After a comprehensive internal review that included feedback from customers, The Westbound Transpacific Stabilization Agreement (WTSA) has revisited, and made changes in how it calculates, guideline bunker fuel surcharges in the U.S.-Asia freight market.
WTSA member shipping lines have adopted a simpler, more transparent formula for dry cargo which eliminates a number of variables that made the formula more complex; distinguishes between bunker fuel-related costs for West Coast port-to-port and East Coast all-water services; and narrows the formula tiers – the threshold fuel prices that trigger surcharge increases and the amount of those increases – to ease the impacts of monthly adjustments.
WTSA member shipping lines intend to implement the new formula effective October 1, 2008 in their tariffs and in service contracts going forward, for dry cargo moving from all U.S. origin locations to all Asian destinations. A separate guideline covering refrigerated cargo will be finalized and announced shortly, to take effect on November 1, 2008.
“The new formula is a significant departure from how WTSA has calculated its bunker surcharge guideline in the past,” said WTSA executive administrator Brian M. Conrad. “Container lines face an urgent need to recover fuel costs that have more than doubled in 18 months. In turn, customers are being asked to absorb a sizable increase in their freight costs, and carriers recognize that this will require an easily justifiable, transparent process.”
WTSA began the process of modifying its surcharge formula by eliminating unwieldy steps that were part of an effort to arrive at a complete “average of averages” that reflects the cost impacts of rising fuel prices on multiple, different container services. Specifically, the new bunker surcharge formula:
• Tracks a single marine fuel, IFO 380, which accounts for 98% of fuel-related costs.
• Eliminates the weighted average of weekly prices at 11 load ports.
• Uses a straight average of Hong Kong and Los Angeles prices for the West Coast; and Hong Kong and New York prices for the East Coast surcharge.
• Uses fuel price data for the three ports from a publicly available web site, www.bunkerindex.com
A second set of changes involves straightforward components for constructing fuel cost impacts from changes in fuel prices. These include:
• Vessel effective capacity
• Westbound allocation of deadweight capacity after eastbound empty repositions
• Maximum capacity for loaded containers before reaching a ship’s weight limit
• Daily fuel consumption
• One-way steaming time (excluding time in port)
Averages for the above components vary for West Coast and East Coast services, but are constant for each. A simple calculation adjusts effective capacity to allow for the deadweight impact of empty returns; multiplies the fuel price (per ton) by consumption (tons per day), then by transit time (steaming days); and finally dividing by the maximum number of loaded containers by weight for the ship’s effective capacity, to produce an average fuel cost per sailing per 40-foot container (FEU).
Under the new formula, for example, the weighted average fuel price of $689.60 per metric ton developed under the current formula for the month of August 2008, translates into a bunker fuel surcharge of $767 per 40-foot container (FEU) from the West Coast, and $1,515 per FEU from the East Coast. Going forward the monthly-adjusted totals will be fine-tuned further, developing distinct weekly average price information for each coast.
With separate calculations for West Coast and East Coast services – an approach favored by many shippers in discussions with WTSA – Conrad said it is inevitable that many customers will see differences in their surcharges under the new formula versus the old one. “The carriers’ focus was to make the formula as simple and transparent as possible, and to reflect as accurately as possible the fuel costs passed through depending on routing,” he explained. “We believe that, under the new formula, those objectives have been met.”
WTSA is in the process of preparing a fact sheet that it will post on its web site shortly, detailing the new bunker surcharge formula, with a matrix that translates current average fuel prices to per container surcharge levels.