The last time you pulled up at the pump to fill your car with gas, did you wince when you saw the bill? Well, that’s why overall freight costs are headed north. The shipping lines usually lag the gas pump by about a month, so you won’t be surprised to hear Bunker (or fuel) surcharges are to be adjusted upwards. No surprises there, you say. What is different this time are the amount and the mechanism.
For many years, NVOCC’s (Non-Vessel Operating Common Carriers) like Exel, Kuehne & Nagel, CH Robinson, and others have been able to negotiate the freight rate and BAF (Bunker Adjustment Factor) in March/April and fix it for the year ahead from May 1. This year the lines are imposing an EBAF (you guessed it — Emergency BAF) and the word is that it will be in the region of an additional $280/20ft and $320/40ft — the ratio is usually the 20ft being 80% of the 40ft. How this will manifest itself in quotations remains to be seen. The lines may just quote one enhanced BAF figure, but behind the scenes agree part as regular BAF and part as EBAF, or they may actually call out the two surcharges. The fact is that they will be applied — and unlike previous years, they will be floating, adjusted month by month or quarter by quarter, so if gas gets to $4/gallon the EBAF will rise further.
This has been a crazy year for freight rates. The lines have faced the opposing pressures of rising fuel costs and at least on some routes, falling utilisation. We recently heard of a BAF quote on the North Atlantic route coming out higher than the sea freight, the 20ft container rate was $900 but the BAF was $1100! Yet on the China to the West Coast US route, we have heard capacity levels are below last year, a sure sign the combination of China tax changes and the weak US dollar were having an effect on trade from at least the middle of 2007. So while BAF surcharges are going up, freight rates sea port to sea port should stay the same, helped by a softer market. Where freight rates will increase is to inland ports, the overland carriage on containers will be hit by the fuel cost increases that commonly are included in the on-carriage freight number rather than the BAF surcharge which typically applies only on the ocean freight.
The good news is we have another few months before the new rates will be imposed. Negotiations are ongoing and will mostly likely be fixed by April for May 1 implementation.
Our thanks to Duane Blaine of CH Robinson for his advice on the current trends in the 3PL market.