In light of recent developments in fuel prices, shippers should begin to prepare for future Bunker Adjustment Factor (BAF) increases.
That’s the word from Alan Murphy, CEO of maritime consultancy Sea-Intelligence.
When the pandemic hit the world, global crude oil prices virtually collapsed and public discourse switched from the IMO 2020 regulations and the early bottleneck-induced spikes in the Very Low-Sulphur Fuel Oil (VLSFO) premium to the pandemic at first, he explains. And then to port congestion and record-high freight rate levels. “However, just because an important topic disappears, does not mean it no longer exists.”
There was a dramatic drop in the bunker fuel prices due to the pandemic, after which they somewhat increased and stabilised at a level of around US$290/ton for IFO380 and around US$340/ton for VLSFO.
This level was fairly stable from June to early November. “However, since then, the fuel price has begun to increase significantly. For VLSFO fuel, the price increased 35% from November 1, 2020 to January 8, 2021.”
But the carriers’ different BAF structures mean they did not all adjust BAF at the same time, he adds. “Some do it monthly (usually based on the monthly average fuel price with a two-month time lag), and some do it quarterly.”
From figure 1 it’s clear that November rates only increased slightly – from US$337/ton in October to 357, as the upturn only gathers pace during November. “However, in December we see a jump to US$407/ton and January thus far is at US$427/ton, with an upward trend.
“For carriers that make monthly adjustments, this means that low-sulphur fuel prices can trigger BAF increases, especially from March onwards. For carriers that make quarterly adjustments, Q2 BAF (applicable in April-June) would be based on the average fuel price in December-February, and while the beginning of 2021 remains stable by virtue of stability seen in most of the second half of 2020, the calculational basis for BAF stands to increase significantly for 2021-Q2.”
In addition, says Murphy, the VLSFO premium also increased from a stable value of US$50/ton for most of 2020 to US$86/ton from mid-November onwards.
“Not only is this important for BAF structures, but it is also important in two other contexts. Firstly, this means that carriers will see an improvement in the relative value of the scrubber installations, allowing them to use IFO380. But it also means that we might begin to see a rekindling of the discussion as to whether BAF formulas should take the scrubber-enabled vessels into account - especially on the Asia-Europe trade where many vessels have had scrubbers installed.”