Like how an international trader has to bear in mind many charges while shipping goods, shippers also have to shell out certain expenses. Bunker Adjustment Factor (BAF) is one such additional cost that shippers pay to compensate for the highly volatile fuel prices. The BAF value can be included within the freight charge or added separately based on the trade routes and terms between the shipper and carrier.
Alternatively known as the Fuel Adjustment Factor, BAF considers the volatility of oil prices and oil-associated costs for running the vessel. This helps in calculating a more accurate shipping cost.
What is BAF?
BAF is based on the twenty-foot equivalent unit (TEU). Its exact value depends on the trade route and represents the variable part of shipping prices attributed to fuel costs.
Since the International Maritime Organization (IMO) 2020 has come into existence, it has encouraged the adoption of greener technologies to counter the pollution hazards associated with transporting large container ships. New eco-friendly measures such as the global sulfur cap have been introduced, restricting sulfur emissions to 0.5% from 3.5%.
Complying with such regulations invariably means higher costs for shipping companies, either by improving technology or sourcing cleaner fuel. It is precisely this additional cost that is passed on to the shipper by way of BAF.
Although the latest IMO regulations have sparked a wave of curiosity in the shipping industry, and left many questions unanswered about the guidelines, BAF is a crucial aspect related to shipping.
Type of BAF on Ocean Freights
There are three main kinds of BAF in ocean freight.
1. Fixed BAF
Fixed BAF is a predefined charge that doesn’t factor in the fluctuations in fuel prices. This BAF type is ideal for a trader who wants to estimate the total shipping cost accurately by calculating the exact bunker cost beforehand.
For instance, you will receive a fixed shipping cost that includes an additional fuel charge before dispatching the shipment.
2. Flexible BAF
In contrast to fixed BAF, flexible BAF is linked to real-time developments in oil prices. This option ensures that the shipping carrier doesn’t lose money, irrespective of how the oil prices go. Flexible BAF decreases the shippers’ price security since they cannot estimate the final cost of the shipment.
Here, your final shipping costs will vary based on the fuel prices and trade routes, which you will find out later.
3. Locked-in BAF
Locked-in BAF is the common ground between the other two models. In this type of BAF, the trader and carrier agree on a locked-in bunker price for a particular period. It is based on the concept of a classic forward deal where one party gains and the other loses based on the movement of the oil prices.
The carrier gains a surplus if oil prices decrease, and the procurer makes a profit if oil prices increase during shipping.
Example: The shipping cost for ‘A’ is fixed for a certain period based on a mutual agreement. ‘A’ will incur profit or loss depending on the increase and decrease of oil prices, subject to the shipping process concluding before the due date mentioned in the locked-in BAF agreement.
Who Issues the Bunker Adjustment Factor?
The BAF is set independently by individual shipping lines. However, the European Commission closely monitors the prices.
How can we Calculate BAF?
Different shipping lines calculate their BAF by using different formulas. These metrics constantly change on a monthly or bimonthly basis.
However, to address the growing criticism of non-transparency in BAF, several shipping lines have made their calculation process public. For example, Maersk Line, Limited, uses the following formula to simplify its BAF calculation procedure:-
BAF = (Total fuel consumption x transit time) / (ship’s total capacity) x utilization factor
On the other hand, Hapag-Lloyd uses the following formula to calculate BAF:-
BAF = Fuel price per tonne x Fuel consumption in tonne/ Carried TEU
Note: Both these methods are based on flexible BAF and provide specific price security to the carriers.
What is IMO 2020, and How has it Affected BAF?
IMO 2020 introduced a new regulation to reduce pollution levels worldwide by cutting emissions. It came into force on January 1, 2020. The body has placed restrictions on emission control with its compulsory Data Collection System (DCS).
This restriction has forced shipping lines worldwide to develop technologies for minimizing their sulfur emission, which comes with an extra cost. The added expenditure, in turn, results in increased shipping costs through logistic tariffs or by way of using low sulfur fuel prices.
The BAF charges would have to be calculated based on the new fuel prices if a shipping carrier opts for the latter, thus further increasing BAF prices worldwide.
Should Freight Rate Include BAF Surcharge?
Rather than looking at BAF as an additional cost, one should include it in the total price of the transport. Traders can also arrange for a fixed price or a container yard agreement to reduce friction and provide price security to both parties.
With vessels becoming more efficient and bunker costs becoming less significant, a fixed bunker price seems a better option.