Fuel Prices Surge: Shipping Companies Levy Emergency Bunker Surcharges

(Image Courtesy: Aruomaritime)

The shipping fuel has become increasingly costly as global crude oil prices have returned to peaks not reached since 2014, lifted by the United States’ exit this month from the landmark nuclear deal with Iran and imposed sanctions against the OPEC member.

The world’s largest container shipping company Maersk Line is increasing prices because of a surge in the cost of bunker fuel. MSC was the first ocean carrier to react to diminishing returns caused by soaring fuel costs and announce an emergency bunker surcharge across its services.

What is Bunker Surcharge?

A bunker surcharge, also known as bunker adjustment factor (BAF), is the charge shipper’s incur to compensate for fluctuating fuel prices and is typically in addition to other surcharges and fees added to the freight costs. Some of those surcharges include:

A peak season surcharge (PSS) is the fee that is applied when transporting cargo from Asia, typically anytime between June 1 and October 31. An emergency bunker surcharge (EBS), which is essentially the same as a bunker surcharge, is the adding of a premium for fuel to the cost of the freight.

The bunker surcharge, or bunker adjustment, is specific to ocean carrier’s fuel costs that change on a month-to-month basis. One month fuel rates are down so the surcharge may be less and vice versa, shippers are faced with higher surcharges when fuel costs are on the rise.

(Image Courtesy: Scan Marine)

Shipping Companies React to the Rising Fuel Prices

In a customer advisory MSC said, “The continued surge in bunker prices has greatly impacted the operating environment for container shipping lines. MSC is therefore introducing a worldwide temporary emergency bunker surcharge on all ocean and land-based cargo carriage with immediate effect.

“Fuel prices are up more than 30% this year, and almost 70% since last June.” MSC did not state the quantum of the emergency surcharge, or whether it would also apply to its contract business which generally has BAF mechanisms built in.

Maersk Group posted USD 239m loss across its combined sectors, suggesting that the result for Maersk Line was even worse. During an investor results conference last week, Maersk Line chief commercial officer Vincent Clerc admitted it had been “difficult to pass on the full extent of the fuel cost increase to customers”.

Confirming that it generally took one to two quarters for bunker surcharges to kick in, Clerc also alluded to some areas where BAF surcharges were more difficult to implement, “where we have faced strong capacity injection”.

Maersk Line paid around USD 3bn for bunker fuel for its 750 or so ships and is on course to pay at least one-third more this year, which will come straight off of its bottom line. Its inability to obtain compensation for rising fuel costs was the biggest concern voiced by investor analysts covering the results conference.

(Image Courtesy: Sea Master)

Current Scenario

Even with slow-steaming, ultra-large container vessels consume over 100 tonnes of bunker fuel a day at sea. “The increase (in bunker fuel prices) is more than 20% compared with the beginning of 2018 and this unexpected development means that it is no longer possible for us to recover bunker costs through the standard bunker adjustment factors,” Maersk said in a note to customers.

The bunker price has now reached USD 440 a tonne in Europe, which is the highest since 2014, it said. The surcharge for a 40-foot equivalent (FFE) container would be USD 120 based on the current bunker price. Should the bunker price increase to USD 530, tariffs would be multiplied by a factor of two, whereas a bunker price of USD 370 would remove the surcharge, it said.

A statement released by the Maersk said that prices had hit USD 440 per tonne in Europe – the highest rate since 2014 – and 20% up on prices at the start of the year. “This unexpected development means it is no longer possible for us to recover bunker costs through the standard bunker adjustment factors,” the statement continued.

“Due to the unsustainable nature of the situation, Maersk Line has decided to introduce an EBS as a necessary action to ensure a continued sustainable service.” Maersk said that the EBS would take effect from 1 June, warning of an increase if bunker costs hit USD 530 – although it also said the EBS would be removed if prices dropped to USD 370.

(Image Courtesy: mfame.guru)

The Way Ahead

Experts warned that with all carriers facing the same pressure it will be much easier for them to collectively enforce payment from shippers. However, it is being said that some shippers may be able to avoid the additional costs, with larger shippers likely having negotiated such eventualities into their contracts.

How they are implemented will often depend on the carriers’ customer mix, with higher volume shippers likely getting a free pass. But the smaller shippers won’t get any sort of free pass as far as the steep rise in fuel prices are concerned, with these costs passed on to them. Despite this, the carriers would always make a loss when it comes to fuel, but this surcharge would enable them to recover more.

(References: The Loadstar, Raidió Teilifís Éireann)

Sea News Feature, May 28