Pacific box lines turn to new bunker formula
12 Mar 2009
Source:Lloydlist

TSA seeks to boost transparency over fuel charges as carriers start to offer all-in rates

TRANSPACIFIC container lines plan to use a new method of calculating fuel levies in the next round of service agreements as industry leaders warn against the potentially suicidal decision by some carriers to offer all-in rates in a bid to attract new business.

The initiative comes against a background of weakening freight rates and a recent move to charge shippers a single price that combines ocean transport with bunker and other surcharges - a development that could drive lines out of business should oil prices rebound.

As ocean carriers and shippers prepare to open negotiations on annual contracts covering cargo moving from Asia to the US, the 14 members of the Transpacific Stabilization Agreement unveiled a bunker charge formula designed to bring greater transparency to the process.

TSA members are braced for a drop in transpacific eastbound freight rates agreed for the contracts that will be renewed from May 1, a reflection of rapidly weakening cargo volumes.

Neptune Orient Lines president Ron Widdows, who also chairs the TSA, conceded last week that rates would be below those fixed in 2008-2009 contracts.

Some shippers have told Lloyd's List they expect to obtain discounts of around 10%.

TSA lines, which are meeting in Tokyo this week in conjunction with the biannual Box Club forum, usually issue a notice indicating the level of rate increases they will seek, but took no such action this time.

"It would have been disingenuous for the TSA to come out with an announcement saying it was recommending members to raise rates," Mr Widdows said.

Instead, the TSA will provide guidance on economic levels beyond which there is a real danger of having an unsustainable situation, he continued.

"What you will hear from the TSA is more about the general efforts of carriers to end up with contracts in place that allow us to go on for a period of time," he said.

Mr Widdows also spelled out the dangers of eliminating bunker adjustment factors. "That would be truly unwise," he said.

Yet that is what has happened in some cases in the Asia-Europe trades, and to a lesser extent in the Pacific.

"Imagine what would happen, if fuel prices go up, to those lines that are on the brink," Mr Widdows said.

"That would put some people away," he added.

At least in the Asia-Europe trades, a large percentage of contracts are renegotiated on a quarterly basis, whereas Pacific service agreements typically run for a year.

The handful of transpacific contracts already concluded have been fixed at rates that are down by "no small drop", said Mr Widdows, but the bulk have yet to be signed.

TSA lines will begin the transition to a new bunker charge calculation from May 1. The revised formula distinguishes between west coast and east coast sailings; reduces volatility through quarterly adjustment; and addresses changes to vessel size, speed and fuel consumption in recent years, TSA lines said in a statement.

"Vessel and operating characteristics have changed in the seven years since TSA last modified its bunker formula," Mr Widdows said. "In the current environment of price volatility, members saw an opportunity to improve the accuracy of their fuel cost calculations, while also accommodating shippers' calls for greater transparency in how the charge is developed."

The discussion agreement group began working on the new formula last summer after bunker fuel prices hit a peak level of $767 per tonne - a 260% increase since the beginning of 2007.

Prices have since dropped sharply, but are expected to see continued volatility over time.

"TSA has taken a clear step forward with this new bunker formula," Mr Widdows said. "It is simpler, more transparent, and more accurately captures fuel-related costs for local, intermodal and all-water east coast services."

TSA plans to post the new formula on its website.