Baffled By Your BAF? A Look at 2020 BAF Programs

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The challenge of navigating marine spend is not new, but the recent enactment of the International Maritime Organization’s (IMO) sulfur regulations is magnifying the distortions in marine fuel reimbursements.

BAF Programs Should Not Vary Drastically Across Similar Vessels & Trade Lanes

Consider a few of the world’s most traveled trade corridors – the Trans-Pacific lanes from Asia to the U.S. West and East Coast. Thus far in Q1 2020 bunker adjustment factor (BAF) pricing on these lanes fluctuated dramatically across various carrier programs. Across 10 different carrier programs, the BAF cost for a 40-foot container (FEU) going to the West Coast ranged from $270 to $570 per FEU.  On the East Coast, the difference is even more pronounced when comparing BAF programs – with a range between $400 to $1,100 per FEU.

When it comes to standard procurement practices, remember: nowhere else in your supply chain is it acceptable for pricing to demonstrate this degree of variance.

Even more perplexing are the BAF variances that exist within carrier alliances that often share vessels within the Trans-Pacific trade.  Within one alliance with services to the west coast – there is more than a $110 difference among the respective carriers.  On the east coast, the difference is once again more pronounced – with one alliance having more than $180 difference among the respective carriers.

When comparing numbers for the East and West Coast – carriers take drastically different approaches to account for the increased distance and fuel consumption within their BAF programs.  Examining 9 different carrier programs the disparity becomes evident. One carrier requires just over $150 per FEU in additional fuel to go to the east coast compared to the west coast, while another is asking more than $570 per FEU.  On a percentage basis, that works out to be an increase of nearly 60 percent and 130 percent respectively.

Another counter-intuitive observation of the post-IMO 2020 landscape is the BAF pricing associated with carriers utilizing scrubbers. Carriers who have strategically invested in scrubbers for their vessels are still able to use the heavy IFO380 fuel, which is $100-$200/MT cheaper than very low sulfur fuel oil (VLSFO) options of other vessels—which would ideally translate to lower BAF pricing.

On the contrary, these carriers have some of the highest BAF numbers among their peers. This suggests these carriers are looking to recoup the investment costs of their scrubbers in their BAF programs in lieu of transparent fuel cost programs. The projected payback period for the largest vessels could be as small as one to two years should HSFO to VLSFO differentials remain as wide as they are at present.

How Can Shippers Eliminate the Volatility of Differing BAF Programs?

Though the large discrepancy in prices is a direct response to IMO 2020, this variability existed long before it and will continue to endure throughout 2020 and beyond if shippers do not take appropriate measures to mitigate it.

When met with drastically different BAF pricing from carrier to carrier, even with similar vessel types, shippers should question whether these programs are fair, accurate, and based on valid data. Transparency is imperative to ensuring BAF programs are both equitable and reflective of current market conditions. The risk associated with inaccurate and opaque pricing mechanisms is far too great for shippers to gamble, and far too time-consuming to navigate on a regular basis.

Running an ocean tender while modeling multiple different carrier fuel programs is both difficult and time-consuming. It also leaves too much to chance, not fully understanding how each of those BAF programs will react to changes in fuel prices. Some could move inconsistently, aggressively, or just be confusing. It is imperative that shippers find partners to bring clarity and consistency to managing this volatile spend.

Breakthrough Marine Fuel Recovery is the only fuel reimbursement program on the market that offers accurate, unbiased, and market-based pricing data for maritime freight. With core tenets that prioritize transparency, removing distortion, and creating equitable reimbursements for all parties, shippers can confidently navigate contracts with carriers who provide exceptional service.

Shippers and their carriers deserve a transparent picture of the cost, consumption, and emissions needed to move freight. For more information about Breakthrough Marine Fuel Management and how it can elevate your maritime shipping strategy, contact us.

 

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