If you asked an executive from a major container line to sum up the IMO 2020 global sulfur cap in one word, I imagine the response would either be an expletive or the word “Expensive”.
Major container lines are facing higher costs due to an increase in expected bunker fuel prices from IMO 2020. Hapag-Lloyd has estimated the sulfur cap will cost the company $1 billion and the entire shipping industry up to $60 billion. MSC has estimated its costs at $2 billion.
To cover their costs, lines are proposing Bunker Adjustment Factors (BAFs). BAFs are tariffs added to base freight rates that take into account changes in fuel prices, the major component of operating costs.
BAF formulas vary, but are typically applied per Twenty-Foot Equivalent Unit (TEU) and include two key elements: the average fuel price in key bunkering ports across the globe, and a trade factor that reflects average fuel consumption on a given trade lane calculated through variables like transit time, fuel efficiency and trade imbalances between headhaul and backhaul legs.
Maersk has been among the most vocal and transparent with its BAF. The company is using a BAF between $480 to $840 for every forty-foot equivalent container moved from the Far East to Northern Europe. This is a significant additional cost. The new BAF went into effect on January 1, 2019, a full year before the sulfur cap goes into force.
Hapag-Lloyd also began utilizing a BAF on January 1. The company stated its BAF was in response to the implementation of IMO 2020. The charge will replace all previous bunker recovery surcharges implemented by the company. Hapag-Lloyd says it aims for transparent calculation of costs and that parameters include vessel consumption per day, fuel type and price, sea and port days, and carried TEU.
MSC is another shipper that introduced its BAF surcharge on January 1. The company stated the new surcharge will replace existing bunker surcharges and will be determined by a combination of fuel prices at bunkering ports around the world and specific line costs such as transit times, fuel efficiency and other trade-related factors.
CMA CGM is also pursuing BAFs, with several surcharges entering service as of December 1, 2018. The company said that it would apply or adjust fuel surcharges on a trade-by-trade basis to take into account extra costs that it faces when the IMO low sulfur regulation comes into effect.
Other lines including OOCL, ONE and APL have also announced BAF surcharges.