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.

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.

DPWN cited three key factors that drove the decision to focus only on international shipping to and from the US, a move that means DHL’s daily air volume in the country will drop from 1.2 million shipments to just 100,000. First, it simply had to “face reality,” DPWN CEO Frank Appel said at a recent press conference in Germany, explaining that the company had to acknowledge it could not figure out a way to operate profitably in the US. Its annual costs in the market averaged more than $5 billion and it could not generate enough revenue to earn money, losing an average of $1.3 billion per year. UPS and FedEx have long-entrenched, integrated networks in the US as well as tremendous brand awareness among American consumers and shippers, advantages that proved too significant for DHL to overcome.

Second, its business in other parts of the world, particularly Asia, has grown enough in the last five years that it no longer believes the US market holds the same strategic importance. Finally, the global economic downturn makes pouring money into a loss-making market prohibitive. DHL estimates it has lost $10 billion in the US since it purchased Airborne Express in 2003 and tried to battle UPS and FedEx on their home turf (ATW, January 2008).

It’s long been reported that their U.S. express unit has been losing money hand over fist, but this is still pretty dramatic. They are pulling out of the domestic express market completely while still offering international express services to and from the U.S.. Via JOC Online:

Deutsche Post in a press conference in Bonn said the downsizing of DHL Express in the U.S. will cost $1.9 billion on top of a charge of $1.5 billion charge for an initial restructuring announced in May that cut 5,400 jobs.

Deutsche Post stressed it will continue to offer international express service to and from the U.S. The successful contract logistics and freight forwarding units, which employ around 25,000 people, are unaffected by the $3.4-billion, two-year restructuring.

“There is no alternative…this is absolutely necessary,” according to Deutsche Post CEO Frank Appel, who said the company had to act to stem “unacceptable” losses at the U.S. express unit which are expected to reach $1.5 billion this year — $200 million higher than forecast in May.

Appel said the restructuring, which will be booked mostly in 2008, is expected to cut DHL’s U.S. losses in 2009 to $900 million and under $400 million on an annualized basis by the fourth quarter of next year.

Possibly a result of acquiring/growing too big, too fast? I don’t know enough about the details of the inner workings of Deutsche Post, but with so many different business units acquired and absorbed so quickly over the years some growing pains were inevitable.

Just a quick note that they certainly haven’t let up and I’m curious to know if anyone else out there is experiencing the same thing or can confirm the general situation. There are many NVOCCs focused primarily on the China (or Asia) markets and for years they have succeeded based on the booming growth in Chinese imports to the U.S.

Now they almost seem desperate looking for freight, as I seem to be getting cold-called left and right by such companies. I can only assume that with reduced import demand, rising costs in China, etc that it’s a challenging market for those whose business is concentrated on China. I would imagine they are (or should be) taking advantage of the boost in U.S. exports, but if their operations are not diversified or flexible enough to handle exports in as profitable a manner then perhaps it isn’t as much help as I thought. If anyone out there has further input please share.

I too am appalled at the general lack of geographical knowledge by folks within the logistics provider industry, particularly sales people. I’ve worked both sides of the fence and as a customer it is pretty embarrassing when you have to explain or point out to the sales rep the location of the country his or her company claims they can service for you. I certainly don’t expect every person who walks through the door to know exactly where Namibia or Mali is, but is it too much to expect they should know countries such as Brazil, India, Pakistan, and Indonesia? These are all real examples that I have experienced as a customer dealing with sales reps from providers.

And don’t get me started about China: if you are trying to sell me on your China services and you can’t even figure out the basics of Northern and Southern China logistics points, then you better try to sell me something else. No, Yantian and Shanghai are not even remotely close to each other, I am sorry to say.

And despite these challenging market conditions US 3PL revenues cracked the $100 billion mark at $103.7 billion in 2005, and hit $113.6 billion in 2006. Last year’s $122 billion represents a 7.2 percent uptick from 2006.

As in its past reports, Armstrong divides 3PL market segments into four categories: domestic transportation management, international transportation management, dedicated contract carriage, and value-added warehouse/distribution (VAWD).

International transportation management paced these categories with the highest year-over-year net revenue growth at 9.5 percent and $17.0 billion, followed by domestic transportation management at 8.0 percent and $6.0 billion, VAWD at 7.7 percent and $22.5 billion, and dedicated contract carriage at 2.7 percent and $11.5 billion.

The report added that 3PL revenue growth was highest in non-asset transportation management, and it also noted that overall industry growth continued a pattern of being more than three times the growth of the US gross domestic product.

Armstrong & Associates President Richard Armstrong told LM in an interview there are multiple reasons for the continued growth of 3PLs, even during this difficult domestic economic climate.

“[Shippers] continue to outsource logistics activities and depend more on 3PLs to provide them with a wide scope of services, and the increased potential for these services has also increased over time,” said Armstrong. “These services are very complete across broad geographical areas and can be maintained [by 3PLs].”