Understanding Bunker Fuel: is there a relationship to crude prices?

Unless you work for an ocean container line, there seems to be a lot of confusion regarding bunker fuel costs and how they play into ocean container costs and BAF (Bunker Adjustment Factor – fuel surcharge for container lines).  This is especially compounded when folks look at the headlines in regards to crude oil prices and start asking questions about how those crude oil prices will affect bunker fuel.  While at the end of the day all petrol and fuel oils come from the same source, the way they are priced and handled are very different. This makes quick and simple comparisons and forecasts based on published crude prices very difficult. But that is, in fact, exactly what I am going to try to do in this post.

Firstly, the headlines you see on Bloomberg or CNN with the ever-changing prices on crude reflect oil futures. Basically, these are mostly large financial deals in multiple contracts between buyers and sellers who agree to buy and sell a specified amount of oil at an agreed upon price at some date in the future. In most cases, no actual oil is ever delivered or processed; the transaction is simply a financial one with cash being settled at the end of the day.

Bunker fuel, on the other hand, is a derivative of crude oil. In the simplest and crudest of terms, bunker fuel is the gunk that is leftover after refineries have processed all the more valuable fuels from the crude source. It is thick and heavy and must be heated before it can be used in an engine. It is difficult to store and transport. And it is ideal for large marine going vessels that have the heavy engines and fuel capacity to handle bunker fuel. Because of this, bunker fuel is not readily available like gasoline / petrol. It is mainly stored at or near major ocean ports and primarily sold and delivered via physical contracts to marine vessel interests. Because of this, bunker fuel prices vary widely from port to port. While there certainly are bunker fuel futures they are mainly utilized by the marine community and unlike crude futures the contracts normally entail actual physical delivery of the fuel. Also, like crude, there are a number of bunker fuel price indexes that the maritime community and their financial interests use.

For the purposes of this discussion I am going to focus on the prices published by the TSA (Trans-Pacific Stabilization Agreement) Carriers and because I reside in the U.S. this will be written from a Trans-Pacific standpoint. The TSA Carriers have agreed to their own index of bunker fuel prices which is a published weekly average based on bunker fuel prices to both the U.S. West Coast and U.S. East Coast. These weekly average bunker fuel prices are available publicly at the TSA website here:

http://www.tsacarriers.org/calc_bunker.html

They then take an average of the weekly average fuel price over the entire quarter and then set the next quarter’s bunker fuel price based on that average. It is this index and formula that most carriers use when assessing quarterly BAF (fuel surcharge) charges to adjust to rising / falling bunker fuel costs.

Because the media and public knowledge are largely geared around crude oil futures and prices, this can cause a lot of confusion when supply chain / logistics managers start talking about bunker fuel and what kind of BAF (fuel surcharge) they will have to pay. It’s only natural for others to immediately switch their brains to thinking about crude prices and the headlines for that day / week and try to make a connection to what this supply chain / logistics manager is telling them about future ocean freight fuel cost increases. And it’s also only natural for many supply chain / logistics managers to try and find a link or relationship between the same headlines they see every day regarding crude prices and the BAF charges they will have to pay in the future. So this begs the question: is there a simple and direct correlation between bunker fuel prices and publicly reported crude prices? And can that correlation be used to potentially forecast or understand where bunker fuel prices might be headed in the future?

Unfortunately there is NOT a simple and direct correlation between crude oil prices and bunker fuel prices. That being said, there is a very broad figure you can use to quickly derive a rough bunker fuel price from whatever crude oil price you see published or that someone in your company questions you on. I call this number the “Bunker Fuel Multiplier” and quite simply it is just a multiple of the crude oil price. I came up with this figure because I was constantly being asked within my own company, by multiple people over multiple years, what the bunker fuel was based on that day / week / year’s crude oil price. I was also constantly asked where bunker fuel, and subsequently BAF, was going to be in the following month / quarter / year given crude oil price assumptions.

So what we did was start tracking the TSA Weekly Average Fuel Price (WAFP) going all the way back to January 2006 through today.

Starting in May 2009, the TSA adjusted their formula to establish separate pricing for West Coast vs. East Coast. Prior to May 2009 our figures reflect the old TSA formula. From May 2009 onwards we just did a simple average of the West Coast and East Coast prices to come up with a single number to match the old formula. We then also tracked the average weekly futures price for NYMEX crude as well as the weekly BRENT spot price for crude:

From there we did a simple calculation of where the bunker fuel price for that particular week compared to NYMEX and BRENT from a multiplier standpoint. This is what we found:

Over the past 5 years, Bunker Fuel has been priced at an average multiple of 5.8x the price of NYMEX and BRENT. That means that over the long run you can take the price of NYMEX or BRENT and multiply it by 5.8 to get a rough bunker fuel price. So the next time someone in your company asks “what if fuel hits USD 200 per barrel next year? what will that mean for bunker?” you can tell them that might equate to a bunker fuel price of USD 1,160 per ton (USD 200 x 5.8).

However, while this is a nice, simple, broad indicator it is very broad. As I mentioned, there is not a clear and direct link between crude oil prices and bunker fuel prices. Just look at the Bunker Fuel Multiplier chart above; within that 5-year average of 5.8 there are weeks and months – and years – where the multiplier was anywhere from 4.8 to 8.1 times the price of crude. For example, if we were to break down the Bunker Fuel Multiplier by calendar year:

2007 = 5.4

2008 = 5.3

2009 = 6.1

2010 = 5.9

2011 = 6.3

Also, for 2011 there has been a huge divergence in the bunker fuel multiplier between NYMEX and BRENT. Again, look at the above chart and notice the huge divergence between the NYMEX and BRENT. For 2011 the NYMEX multiplier is 6.8, meaning that bunker fuel has averaged 6.8x the price for NYMEX crude. But for BRENT the multiplier has been 6.3x, meaning that bunker fuel has averaged 6.3x the price for BRENT crude. The reason behind this is because in 2011, for reasons I do not know, NYMEX has been trading at a 10-20% discount over BRENT over the course of the year. Whereas prior to 2011 the two prices were nearly identical. If there was a change in how the BRENT spot price is calculated and published, I do not know it.

Because of the volatility in oil and bunker fuel prices, not to mention the variances between NYMEX and BRENT, the Bunker Fuel Multiplier can vary widely from month-to-month and year-to-year. With that in mind, I always provide a range when folks ask me where bunker fuel will be in the future based on crude oil assumptions. For example, if someone asks me where bunker fuel might be at USD 100 per barrel, I would tell them “probably in the range of USD 580-630 based on historical averages”.

So to wrap it up:

• Bunker fuel is a derivative of crude and therefore there is some correlation between crude oil prices and bunker fuel prices.
• By comparing current and long term prices of the TSA Weighted Average Bunker Fuel Price against NYMEX and BRENT crude prices we can determine a simple “bunker fuel multiplier” that makes it handy to at least come up with a rough estimate of where future bunker fuel levels will be based on any crude oil price assumption.

Why would being able to roughly forecast bunker fuel prices be useful?

• Bunker fuel is a prominent component of ocean carriers’ actual vessel operating costs.
• Base ocean container rates fluctuate based on the actual cost of bunker fuel the carrier thinks they will have to pay.
• BAF (Bunker Adjustment Factor, or fuel surcharge) charges are configured and added onto the base rate you pay for ocean freight once bunker fuel levels exceed a certain amount for that quarter.
• BAF charges are additional / on-on-top-of the base rates you will pay to carriers.
• Therefore, understanding when and how your carrier will asses quarterly BAF charges, not to mention how much they actually pay for bunker fuel configured into your base rate, allows you to actually plan and forecast for future rate increases.
  • Or to help you when putting together your freight spend budget for the next year.
  • Or to help you understand where container freight rates might be headed when it comes to negotiating new ocean carrier contracts.

For too many companies, BAF surcharges and actual bunker fuel costs are little thought of or not understood at all. Too often companies simply defer to whatever their carriers tell them and go along with whatever the consensus is. And as lengthy and technical as this post is, this is actually a very simplistic way of looking at and calculating potential future bunker fuel and BAF costs using the simple price of crude oil. There are certainly other, probably better, ways of looking at and trying to forecast future bunker fuel costs and plan for potential cost increases or decreases. Regardless, the more control you have over understanding what affects the carriers’ costs and bottom line and how those costs may or may not affect you will only help you plan better for the future, as well get a handle on your total supply chain costs. I hope my simplistic methodology can perhaps help others to think along these tracks so they can be better prepared during ocean contracts season.

How to use U.S. Customs Data within 3PLs – Zepol.com Guest Post

The transportation industry makes up a large portion of users of U.S. Customs data. Because U.S. Customs data relates directly to every portion of a NVOCC, Customs Broker, or 3PL’s import business, these users see the data as an essential business tool. A transportation service provider that works without import manifest data is at a significant disadvantage to their competition.

3PLwire.com readers are looking for the best tools to grow their businesses, and trade data provides a number of uses that break through traditional lead generation. Because the transportation service industry is unique, there is a need for different information to help sales people do their jobs. Companies and sales people in this industry have the challenge of both maintaining their current relationships and finding new customers to grow their businesses.

What are some of the ways that transportation companies are utilizing U.S. trade data?

Qualifying Companies for their Sales Teams

The most popular use of U.S. Customs data is to analyze what and how often potential customers are actually importing. I have heard stories about sales representatives going to local Customs offices to read through Customs entry books, but it is much easier to use an online application that shows the manifest records of every shipment and that is accessible from anywhere.

Because the data from U.S. Customs is rich with useful information, users use the data to develop lists of leads that meet their requirements. These lists could be based on the number of TEUs imported during a month or what products the lead ships, but none of which could be done with directories or paper records.  Once a target list is identified, further analysis can be done on an importer’s activity to educate a sales person before they step in a logistics manager’s office.

Competitive Analysis

To do effective competitive analysis in the transportation industry, companies must have access to both House and Master Bills of Lading as they exist in the source data provided by U.S. Customs. By being able to view both types of bills, transportation providers can gain an understanding of which providers are currently handling an importer’s trade. See the example of a House and Master Bill of Lading below for a better understanding why this field is important.

Trade Lane and Market Profiling

Instead of basing decisions on broad industry wide reports, smart marketing and trade departments at transportation companies are using U.S. import data for specific, accurate analysis. With a quality trade data tool, these companies are able to drill into their markets no matter how they describe them (region, trade lane, commodity, or other). This data allows them to determine accurate market shares and fully understand who the most important players are and what products are the most traded for a region or market sector.

This also provides a clearer understanding of the supply side of a 3PL’s business, because they can look closely at the available carrier options. Getting a better understanding of which competitors use a specific carrier for a port can provide important ammunition in rate negotiations. With the way that next year’s ocean environment looks, looking at both sides of your 3PL business is prudent.

This guest post is provided by Zepol Corporation. Kevin Palmstein is the Marketing Manager for Zepol Corporation. Zepol is the leading provider of United States trade information. Zepol’s products, TradeIQ™ and TradeView™, provide access to the latest U.S. Import Customs trade data and U.S. Import/Export Census trade statistics respectively. To learn more about Zepol, visit www.zepol.com and read their trade data blog, www.zepol.com/blog.

Top 25 Global 3PL’s – 2008

It has been awhile since we last discussed the top 25 global 3PL’s. In fact, I believe the last rankings we wrote about were the numbers published by Armstrong and Associates from 2006.

The latest report I saw was an article published by SJ Consulting Group detailing the 25 largest 3PL companies based on 2008 overall revenue numbers in USD.

As with anything, I would suggest taking these numbers with a grain of salt since not all companies on the list are publicly listed.

Here are the top 10:

1 DHL Logistics (1) $39,900 – Germany

2 Kuehne + Nagel (2) $20,220 – Switzerland

3 DB Schenker Logistics $12,503 – Germany

4 Geodis (3) $9,700 – France

5 CEVA Logistics (3) $9,523 – Netherlands

6 Panalpina (2) $8,394 -Switzerland

7 Logista (3) $8,190 – United Kingdom

8 CH Robinson Worldwide $7,130 – USA

9 Agility Logistics (2) $6,316 – Kuwait

10 UPS Supply Chain Solutions $6,293 – USA

DHL continues to hold a dominant position on the list with nearly double the revenue amount of the number two player; Kuehne & Nagel. Notable companies that were not in the top 10 are Expeditors at number 11 and Hellmann at number 19.

The only company in the top 10 that I am not overly familiar with is Logista.

If you are currently searching for potential 3PL companies, please be sure to check out our list of 3PL providers.

Notes:*Currency has been converted to USD. Gross Revenue shown here for non-asset based logistics (1)Reallocation of the division(2) Currency Impact (3)Growth includes impact of acquisition.

Source: SJ Consulting Group Estimates

Global recession and the fate of small forwarders

This is a topic that I have been thinking about quite a bit over the last few months as the global recession continues to develop. What will be the fate of the small freight forwarders? According to a report I read on the Financial Times, many of today’s small freight forwarders will simply disappear. The main contributing factor will be cash flow. As more and more customers try to extend their credit terms and string forwarders out for cash, the harder it will be for forwarders to keep up with timely payments to the airlines and steamship lines. Making things more difficult for the small forwarder will be customers who go belly up, leaving forwarders holding the financial bag.

If this scenario does play out as the report on Financial Times states, then the large global forwarders will benefit by gaining additional market share. Mostly because the global players have the financial reserves to weather the storm.

If you work for a small forwarder, let me know your thoughts on the FT article.

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