tend to assume bunkering in Shanghai, Rotterdam, Fujairah, and New York, to the point where it makes us wonder whether there really aren't any other ports out there where you could do it. 

A shipper moving cargo from, say, China to Brazil, or from India to South Africa, may end up paying BAF based on bunker prices in ports the vessel will never be anywhere near! 

The truth, of course, is that carriers are always seeking cheaper bunkering ports. This is not nefarious in and of itself. A manufacturer who has sold a complete toaster at given price to a retailer will also constantly look for cheaper ways to source toaster components, to become more profitable. That’s entirely as it should be. 

The difference is that, should steel prices increase, the toaster manufacturer doesn’t get to go to the retailer and invoke the “SAF” (Steel Adjustment Factor”), because such a thing does not exist, and neither does the Aluminium Arbitrary, the Microchip Low Level Surcharge, or the Copper Additional!

In container shipping, this search for bunker arbitrage takes many forms. Hedging, forward buying, bunkering in cheaper ports (e.g., until recently, Vostochniy), neglecting to adjust for the fact that (by capacity) 30% of the container fleet is now equipped with scrubbers, enabling carriers to sail on high-sulphur but charge shippers for low-sulphur, selective port-picking for formula purposes, and many more.

When pressed for details beyond their comfort zone, carriers clam up, and this has forced many shippers to create their own formulas. Some are equally simplistic, but that can mostly be blamed on the fact that most shippers are not familiar with the intricacies of bunkering – and why should they have to be ?

The issue here is not that large shippers are trying to throw their weight around. Rather, the blame for the very existence of independent BAF formulas lies with carriers, for their abject failure to share the details of their own calculations in the first place!

You cannot ask someone to pay their fair share of a cost increase without laying your cards on the table – ALL your cards – so they know that they are indeed paying their fair share. “Trust us” is not good enough, because to put it mildly, when you scratch the surface there is no basis whatsoever for trust.

Those of us who have actually spent an awful lot of time trying to understand the details, and created our own formulas accordingly, know one thing: when carriers claim that they are “unfair”, we are probably on the right track…

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