Bunker Adjustment Factor (BAF) Surcharge

The term "Bunker" refers to the fuel that is used to operate ships. Bunkering is the action of supplying a ship with bunkers. The ship operator is responsible for the payment of these bunkers to the bunker supplier. As bunker fuel prices are quite volatile, the shipping lines charge a fee called "Bunker Adjustment Factor (BAF)" to cover the fluctuations in global bunker costs.

This BAF is charged either as a separate charge or included in the freight charge depending on the trade route.

BAF means Bunker Adjustment Factor and CAF means Currency Adjustment Factor. BAF and CAF are generally used by sea shipping carriers. These are charges which levied along with ocean freight to different locations at different season. When oil prices fluctuate globally, the BAF is imposed to basic ocean freight to stabilize the cost of freight. BAF has derived from the term bunker (fuel storage containers). Such surcharge is added up on the ocean freight by shipping companies to supplement fuel factor costs and termed as BAF. CAF is one of the charges added up on the basic ocean freight by sea shipping carriers on the basis of continues fluctuation of exchange rates. Currency Adjustment Factor CAF is applied on freight rates to minimize or control the losses or gains against fluctuations on the currency exchange rate tariff. CAF is a part of ocean freight to balance and cater against difference in currency value fluctuations.

So, the major difference between BAF and CAF is that, BAF is related oil price and CAF is related to foreign currency.  

Bunker surcharge refers to floating part of sea freight charges which represents additions due to oil prices. Shipping lines now set their own independent BAF rates. They will be closely monitored by the EC to ensure that no collusion is taking place.

BAF is the additional charge levied on the shippers to compensate for fluctuations in the price of the ship's fuel. Also called bunker surcharge.

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. 

In such an energy-intensive industry various political and economic crises cause the price of oil to fluctuate rapidly. In 1973, the price of oil rose as it did in 1979. These were the two so-called “oil price shocks” to the shipping industry. In 1990, oil again rose because of the Iraqi invasion of Kuwait. These fluctuations cause a severe effect on the price of the fuel used in liner vessels, especially when liner vessels are supposed to provide a fast service and high speed causes the fuel consumption of the vessels to rise approximately as the cubic power of the increase in speed.

Although liner conferences and non-conference liner operators provide a stable tariff or freight rate for their shipper-customers, suddenly escalating fuel costs give them no option but to reflect the increases in the form of a “bunker adjustment factor” commonly known as “BAF”. BAF is meant to operate on the principle that the amount recovered from the market should offset the additional cost of bunker fuel over the base level of the liner conference’s tariffs or rate structure.

BAF is expressed differently by different liner conferences and “rate agreements”. It can be expressed as a percentage of the base rate or as a specified number of dollars per revenue ton, that is per 1,000 kilogrammes or per 1 cubic metre of cargo shipped or even per container, either for a full container (FCL) or less than container load (LCL). Lines do decrease the BAF when this is merited, for example, if bunker prices in intermediate ports reduce. As an example of a reduction, the Hong Kong-Europe Freight Conference, operating between the Far East and Europe and the Mediterranean, cut its various surcharges in mid-February 1991, following reduction of bunker oil prices. The 30-member conference reduced the BAF from 9.74 per cent to 4.94 per cent. This would mean a reduction of about US$144 per container shipped at US$3,000 from the Far East to Europe.

Liner conferences can use reductions in BAF and other surcharges as a marketing tactic to encourage shippers to use their members’ services. Usually, independent accountants take into consideration actual prices of bunker fuel at intermediate ports on a trade route on the basis of data furnished by member lines. The accountants then advise the conference to increase or reduce the BAF. This may be reviewed weekly or monthly or even more often in times of high volatility. The results of the reviews and any changes in the BAF are published and advised to the shippers’ associations.

Shippers and their associations do object to BAFs (and other surcharges) but in many cases they pay the surcharges (depending on how badly they want the service. It must be stated that in most cases conference members have no control over bunker prices prevailing at different bunkering ports. However, it can also be stated that some conferences may not reflect a swift enough reduction in bunker prices in their published BAFs. This surcharge can also be called “Fuel adjustment factor” or FAF.

BAF refers to floating part of sea freight charges. BAF charges to be applicable for a certain period on a certain trade route. BAF Charge is added to the base rate ocean freight cost reflecting the cost of fuel (called bunkers) to be used for the voyage. This charge is separated from the base rate freight cost because fuel costs are more frequently subject to fluctuations. Contracts are usually agreed for longer periods of time, whereas fuel prices can fluctuate dramatically over relatively short periods of time. BAFs thus allow for easier contracting as the uncertainty as regards fuel prices is accounted for in a mechanism agreed between conference members and shippers.

BAFs are usually calculated with reference to oil market prices; typically independent oil price quotes in one or more important ports. The changes of oil prices are measured against the oil price in a reference year (normally the year in which the BAF formula was agreed upon). As different conferences serve different trades, the conferences may use different independent oil price quotes.

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