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Bunker Adjustment Factor

Jun 28, 2022Introduction to Trade

The Bunker Adjustment Factor (BAF) is an additional fee that shippers must pay in order to account for the volatile and unpredictable nature of fuel prices. The BAF can be included within the freight charge or charged separately, depending on the trade routes and conditions between the sender and carrier.

The BAF is an important parameter in determining the cost of running a ship, as it takes into account fluctuations in oil prices and costs. This allows for a more precise shipping cost calculation.

What Is BAF?

BAF is a surcharge that shipping companies pass on to their customers to cover the increased cost of fuel. The BAF is typically calculated as a percentage of the base rate, and it can vary depending on the carrier and the destination.

The purpose of the bunker adjustment factor is to reimburse shipping companies for the increased cost of fuel. This surcharge is based on the twenty-foot equivalent unit (TEU), which is a measure used to calculate the capacity of a container ship. The value of the BAF depends on the trade route and represents the variable part of shipping prices attributed to fuel costs.

Since the International Maritime Organization (IMO) 2020 has come into existence, it has encouraged the adoption of greener technologies to counter the pollution hazards associated with transporting large container ships. New eco-friendly measures such as the global sulfur cap have been introduced, restricting sulfur emissions to 0.5% from the previous limit of 3.5%.

BAF is a necessary surcharge for shipping companies to cover the increased costs of fuel. This charge is based on the twenty-foot equivalent unit (TEU) and its value can depend on the trade route.

BAF types on Ocean Freights

There are three distinct types of BAF utilized in ocean freight.

1. Fixed BAF

Fixed BAF is a set amount that does not fluctuate with changing fuel prices. This type of BAF is excellent for businesses who wish to calculate the total shipping cost precisely by knowing the bunker price ahead of time.

For example, before shipping goods, you will be charged a fixed fee that includes a petrol charge.

2. Flexible BAF

Flexible BAF is a type of bunker adjustment factor that is dependent on real-time oil prices changes. This choice keeps the shipping company afloat, no matter how the oil market fluctuates. Because shippers are unable to predict the end cost of their shipments, flexible BAF lowers their price security.

Here, your final shipping costs will vary based on the fuel prices and trade routes, which you will find out later.

3. Locked-in BAF

Locked-in BAF is a type of bunker adjustment factor where the trader and carrier agree on a locked-in bunker price for a particular period. This allows both parties to know the exact cost of shipping goods, and helps to avoid any surprises.

For example, let’s say you are shipping goods from China to the United States. The shipping cost for this shipment is fixed for a certain period based on a mutual agreement. This means that you will know the exact cost of shipping your goods, and you will not be surprised by any changes in fuel prices. This type of BAF is great for businesses who want to know the total cost of their shipment ahead of time.

Who Determines the Bunker Adjustment Factor?

The BAF is set by shipping lines, but monitored closely by the European Commission. This ensures that prices are fair and accurate.

How is BAF calculated?

The BAF of each shipping line is calculated in a variety of ways. These variables are updated on a monthly or bimonthly basis. To address the concern that BAFs are not transparent, various shipping firms have made their method for calculating BAF public.

For example, Maersk Line Limited uses the following formula to minimize its BAF calculation:

BAF = (Total fuel consumption x transit time) / (ship’s total capacity) x utilization factor

BAF is the amount of fuel used by a ship while it’s at sea. This calculation takes into account how long the journey will take, how much fuel the ship can hold, and how often the ship is used.

On the other hand, Hapag-Lloyd uses the following formula to calculate BAF:

BAF = Fuel price per tonne x Fuel consumption in tonne/ Carried TEU

The cost of fuel is calculated by multiplying the fuel price per tonne by the fuel consumption in tonne per container. This calculation is then divided by the number of containers that are carried on each voyage.

IMO 2020

IMO 2020 is a regulation that was introduced to reduce pollution levels by cutting emissions. It came into force on January first, 2020 and has placed restrictions on emission control with its Data Collection System (DCS). This has forced shipping lines worldwide to develop technologies for minimizing their sulfur emission, which comes at an extra cost. The added expenditure then results in increased shipping costs through logistic tariffs or by way of using low sulfur fuel prices. If a shipping carrier opts for the latter, the BAF charges would have to be calculated based on the new fuel prices, thus further increasing BAF prices worldwide. Consequently, IMO 2020 has had a significant impact on the BAF.

Should BAF Surcharge be included in Freight Rate?

BAF should not be seen as an additional cost, but rather it should be included in the overall price of transportation. By doing this, traders can negotiate for a fixed price or a container yard agreement which will provide price security to both parties involved. A fixed bunker fee appears to be a superior option with vessels becoming more efficient and bunker expenditures becoming less significant.

What’s Next?

Now that you know everything there is to know about BAF, you can start planning your shipments with ease. Keep in mind the type of BAF that best suits your needs, and be sure to include it in your overall shipping costs. This way, you can avoid any surprises down the road.

We hope this article was helpful in explaining the bunker adjustment factor (BAF). If you have any questions or would like to learn more about how we can help you ship your goods, please contact us. We would be happy to assist you further.

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