The shipping industry became very energy and capital focused with the development of containerization and usage of containers ships. In such an industry fuel could be considered one of the most critical costs where the fuel may be as high as 50% of the carriers cost. Bunker fuel started to be used in the shipping industry increasingly in the 1950’s as it is the primary power source for the vessel engine.
In the shipping world we hear the bunker term a lot as it is one of the main costs that the carriers incur. Bunker fuel is a primary type of fuel oil used aboard ships. Compared to the other petroleum products, it is crude and highly polluting. In the days of steam there were coal bunkers but now they are replaced with bunker fuel tanks. In the simplest and crudest of terms, bunker fuel is leftover after refineries have processed all the more valuable fuels from the crude source. It is thick and heavy; must be heated before it can be used in the vessels’ engine. It is difficult to store and transport as well, therefore it is mostly stored at major ports or some refineries close to the port.
In the past there have been many fluctuations which had serious effects on the price of the fuel used for vessels. Before that carriers were able to offer long term service contracts with all inclusive rates to their customers. With these fluctuations carriers were no longer able to offer stable freight rates to their customers, and they had to reflect the increases in a format named Bunker Adjustment Factor, also known as “BAF”. This high cost surcharge has been separated from the base freight rate and adjusted commonly on a quarterly basis in January, April, July and October each year.
Since bunker is a type of oil, you may think changes in oil prices have a direct affect on the price of bunker; but there are no simple correlations between bunker oil and crude oil prices. Even though all petrol and fuel oils come from the same source, the way they are priced and handled is entirely different. There are also other factors such as speculation in the crude market, refining priorities and capacity constraints, inherent difficulties for vessel operators in either storing or hedging fuel – create pricing distortions that may have an affect on bunker oil prices. Also there are a number of bunker fuel price indexes that the maritime community and their financial interests use. To get a better understating of BAF calculations click here: http://www.3plwire.com/2011/12/29/understanding-bunker-fuel-is-there-a-relationship-to-crude-prices/
Today in the shipping world the common scenario is that the carriers determine the BAF amounts and shippers add this surcharge on top of their base freight rates. However the benefits of understanding bunker and its functionality could help importers and exporters to be able to get better future cost analysis related on their freight. By doing that they would be able to get their supply chain cost better and more accurately. With the understanding of BAF companies may create more accurate annual and quarterly cost plans.