The BOC Blast 186 – Rising fuel prices squeezing shippers and carriers

Rising fuel prices squeezing shippers and carriers

Dustin Braden, Assistant Web Editor, JOC.com | Feb 27, 2017 7:00AM EST

Rising bunker prices, up roughly $180 per ton from this time last year, will cost beneficial cargo owners more, spur container lines to seek higher all-in trans-Pacific service contract rates, and delay cash flow to carriers.

BCOs are set to pay more as the bunker fuel adjustment increases in line with rising bunker fuel prices and oil prices, which IHS Markit forecasts will rise by nearly a third year-over-year to $58 a barrel in 2017. Fuel costs generally account for nearly three-quarters of carriers’ operating costs.

Since 2009, the price of a ton of bunker fuel from Asia to the US West and East and Gulf coasts has on average been 5.7 times greater than the price of a barrel of Brent crude oil. Assuming that multiplier and the IHS Markit forecast holds, the average cost for bunker fuel in 2017 should come to $330 per ton. Such an increase would raise the current BAF for 20-foot containers to $292 from $238 and to $324 from $264 for 40-foot boxes to the West Coast, according to the BAF surcharge calculator of the Transpacific Stabilization Agreement. To the East Coast, the BAF would rise to $537 from $473 for 20-footers and from $525 to $597 for 40-footers.

As container lines seek higher trans-Pacific service contracts after last season’s record-low rate signings, they will have to seek higher all-in rates since the BAF for this year’s contract talks will likely be up around 42 percent and 39 percent from the same period last year to the West and East/Gulf coasts, respectively.

The BAF for 2017’s contracting cycle are set to be on par with the levels seen during 2015 contracting, but below 2014’s levels.

Beyond rising costs, higher bunker prices are problematic for container lines because of the delay between when fuel prices rise and when the container lines are able to pass those increases off to customers. This means container lines must spend billions of dollars on more expensive fuel without necessarily having the funding needed to offset the increase, according to maritime analyst SeaIntel.

Evidence of this trend was found in the fourth-quarter earnings report of Matson. The company, which has issued three bunker surcharges since November, said that its earnings were impacted by higher fuel costs and that because of the lag between the increase in costs and implementation of the surcharges, revenues were affected. Matson’s net income fell in the fourth quarter by 27 percent year-over-year to $19.4 million, and net income for the full year was down 21.8 percent to $80.5 million.