This year’s Trans-Pacific Maritime (TPM) Conference—the annual gathering of the trans-Pacific and global maritime container shipping and logistics community—highlighted myriad dynamics being faced by the industry, including disruptive global trade dynamics, ocean capacity and service reliability, and the impending IMO 2020 sulfur regulations.
With the latter taking a prominent position on the conference agenda, it was evident that beneficial cargo owners (BCOs) and carriers alike desire a simplified approach to navigating the complexities of the maritime energy landscape. However, accomplishing this without accurate and transparent reimbursement mechanisms will be onerous.
2019 TPM Conference Takeaways
As evidenced at this year’s conference, fuel is becoming an ever-greater catalyst for change throughout the ocean bid process. Whether it manifests through new rate structures, fuel price calculation methodologies, or shifts in industry relationships, fuel’s influence took center stage, resulting in these important takeaways for BCOs from TPM 2019.
Carriers Reluctant to Accept All-in Rates
Carriers are demonstrating reluctance to continue with any legacy all-in rates or rate structures that do not include a floating bunker component. Such rates have traditionally been locked in for extended periods of time, without clear separation between associated costs for freight versus fuel. For BCOs as well as their carriers, this strategy was overly simplified and failed to account for fuel market dynamics, creating winners and losers.
In 2019 carriers are taking strategic steps to ensure their costs are separated in order to mitigate potential fuel market risk. Some are even willing to refuse to contract using old methods, effectively removing all-in rates from negotiations.
CEO Rolf Habben Jansen of Hapag-Lloyd recently stated that his company will no longer write all-in contracts, stating that “the risk is too high” for carriers amidst changing fuel prices. In the same tone, George Goldman, president of ZIM Integrated Shipping Services recently commented on the need for separation between the two costs at a trade conference, and affirmed his company’s objective to “delink bunker fuel discussion from the freight discussion.”
For BCOs, moving away from legacy rate structures takes them into an unfamiliar territory as decoupling will ultimately result in the need for all parties to be much more informed about fuel than they have been in the past. BCOs now have a choice to either create their own BAF programs, or accept those advocated by their individual carriers.
Calls for Transparent and Accurate BAF Formulas
Because of the escalating importance of fuel costs in contract negotiations, carriers and BCOs universally expressed their increasing desire for accuracy and transparency.
For carriers, creating a more transparent and accurate solution largely implies moving to a new and more explicit BAF calculation program. From Hapag-Lloyd to Maersk, most carriers are adopting a new methodology to calculate the volatile cost of the fuel their vessels consume, centering these formulas around various trade factors and metrics on fuel consumption .
For BCOs, best-in-class procurement teams seek an understanding of various cost categories that comprise their spend. By using externally-determined mechanisms to account for fuel, BCOs remain reliant on carriers to pass along accurate fuel costs. By taking control of their strategies, BCOs can better manage the price they pay for bunker fuel ensuring it is a fair and competitive pass-through expense that both they and their carriers can agree on.
Both parties should be ready to share in the costs associated with the changing regulatory environment, but BCOs are at a disadvantage if they don’t understand the underlying data that drives fuel cost changes.
BCOs See Variable Costs on the Same Trade Lanes
Although carriers are adopting more specific methodology to calculate the cost of fuel to move vessels on the high seas –a crucial step towards greater transparency— it’s also important to note that no two carriers are using the same formula.
Whether it’s Hapag-Lloyd, CMA CGM, Maersk or others, no two of them are presenting the same formulas, so BCOs therefore experience variable cost projections in the bid process across a single trade lane. This makes transparency into cost structures critical to leveling the playing field across BCOs and carriers. Effectively navigating the complexities of the maritime landscape is only possible when all parties understand these cost components.
Fair Marine Fuel Management, For All Parties
With these dynamics now in place and fundamentally changing the marine freight bid process, there has never been a more critical time for BCOs to adopt strategies that fairly and accurately account for bunker fuel.
To consider fuel a competitive “pass-through” expense, it is necessary for BCOs to develop a mechanism to ensure carriers are consistently working towards greater vessel efficiency and improved operating practices. Such visibility affords them transparency not only into their true costs, but into how those costs are changing over time as well.
With Breakthrough’s robust and data-driven Marine Fuel Management program standardized across their entire carrier base, BCOs gain the ability to advocate for better strategies and more efficient operations over time, regardless of changing bid cycle, contract, and market dynamics. We create strategies that help BCOs effectively navigate the upcoming changes associated with IMO 2020, and the unforeseen market complexities that will follow.
For more information on Breakthrough Marine Fuel Management, visit our solutions page.