New IMO 2020 Fuel Indexing Mechanism Launched

With container line stakeholders facing an additional $11 billion fuel bill next year due to the switch to low-sulfur fuel oil, shipping consultant Drewry has joined with the European Shippers' Council (ESC) to launch a new bunker adjustment factor (BAF) indexing mechanism.

The two parties believe their simplified BAF indexing mechanism and bunker charge guide will help shippers monitor and control bunker costs as shipping lines switch to the more expensive bunkers required under the IMO 2020 low-sulfur regulation that becomes mandatory Jan. 1.

As reported in FreightWaves, "bewildered" shippers and forwarders have expressed confusion over the timing and transparency of new charges now being introduced by container lines as they phase in low-sulfur IMO 2020 compliant fuels and pass on higher costs to customers.

Shippers are also wary that container lines might hike the fuel component of freight to compensate for bearish spot rates.

For their part, carriers have insisted they will only charge for the "extra cost of compliance" as they phase in the new fuels.

ESC and Drewry drew on shipper input in establishing their new indexing mechanism. The process of adjusting BAFs is streamlined by identifying common standards and definitions for bunker price measurement periods, BAF adjustment periods, fuel reference prices and transparent indexing formulae.

"By giving to shippers the possibility to better analyze present and future types of fuel costs, this toolkit is representing a significant step towards a more transparent framework for the best interests of all parties," said Jordi Espín, maritime policy manager at ESC.

Step one of the process sees the shipper and the provider agree on the "baseline" initial bunker charges and the link to the baseline external fuel price at the start of the contract. For the period of the contract, revised bunker charges are calculated based on the previous quarter's average price. They are then applied contractually to the following quarter with no need for negotiation.

"BAF charges are updated once a quarter with a lag time of one month to allow parties to update their respective invoicing and purchasing systems," said a statement.

"Consideration is given to an additional ‘interim' BAF adjustment to address the risk of huge volatility in the early prices of the new fuel."

The indexing mechanism tracks and applies the change seen in any relevant bunker price index — global, basket of regional or regional — as compiled and published by any neutral third party, including Drewry.

Philip Damas, head of Drewry Supply Chain Advisors, claimed the ESC-Drewry IMO 2020 toolkit and its indexing mechanism would help improve transparency and fairness in how extra fuel costs incurred by shipping lines and forwarders due to the new regulation were passed on to exporters and importers.

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