WTSA --[ Bunker Charges Fact Sheet ]

Bunker Charge (New Formula)

Fact Sheet

In July 2008 marine fuel prices on the world market averaged a record $767 per ton – an increase of nearly 260% from $296 per ton at the beginning of 2007. That increase, in turn, raised the cost of a single US-Asia sailing from an average $704,000 to $1.83 million via the West Coast; and from $972,000 to $2.52 million via the East and Gulf Coasts via Panama.

Carriers are under intense pressure to recover these cost increases. Shippers incurring high fuel costs in their own operations are rightly concerned about rising transportation costs, and would like greater transparency in the way ocean carrier fuel charges are calculated. In response, member lines in the Westbound Transpacific Stabilization Agreement (WTSA) have undertaken an extensive internal review of its current bunker charge in an effort to make their calculation formula simpler and more accessible to the shipping public.

WTSA’s revised bunker fuel charge formula – effective January 1, 2009 with separate calculations for dry and refrigerated cargo - enables customers to quickly and easily access weekly bunker fuel prices over the internet… uses fewer loading ports in its calculation… bases the calculation on a set of clear, simple assumptions… updates charge tiers to better reflect fuel price sensitivity relative to carrier costs… and establishes distinct charge levels for West Coast and East Coast/Gulf sailings.

WTSA’s new bunker charge calculation formula starts with fewer variables:

1. We base the formula on CS 380 (IFO 380) marine bunker fuel only, which accounts for 98% of marine fuel-related costs.

2. We establish separate charges for West Coast and East Coast/Gulf all-water services.

3. We reduce the number of loading ports used to construct weighted average fuel prices, basing them on a straight average of:

4. WTSA has partnered with independent data provider Bunkerworld to construct and post, beginning October 1, 2008, weekly average fuel prices on a dedicated web page, www.bunkerworld.com/markets/wtsaindex/

In order to calculate the cost impacts of fuel price fluctuations on an average transpacific sailing, we assume the following, based on a survey of WTSA members:

* Vessel capacity allowing for mix of equipment sizes, out-of-scope cargo, heavy and oversize cargo, load-bearing limits on deck and hatches, bridge visibility, load sequencing for priority cargo and port rotation, etc.

** Maximum WB containers that can be loaded on 2,744-FEU vessel

*** Based on total fuel cost per sailing minus percentage reflecting share of vessel deadweight allocated to WB empties.

Using the variables and assumptions described above, the following is a sample calculation of the new WTSA bunker charge, using posted weekly fuel prices for the first week of August 2008, of $702 per ton in Hong Kong; $770 per ton in Los Angeles; and $695 in New York (Source: Bunkerindex):

The next step is to establish the fuel price tiers which trigger up or down movement in the bunker charge. This requires an understanding of price sensitivity – how fluctuations in the CS 380 fuel price affect the fixed cost of the sailing per FEU.

To test price sensitivity, WTSA ran the calculation using a weighted average fuel price for the first week of June 2008 ($617.75 from the WC; $588.25 from the EC/Gulf), and compared it to the result for the first week of August, shown above:

$617.75/ton x 158.45 tons/day x 13.94 days = $1,364,481 x 0.9229 = $1,259,280 divided by 1,849 FEU = $681.06/FEU (WC)

$588.25/ton x 127 tons/day x 24 days = $1,792,986 x 0.9116 = $1,634,486 divided by 1,281 FEU = $1,275.95/FEU (EC/Gulf)

Thus, the fuel price rose by $118.25 over 2 months from the WC and by $110.25 from the EC/Gulf, and carrier cost per FEU rose by $130.37 and $239.13 respectively. In other words, every $20 increase in the price of fuel translates into another $22.05 in carrier cost from the WC, and another $43.48 from the EC/Gulf. From this we are able to develop the following index:

WTSA’s simplified calculation methodology, and the creation of distinct charges from the U.S. West Coast and East Coast/Gulf affects the surcharge in two ways:

1. Individual tiers are narrower than under the old formula. As a result, a $20 fluctuation in the fuel price to either coast does not trigger as dramatic a change in the surcharge.

2. There is inevitably a significant disparity in USWC and USEC/Gulf charge levels due to the actual cost of fuel consumed, as demonstrated previously.

East Coast all-water services are, by definition, less fuel efficient – each ship is at sea many more days and, because of Panama Canal capacity constraints, ECAW service requires 8-9 ships of no more than 4,500-TEU capacity, versus a typical West Coast service involving five ships of more than 6,000-TEU.

Many U.S. exporters to Asia load and ship cargo at multiple locations, and route their shipments via all coasts, and a West Coast routing may entail offsetting inland transport costs and related fuel charges. Thus fuel-related transportation costs tend to average out over time.

Quarterly Adjustment

WTSA will adjust its new bunker surcharge on a quarterly basis beginning with the January 1, 2009 surcharge, based on September-November 2008 weekly average fuel prices, to reduce volatility in customers' service contracts.

Adjustments will be based on a calculation of average weekly West Coast and East Coast/Gulf bunker prices over a 13-week period ending 30 days prior to the effective date, as follows:

Surcharge Calculation Period

January 1 previous September-November

April 1 December-February

October 1 June-August

The simplest way to calculate the charge is to:

1. Track the average West Coast and East Coast/Gulf prices each week during the quarterly periods shown above;

2. Total the prices for the applicable calculation period and divide by the number of weeks (13) to arrive at a quarterly average; and

3. Look up the charge for that average West Coast or East Coast/Gulf price in the TSA calculation table.

PLEASE NOTE: Because the average weekly West Coast and East Coast/Gulf prices are different, it is necessary to look them up separately under the West Coast and East Coast columns in the table as shown in the earlier example. Reading straight across from one column to the other will not, in most cases, provide the correct charge levels.

Refrigerated Cargo Surcharge Component

Just as WTSA lines have adopted separate West Coast and East Coast/Gulf bunker surcharges to more accurately and completely reflect true fuel-related costs, they have also developed a separate component to cover added fuel costs associated with refrigerated shipments.

The costs to run refrigeration and temperature-control generators over a two- to four-week sailing can be considerable – amounting, for example, to $133 per FEU via the West Coast and $219 per FEU via East Coast/Gulf all-water service, at a bunker fuel price of $300 per metric ton.

As with the bunker surcharge for dry cargo, WTSA uses a set of simple assumptions in calculating the refrigerated component:

Daily fuel consumption per refrigerated container = 200 grams/kilowatt-hour

Blended average power usage per container (frozen vs. chilled) = 5.31 kilowatts

Average refrigerated slots per sailing = 1,000

One-way steaming time = 17.5 days from WC; 28 days from EC/Gulf

The calculation itself is as follows:

West Coast: 200g x 5.31 kilowatts x 24 hours = 39.4 kilograms (39,360g)

39.4 divided by 1,000 x 17.5 days = 0.446 MT / container / sailing

East Coast: 200g x 5.31 kilowatts x 24 hours = 39.4 kilograms

39.4 divided by 1,000 x 28 days = 0.714 MT / container / sailing

Multiplying the above numbers by the applicable average West Coast and East Coast/Gulf fuel prices, produces the refrigerated surcharge component, which is then added to the applicable dry cargo bunker surcharge.

Example (at an average bunker fuel price of $640):

1. $640/MT x 0.446 MT/container/sailing = $286

$640/MT x 0.714 MT/container/sailing = $457

2. $701 (dry WC surcharge at $640/MT) + $286 = $987 WC refrigerated surcharge

$1,386 (dry EC surcharge at $640/MT) + $457 = $1843 EC refrigerated surcharge

Price Sensitivity

For each $1 increase in per ton bunker fuel prices, it was determined that the refrigerated component of per container fuel cost rises by 45 cents from the West Coast and by 71 cents from the East Coast/Gulf. Thus, for every $20 per metric ton movement in the price of fuel, the rounded cost impact on fuel cost related to refrigerated equipment adjusts by $9 via the West Coast, and by $14 via the East Coast/Gulf. These form the tiers of a refrigerated component index.

Customers shipping refrigerated cargo should use the above table, which shows total West Coast and East Coast/Gulf all-water surcharges (the combined dry bunker surcharge plus refrigerated component) for each $20 fuel price tier.

Q: Why are you modifying the bunker charge and the calculation formula now?

A: Marine fuel prices have risen suddenly and sharply to record levels in a period of months, and have fallen almost as quickly, suggesting a longer-term trend of severe price volatility in which prices are likely to rise again. Fuel is the single largest cost component of a container vessel sailing, and carriers are under intense financial pressure to recover those rising costs. For shippers in all trades, but especially for those in trades characterized by relatively low cargo values and margins such as US-Asia, the cost impacts have been huge.

Customers facing much larger total freight bills are understandably concerned. They are willing to accept bunker charges broken out from rates and allowed to float with world bunker fuel prices, but they want to be sure that any charge a) accurately reflects costs; and b) is transparent and easily understandable and verifiable.

WTSA’s bunker charge formula has been in place since 1988. Of necessity it has reflected a weighted average of different types of fuels burned, different load ports,and WTSA members’ different vessels and service patterns. WTSA’s efforts to arrive at an ‘average of averages’ that fully and completely reflected costs led to a complicated, unwieldy formula. Until recently, fuel prices were low enough that carriers were not as concerned with full recovery and so customers were not as concerned with transparency.

At recent meetings with WTSA, shippers were critical of the formula’s complexity – the number of variables and steps in the calculation – as well as the fact that world spot fuel prices were not publicly available for various load ports at world. Finally, they wanted to better understand how the fuel price per ton translated into fuel cost and charge per FEU. WTSA took these criticisms to heart and undertook a full review of the surcharge, which has led to the changes described here.

Q: Doesn’t the discrepancy between West Coast and East Coast/Gulf charge levels mean that West Coast shippers have been routinely overcharged for years?

A: When the existing formula was initially developed, carriers in WTSA’s predecessor conference, TWRA, had been raising their base rates to reflect higher fuel costs. Shippers demanded greater transparency – they wanted the fuel component of rates broken out in a separate, transparent charge so they could assess whether the increase in freight charges attributed to fuel were justifiable.

A single charge for everyone was simpler in terms of tariff and contract preparation. The ‘weighted average’ calculation formula took into account West Coast and East Coast/Gulf services. The fact that many shippers moved cargo via all coasts suggested that any discrepancies would average out over time. Under the common carriage regulatory framework in place at the time, a single charge simplified public filing of tariffs and contracts. In WTSA’s best estimates, the cost impacts of a single charge represented less an overcharge to West Coast shippers than a discount to East Coast/Gulf customers.

Q: Judging by the calculation methodology you provide, aren’t WTSA carriers passing through their entire fuel costs to customers, as opposed to cost-sharing?

A: In simplifying the calculation, WTSA has by definition eliminated some of the detail in the added variables that helped ensure full capture of costs. But the overall aim is full cost recovery. In the past, when fuel prices were lower and did not represent as large a share of the total operating cost per sailing, carriers had some flexibility to absorb a portion of the fuel bill depending on profitability of their other operations and/or other elements of the total freight charge.

Cost control pressures are much greater today. Liner shipping operations must perform as stand-alone profit centers even within larger organizations, or when receiving government support. No industry can indefinitely absorb a portion of the cost of the largest input in its product and continue to sell that product at a profit. No one would suggest that a company or industry do so.

Q: Why does the bunker charge continue to rise, even as crude oil, gas and even weekly bunker fuel prices have begun to ease?

A: WTSA adjusts its bunker charge quarterly, based on average fuel prices during the 13-week period ending 30 days prior to the effective date (September-November weekly prices, for example, determine the January surcharge). This lag time is necessary to give the market 30 days’ advance notice of upcoming increases to rates or charges, as is required by U.S. law. Thus, bunker charge levels begin to fall 90-120 days after fuel prices begin to fall, just as it takes 90-120 days after fuel prices begin to rise for charge increases to take effect.

Quarterly adjustment involves a tradeoff: While it takes longer for upward or downward bunker price movements to be reflected in surcharge levels, overall freight charges remain stable over longer periods, helping customers better plan their costs related to forward sales.

It should be noted, too, that bunker fuel prices do not necessarily track crude oil, gasoline or other petroleum fuel prices precisely. CS 380 is a heavy, low-level distillate that sells in large quantities at low margins, so it is a relatively unattractive product for refiners. Often, when demand rises for crude oil, heating oil, jet fuel, gasoline and other higher-value products, bunker fuel supplies contract and drive prices still higher in relation to those other fuels. Bunker prices are difficult to hedge against, and bunker fuel is difficult to store in advance in anywhere near the quantity it is consumed by scheduled ocean carriers over time. As a result, most bunker fuel is purchased at spot prices, subject to fluctuating availability.