Federal Maritime Commission (FMC) representative Daniel B. Maffei has said that the Covid-19 pandemic has thrown the fuel charging system into disarray, creating an unpredictable and complex situation for the pricing of container shipping.
Speaking at the virtual Global Liner Shipping Conference, commissioner Maffei, said that the ending of the Transpacific Stabilization Agreement (TSA) in 2018 had also brought about the end of the industry-wide bunker adjustment factor (BAF) which had prevailed up to that period.
“Without BAF, implementation of new IMO 2020 rules meant great uncertainty. Many carriers insisted the additional costs of IMO 2020 compliance would be passed on to the shippers. And many shippers were concerned that the carriers would use IMO 2020 as a convenient excuse to overinflate bunker charges,” said Maffei.
However, with Covid-19 engulfing the global economy in the early part of the year and the failure of oil producers to agree a production deal the price of crude oil, and the price of bunkers, crashed bringing the scrubber spread, the cost of heavy fuel oil compared to low sulphur fuel, down from a high of US$300/tonne to less than US$50/tonne.
Fuel price developments benefitted some more than others, however, with shippers that had negotiated contracts prior to the pandemic crisis seeing fuel prices declining slowly, but non-vessel operators, who generally negotiate contracts later reaping the benefits.
“Less than a year into the IMO 2020 regime, it appears that the multi-billion-dollar investment in scrubber installation will not play out the way industry players intended,” claimed Maffei. The substantial decline in the spread meant that the break-even period for the substantial scrubber investment was significantly prolonged.
Maffei went on to say, “With an estimated 60-70% of overhead being energy costs, the lower cost of fuel has been a big factor in the record profits that some carriers are making as demand has rebounded since the start of the Covid crisis. Yes, spot rates are really high. Yes, capacity management facilitated in the major alliances has allowed carriers finally to get a handle on the supply of container space – sometimes through service reductions and blank sailings that can be the bane of shippers. But low fuel costs is a major factor.”
However, the commissioner is not convinced that the IMO 2020 impact has been completely diffused by the rapid spread of the pandemic, asking whether it is “A time bomb waiting to explode at some later date?”
FMC monitoring of bunker surcharges since 2018 when the TSA ceased to operate showed substantial differentiation, even when fuel prices were comparatively stable, said Maffei.
He pointed out that variation could be considered a positive, showing that carriers were not breaching antitrust regulations.
“However, as is so often pointed out, the variations are so great that many shippers believe the bunker fees have little to do with the actual cost of fuel or the cost of investments in scrubbers and cleaner ships. Take the fact that the surcharges are often not that different between carriers that use only small to mid-size carriers than they are for carriers that use mega-sized ships. Surely, the efficiency of a large ship would reduce the per-container fuel cost,” said Maffei.
Additionally, there is a large variation in bunker charges between imports and exports to the US, where fuel should cost the same, “but carriers know that US exporters who are accustomed to much lower rates may not stomach such a high bunker adjustment charges,” claimed Maffei.
In evaluating the current pricing uncertainty Maffei considers whether a return to a uniform method of calculating bunker fuel costs, a kind of BAF mark two, would be a better solution than the current instability.
Although, Maffei concedes, “It’s not clear who would have the authority to develop a new pricing tool to replace the TSA BAF under US law.”
With antitrust immunity filed with the FMC, that immunity does not extend to allowing parties to discuss rate agreements and vessel sharing agreements in the same trade “if the interplay between the agreements would be substantially anticompetitive”.
The commissioner went on to say, “Currently, the major alliances already participate in vessel sharing agreements for their respective trade lanes, so in order to have discussions about rates, such as a discussion about a tool to replace the BAF, a new agreement would have to be filed and the carriers would have to give up the vessel sharing agreements among the alliances that have clearly been a factor in allowing them to get capacity under control and see profits return. It’s hard to imagine they would ever do that.”
As a result, Maffei believes that developing a more transparent method of fuel calculation would be allowed under FMC rules. A universal approach would be difficult to achieve due to the many differences in vessel types, routes and services offered.
“A transparent, carrier-by-carrier way of addressing these differences is the best approach from a regulatory standpoint,” he said.
According to Maffei, this approach would be viable and legal under the current regulations. And he revealed, “The World Shipping Council recently filed an agreement with our Commission to undertake these types of discussions among its members. So, there is some reason for hope – but only if you have faith that the industry can itself work toward better transparency.”
Nick Savvides
Managing Editor
