17 Feb Explained: The BAF in ocean freight
What is BAF in ocean freight
BAF (Bunker Adjustment Factor) is – first of all – the same as a BUC (Bunker Contribution) or an SBF (Standard Bunker Adjustment Factor). Everyone is using their favourite term to refer to the same thing, so don’t get confused there.
The only word appearing in all the terms is ‘bunker’, the ship’s fuel and therefore an important cost factor for all involved parties. The ship operators have to pay for the fuel to the respective local supplier and afterwards try to pass the cost on to the customer – through the BAF. Hereby the BAF might be charged separately or might be a part of the freight rate, depending on the agreement and line. Thus a BAF refers to the topic of volatility in oil prices, that both shippers and procurers have an interest to hedge, as they need a certain price security for the bunker to calculate their respective prices for transport or products.
What kind of BAF do exist in ocean freight
There are basically three different ways that shippers came up with to distribute the cost of fuel. The ‘fixed BAF’, the ‘floating BAF’ and the ‘locked-in BAF’ are the types of BAF in ocean freight, that all come with their special features for cost management.
A fixed BAF is a certain fee that has to be paid for the bunker, no matter how the oil prices develop in the meanwhile. Once the fixed BAF is agreed on, it is going to be paid for in this exact height. This is the kind of BAF that customers would prefer, if they want to be sure about their final prices and therefore want to know their exact cost.
Contrary to that, a floating BAF is linked to the development of oil prices. This option gives a decent price security to the carrier, as it doesn’t lose any money, however oil prices evolve. This BAF option does decrease the price security for customers on the other hand, as they don’t have any guarantees about the final cost for transport, or the bunker respectively.
The third option is the locked-in BAF, where both parties agree on a locked-in bunker price for a certain period of time. It is kind of a compromise between the previous two BAF models, that makes the locked-in option have the characteristics of a classic forward deal, where one party is advantaged and one is disadvantaged depending on the direction of the price development. The shippers do gain a surplus, if the fuel price actually decreases during the contract period of the locked-in BAF. The procurers save a surplus for themselves if the contrary happens.
How is BAF calculated in ocean freight
Ship operators and shipping lines update their BAF’s in ocean freight on a regular basis, often monthly, but as well annual or semi-annual. Depending on what their customers are looking for and how the oil-prices develop. To oppose criticism regarding the intransparency of BAF’s, shipping lines came up with pricing models for the BAF based on neutral data provided by third-party agents.
MAERSK FOR EXAMPLES UTILIZED THIS SIMPLE FORMULA TO MAKE THEIR BAF TRACEABLE:
BAF = (Total Fuel Consumption x Transit Time ) / (Vessel’s Total Capacity) x Utilization Factor
MEANWHILE HAPAG-LLOYD IS USING A FORMULA SHAPED LIKE THIS:
BAF = (Fuel Price Per TO) x (Fuel Consumption in TO) / Carried TEU
Both are kind of a floating BAF, depending on the oil price, so that shippers have a certain price security for their transportations. The parameters are updated annually at Maersk. Both companies calculate their new BAF quarter-annually. Hapag-Lloyd even does it monthly if the oil’s price volatility exceeds $45 per ton. This meant to provide a flexible and transparent solution, without creating an unmanageable chaos of rates due to too many updates. Still even quarterly rates might become an administrative challenge and with every shipper having their own formula, it is indeed getting harder and harder to manage the BAF in procurement.
Why even a BAF in ocean freight?
One might question himself: Why is BAF even an extra fee? Of course shippers could also offer an all-inclusive price for the transport. A fixed bunker price or even a CY/CY (Container Yard to Container Yard) agreement would be a way to reduce lots of effort for decision making and could as well provide a price security for both parties. With vessels becoming more efficient and bunker cost therefore being a less dominant cost factor, fixed bunker prices are becoming more of an option in the market.
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