Expect more service contracts with bunker clauses
Look for a showdown this year between carriers and shippers over the issue of floating bunker fuel charges as they renegotiate their service agreements.
With bunker prices hitting a new high of $500 a ton in Singapore last week, up from $283 a year ago, carriers are likely to insist on bunker surcharges that reflect the changing rate in fuel, said Howard Finkel, COSCO’s executive vice president of trade.
“The problem is so few shippers pay any bunker,” Finkel said. “We cannot accept non-compensatory rate levels, along with rates that don’t allow for a floating bunker surcharge.”
It is partially the carriers' fault for agreeing to allow this,” Finkel said. He said the rising cost of bunkers and intermodal costs will turn many moneymaking service contracts into losers this year.
“You will see most of the lines as far as the transpacific goes will lose money this year,” he said.
He estimates that about 65 percent of his COSCO’s shippers have contracts that set a price with “bunker included” so that rates don’t increase as fuel prices climb. Another 10 percent to 15 percent have “mitigated” bunker surcharges that don’t fully reflect rising prices. Only about 20 percent have full floating bunker surcharges.
“I don’t think we are unique,” Finkel said. But that will change this year. “We are sticking to our guns.
“We really feel we have to get a handle on this. The United States is probably the only area where this is a phenomena where the shippers don’t pay bunker. In the Asia/Europe trade, which is much healthier these days, people pay full floating bunker. It’s not as much in the transatlantic, but that is not a trade that is in very good shape either,” he said.
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Abbott |
However, Andy Abbott, chief executive officer of Atlantic Container Line, said his company, a transatlantic specialist, has been successful having bunker escalation clauses written into virtually all contracts with customers.
Peter Keller, president of NYK Line North America, said many, but not most, service contracts are written without bunker escalation clauses or clauses don’t fully reflect rising prices, but said that is changing.
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Keller |
“We are moving into an environment where there has to be a fuel component for our costs — just as there is in domestic transportation be it rail, road, air or taxis. The only transportation mode that does not have a consistent fuel component is our industry,” he said. “Frankly that is something that has to change.”
With even the president of OPEC calling last week's oil prices “out of control,” Keller said, “no one company or organization has the ability to manage against that risk. So users of transportation will have to take that risk.”
Finkel estimates about 65 percent to 70 percent of service contracts renew in May, and he said his line will try to convince shippers to pay for rising bunker costs now, in exchange for recognition when their contracts renew in the spring.
Keller also said that his company has been speaking to customers about the need for adjustments to reflect the rising cost, with both large and smaller customers.
Last week the Transpacific Stabilization Agreement, the discussion agreement among 14 carriers in the Asia to U.S. trade, called for “restoration of floating bunker fuel surcharges — broken out from base rates and adjusted on a regular basis to reflect bunker fuel price fluctuations — in all contracts that have had bunker charges mitigated, applied or folded into base rates.”
Finkel noted that many ocean carriers are feeling the double whammy of both higher bunker prices and steep increases in rates from railroads. ' Chris Dupin