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Fuel accounts for 35% of total transportation costs

Fuel accounts for 35% of total transportation costs
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First Published: Thu, Apr 03 2008. 01 25 AM IST
Updated: Thu, Apr 03 2008. 01 25 AM IST
Bangalore: As fuel prices continue to shoot up, container shipping companies are racing to stop financial haemorrhaging by adopting different strategies. French firm CMA CGM, the world’s third biggest container shipping company, plans to build tanks at its port terminals to stock bunkers in an effort to tackle surging oil prices. Meanwhile, the world’s biggest container shipping firm, Maersk Line, has announced the global roll-out of a new formula to calculate bunker prices, which, the carrier, says will be transparent, simple to calculate and fair.
The Maersk formula is expected to set the trend for other container shipping firms, particularly when the shipping conferences related to European trade expire later this year. Neil Ashby, director, Maersk India Pvt. Ltd, spoke to Mint about the new formula and its implication on trade. Edited excerpts:
How is the floating BAF (bunker adjustment factor) formula going to help trade? Can you quantify the approximate savings or additional costs to Indian exporters and importers?
The benefit to the customer is that the price of transportation is adjusted to reflect the actual cost of fuel at all times, as opposed to the alternative, in which the carrier is forced to factor future bunker developments into the ocean freight. In the latter case, the customer will usually pay more as the carrier will naturally be conservative in estimating its costs.
Maersk Line will provide a transparent, simple and fair BAF formula that applies to all trades. With the introduction of the formula, our customers will experience a fair and equitable way of applying BAF.
The formula builds on elements such as fuel consumption, transit time, and imbalances of container flows, with merely bunker price changes determining the BAF level. This means that our customers will pay a BAF which rises when fuel prices climb, just as they will benefit from downward trends as the bunker price fluctuates.
How is the new floating BAF different from the earlier system?
The previous system was dictated by the Liner Conferences based on historic and opaque data. This new formula is open for all to see based on latest and transparent information.
How much does fuel account for the operating costs of Maersk?
It is a major and increasing cost component. Fuel prices have increased rapidly in the last decade. The demand for oil worldwide has multiplied, resulting in price escalation of no less than 365% in that time. In 2007 alone, the increase was 56%. Today, we have reached a concerning oil price above the $100 (Rs4,000)/barrel mark. These facts are having a very negative impact on the container business. Fuel costs now account for 35% of total transportation costs, compared to only 20% 10 years ago. And, to make matters worse, these costs will continue to be volatile and unpredictable.
Despite the fact that it is a floating BAF, why has Maersk given the rates in advance, which will remain valid for a three-month period?
This has been done to maintain continuity and stability in terms of pricing towards our customers. Customers have rate agreements signed with Maersk Line, which are generally agreed for a three-month period. So, it makes sense to have the BAF component stable for the same time period.
Customers can, therefore, plan on known and fixed transport costs for each quarter, which gives them greater security.
What is Maersk’s share in India’s total container trade of about 7 million TEUs a year?
We remain the biggest carrier in the country with a sizeable market share.
Are other container shipping firms also adopting a similar floating BAF?
That is up to them. They are free to follow a model similar to ours if they wish. Maersk Line, as always, is committed to leading advances in industry standardization and the BAF calculator is just another effort.
How will the new BAF formula help offset rising fuel costs for a firm such as Maersk?
The new BAF formula will assist in sharing the burden of fuel cost fluctuations with the customers, just like airline ticket fuel surcharges. Applying the BAF formula means the customer only pays the variation in cost, so although the price rises when oil prices climb, the customer will benefit from downward revision when oil prices fall.
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First Published: Thu, Apr 03 2008. 01 25 AM IST