Bunker & Shipping Industry Overview

Bunker adjustment factor, bunker surcharge or BAF refers to floating part of sea freight charges which represents additions due to oil prices. BAF charges used to be determined by Carrier Conferences to be applicable for a certain period on a certain trade route.

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 Alameda Corridor surcharge (ACS) is applied to cargo being transported via the railroad system through Long Beach and Los Angeles gateway.

More surcharges to consider in ocean freight are:

The Panama Canal surcharge (PCS) is cargo moving through the Panama Canal while the Suez Canal surcharge (SCS) is for cargo being transporting through the Suez Canal. A chassis usage surcharge (CUS) is the fee for accommodations at a destination.

There are far too many surcharge definitions but these give you a better example of surcharges and how each relates to different functions of the shipping process.

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.

The bunker surcharge was once regulated by Carrier Conferences, but in 2008 a European Commission banned them. Shipping lines were then given the authority to set their own bunker surcharge, or BAF rates while still being monitored by the commission to ensure there was no corruption within the process; such as price gauging or setting rates too high to offset other expenses. Basically, charging the customer too much of a bunker surcharge on top of their freight charge.

A bunker surcharge can also be considered the fee a shipper can charge a customer for the use of the bunker but that is an older term used to describe the rate associated with the operation of the bunker or ocean carrier.

Falling bunker fuel prices are putting downward pressure on freight rates for dry bulk and tanker vessels operating in Northwest Europe,

As bunker prices account for 70% of the cost of operating a dry bulk vessel, any significant changes in fuel prices will have a knock-on effect on freight rates.

The drop came despite tighter tonnage list in the UK Continent and a generally positive sentiment in the Atlantic Panamax market. Industry sources said the lower rates are not the result of supply and demand fundamentals, but are the result of falling bunker prices in the Northwest Europe.

The falling bunker prices also could affect freight rates in the dirty tanker market, although so far any impact has been muted. The main market to see a drop in rates was the Mediterranean Aframax sector, where rates on the cross-Mediterranean route, basis 80,000 mt, fell 5 Worldscale points to w100.

Global goods movement is a critical element in the global freight transportation system that includes ocean and coastal routes, inland waterways, railways, roads, and air freight. In some cases, the freight transportation network connects locations by multiple modal routes, functioning as modal substitutes. A primary example is containerized shortsea shipping, where the shipper or logistics provider has some degree of choice how to move freight between locations. However, international maritime transportation is more commonly a complement to other modes of transportation. This is particularly true for intercontinental containerized cargoes and for liquid and dry bulk cargoes, such as oil and grain. Here, international shipping connects roads, railways, and inland waterways through ocean and coastal routes. 

Mode choice (especially for containerized cargo movement) involves balancing tradeoffs to facilitate trade among global corporations and nations. In the current global economy, competing factors have been time, cost, and reliability of delivery. Low cost modes may be less preferred than faster modes if the cargo is very time sensitive; however, slower, lower cost modes often carry much more cargo and, with proper planning, these modes can reliably deliver larger quantities to meet just-in-time inventory needs. Analogous to a relay race, all modes are needed to deliver containerized cargo from the starting line to the finish line.

Marine transportation is an integral, if sometimes less publicly visible, part of the global economy. The marine transportation system is a network of specialized vessels, the ports they visit, and transportation infrastructure from factories to terminals to distribution centers to markets. Maritime transportation is a necessary complement to and occasional substitute for other modes of freight transportation. For many commodities and trade routes, there is no direct substitute for waterborne commerce. (Air transportation has replaced most ocean liner passenger transportation and transports significant cargo value, but carries only a small volume fraction of the highest value and lightest cargoes; while a significant mode in trade value, aircraft move much less global freight by volume, and at significant energy per unit shipped.) On other routes, such as some coastwise or shortsea shipping or within inland river systems, marine transportation may provide a substitute for roads and rail, depending upon cost, time, and infrastructure constraints. Other important marine transportation activities include passenger transportation (ferries and cruise ships), national defense (Naval vessels), fishing and resource extraction, and navigational service (vessel-assist tugs, harbor maintenance vessels, etc.).

International marine fuels statistics were not intended to represent the total energy used by ships engaged in global commerce. Rather, these data were used to differentiate those fuels withina nations domestic stock from those not eligible for emergency allocation calculations within the oil emergency sharing system. Specifically, the IEP agreement tasked the “Standing Group on Emergency Questions” to consider common rules for the treatment of marine bunkers in an emergency, and of including marine bunkers in the consumption against which stocks are measured”. Later, the IEA clarified that a nations marine fuel stocks “may not be counted if they are held as international marine bunkers, since such bunkers are treated as exports under a 1976 Governing Board decision incorporated into the Emergency Management Manual (EMM)”.

Since then, IEA definitions have been reworded to be more consistent with reporting guidance under IPCC. Currently, the IEA defines “international marine bunkers (fuel) cover those quantities delivered to sea-going ships of all flags, including warships. Consumption by ships engaged in transport in inland and coastal waters is not included.” The IEA defines national navigation to be “internal and coastal navigation (including small craft and coastal vessels not purchasing their bunker requirements under international marine bunker contracts). Fuel used for ocean, coastal and inland fishing should be included in agriculture.” 

The intrinsic connection between maritime transportation, international trade, and globalization trends will continue as long as economic wealth continues to derive from consumption of goods and services. While predicting the future changes in global economics is beyond this chapter scope, little evidence exists for a decoupling between the world economy and freight transport. In other words, if the future reveals a saturation effect to global economy, then maritime transport will likely follow such a trend. Hypothetically, scenarios explaining a fundamental change in the connection between trade and global economic growth would require significant changes in population demographics or social valuation of goods and services that decouple wealth from imports and exports, or a shift to greater consumption of services with a general dematerialization in the social culture. None of the current global scenarios or forecasts focused on climate, energy, or economics make these decoupling assumptions.

Demands for global shipping bring with them a host of environmental problems, some of which were discussed in detail above. We conclude with a discussion of the ways in which environmental standards are also becoming a global responsibility, modifying the performance expectations of global industries to serve economic demands while reducing environmental impacts. Specifically, we suggest that maritime transport will increasingly improve its environmental performance as it responds to two motivating forces. First, regulatory and advocacy attention will impose pressure external to the maritime transportation market, through both international and territorial policy action. Second, the continued development of environmental performance metrics in global, multi-firm supply-chain networks will create market-based incentives for less-polluting maritime transportation.

Regulation raises some fears among the industry with regard to the changing nature of shipping competiveness as illustrated by debates about phase-in periods for double hulls, cleaner fuels, and lesstoxic hull coatings. However, as firms shift to network-based standards in response to environmental concerns, maritime transport may recognize that competitiveness will be enhanced through leading adoption of operations and technology that meet increased demands by shippers for transparency and improvement with regard to environmental benchmarks – especially for energy, CO2, and emissions. More importantly, the attributes of maritime transportation that compare best with other modes may create conditions where modal competitiveness favors this sector. For example, as vessels switch to cleaner fuels and less-polluting engines, the energy intensity advantage of shipping and rail more so than long-haul trucking and air freight.

The sustainable intermodal freight transportation solution will require coordinated efforts among industry, government, and academia, along with improved understanding by the general public about how their food, clothing, housing, and other material needs are delivered. As these efforts proceed, the maritime transport industry will continue to involve technologies (including environmental control technologies for air emissions, ballast water, hull coatings, etc.), energy systems (including alternative fuels, increased power plant efficiencies, improved hull and propeller designs, and even novel concepts like wind-assist kites), and operational changes (such as speed reduction, mode rebalancing, and changing route patterns).

Over the years, maritime transport, which is understood as a composition of the maritime shipping and the ports, has evolved in response to the changing economic, institutional, regulatory and operational setting. In view of emerging issues, including a changing global economic scenario, rising environmental and energy sustainability imperatives and growing climate change concerns, maritime transport will have to cope with several new trends.

The world of work is changing because of (1) the development imperative (need for a more equitable global development path); (2) the technological transformation which involve new means of information processing and communications; (3) an intensification of global competition following trade and financial liberalization as well as a dramatic reduction of transport and communications costs; and (4) a shift in political thinking towards greater reliance on markets and a reduced role for the State, accompanied by, and sometimes at odds with, increased political pressure for improved living and working conditions released by the spread of democratic mechanisms of representation and accountability.

As a consequence, new trends in the global labour market are developing in order to adapt to the drivers of change. In Europe, dramatic changes are taking place in the way work is organised and in the structure and age profile of workforces. The number of workers who are permanently employed is falling and companies are increasingly concentrating on their core businesses, transferring secondary activities to contractors.

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