Since our inception in 2004, Breakthrough has been the pioneer in helping shippers accurately manage their transportation energy spend. What started in North American over-the-road fuel management has now expanded to an array of transportation landscapes—as shippers recognize the value of managing fuel across varying modes of transportation.
With new international maritime (IMO) regulations set to take effect in 2020, the industry is fundamentally changing, making the maritime shipping industry one of the most critical landscapes to manage fuel. Sentiment in the industry convenes over these two salient facts—that the market will remain volatile in 2019, and that both shippers and carriers need more accurate and transparent fuel management solutions.
Why BAF Programs are a Thing of the Past
The impending changes incited by the new sulfur regulations have exposed distortions in shippers’ existing marine fuel practices, highlighting a consistent history of inconsistency in BAF practices. To achieve true visibility and control over this marine fuel spend, shippers need to first consider how the following distortions associated with traditional BAF programs may be impacting their ocean shipping strategy and prepare to adopt data driven solutions for the future.
1. Changing Marine Fuel Regulations Are Affecting Your BAF
New International Maritime Organization (IMO) sulfur regulations have triggered a fundamental shift in both price, and demand, of marine fuels. Greater demand for ultra-low sulfur diesel (ULSD) has already triggered price volatility, as the production process struggles to keep pace with increasingly high demand pressure. Additionally, new low sulfur content marine fuels are produced within the same distillation fraction of conventional truckload diesel, resulting in a competitive impact on price dynamics for OTR shipments as well.
Whether it’s environmental regulations from the IMO, or international economic policies like tariffs, these changing regulations and potential price impacts elicit drastically different responses from ocean carriers, including emergency bunker surcharges or a strategic movement towards new bunker fuel types. Without a clear view into a BAF, price changes motivated by these developments are obscured.
2. BAF Programs Lack Agility
Traditional BAF programs do not afford shippers the ability, or even opportunity, to manage their marine fuel spend. By utilizing a program that arbitrarily sets prices on a quarterly—or otherwise infrequent—basis, shippers cannot account for market fluctuations in fuel prices. The price of fuel three months ago does not accurately reflect the price of fuel today. Without visibility into the fuel portion of their marine freight spend, shippers accept a strategy that is inherently distorted.
Crude oil and refined products tend to be some of the most dynamic and volatile cost components in transportation, so utilizing a more agile strategy will be the best way to ensure the price incurred by BCOs is as accurate as possible.
3. BAF Programs Are Inconsistent
In addition to regulations, BAF programs often fail to explain how geography and fuel consumption on trade lanes may impact costs. This is no better exemplified than in how, for the same trade lanes and levels of service, BAF prices can be drastically different—whether it’s a shipper or carrier-based program.
No two carriers set prices the same way, and with no clear mechanism to share these price calculations, shippers often are left possessing an irregular understanding of why BAF prices are different for different carriers.
4. Traditional BAFs are Not Transparent
A key challenge of BAF programs, therefore, becomes establishing a baseline from which to advocate for technological improvements on vessels, ensuring they are adapting to industry standards. With new regulatory changes, many carriers have taken different approaches to address them, employing everything from alternative fuels, to closed loop scrubber technology.
However, shippers often don’t have insight into how—and to what extent—these improvements have been made. With the visibility afforded to them through a fuel management program, shippers can take control of these technological improvements, developing a fuel “portfolio” and gaining greater understanding of how carriers provide value to those who ultimately pay for their programs.
Solution: Marine Fuel Management With Breakthrough
Overcoming these distortions in your maritime strategy is possible with Breakthrough Marine Fuel Management. Our robust and data-driven program aligns with Breakthrough’s core principles of achieving transparency, removing distortion, and establishing fairness in our clients’ supply chains. Here’s how we unlock this value:
To understand the underlying costs associated with your ocean freight movements, Breakthrough will work with your organization to uncover the realities of your current BAF programs. We analyze your data to isolate distortion and inefficiency, forming our recommendations based on your network realities.
Once you gain visibility into your marine fuel cost dynamics, Breakthrough then develops a consumption-based fuel reimbursement strategy with you, accounting for the necessary geographical, fuel, and regulatory considerations. Throughout this process we move shippers from a quarterly BAF program toward a market-based program that accounts for accurate and timely fuel prices.
The resulting marine fuel management program can then be used to replace existing BAF programs with a market-based strategy that is fair and accurate for both you and your carriers. By removing price risk premiums and avoiding unnecessary emergency surcharges, a more competitive landscape is created for both parties, allowing carriers to focus less on fuel and more on the service they are providing.
With drastic regulatory changes on the horizon, and a host of different strategies that carriers will use to adapt to them, fuel will remain a significant portion of shippers’ marine spend for the foreseeable future. As complexity in the marine landscape grows, shippers who implement a program that allows them to clearly see and evaluate their fuel spend will have a competitive advantage in the marketplace.
To learn more about how Breakthrough Marine Fuel Management provides unmatched value to shippers operating on the high seas, please visit our solutions page.