BAF: More increases to come

We are now 3 weeks into the new IMO2020 low-Sulphur regime, and two aspects are emerging for the container shipping sector. The bunker price premium has spiked but seems to ease off slowly, and the carriers have not yet achieved a substantial compensation.

During most of 2019, there was relatively wide consensus that low-Sulphur fuel would likely command a premium around 200 USD/ton. But coming into 2020, the premium measured across the top-20 ports spiked above 300 USD/ton. This is likely driven by short-term transition effects and has also in the past week slowly been easing off, but is still around 280 USD/ton. Unless we see further easing off in the coming weeks, this indicate potentially a higher price than envisioned in 2019.

Secondly, spot rates including the new BAF elements have indeed increased coming into 2020, but even looking at the latest SCFI levels from 17 January the problem is that the increases can basically be explained by the normal seasonality we would expect from the Chinese New Year effect. No separate BAF increase can be distinguished.

Another comparison would be against the rate levels immediately prior to Chinese New Year in 2013 and 2014. At these points in time, bunker fuel had a cost around 700 USD/ton. Not materially different from low Sulphur fuel which for the top-20 ports spiked at 694 USD/ton in early January 2020.

For Asia-North Europe the pre-CNY rates in 2013 and 2014 spiked at 1418 USD/TEU and 1765 USD/TEU respectively. In 2020 they have spiked at 1124 USD/TEU.

Similarly for Asia-USWC they spiked at 2520 USD/FFE and 2111 USD/FFE in 2013 and 2014, whereas in 2020 this is at 1636 USD/FFE.

Clearly, an added element is the increase in vessel sizes which has lowered overall operational costs for carriers, but it is a stark contrast to the last time we saw fuel prices at these levels and does provide another indication that the carriers appear not to be successful in getting through the bunker-induced increases they were looking for yet.