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What is the bunker adjustment factor (BAF) in shipping?

The bunker adjustment factor is an extra fee imposed on shippers to cover changes in the cost of the ship’s fuel. Learn more about its types and calculations in this blog.
bunker adjustment factor (BAF)
Due to the fluctuating nature of oil prices, ocean carriers often find it difficult to accurately calculate operating costs. To navigate this uncertainty, carriers employ a surcharge known as bunker adjustment factor (BAF). This surcharge helps them manage the impact of changing fuel prices, and maintain revenue stability to cover fuel expenses.

In this blog post, we will discuss what the bunker adjustment factor is, how it is calculated, and its impact of various aspects of international shipping.

What is the bunker adjustment factor (BAF)?

The bunker adjustment factor (BAF) is a floating freight charge or a surcharge applied to shipping freight rates to account for fluctuations in fuel prices, particularly bunker fuel.1 Bunker fuel is the type of fuel used by ships, and its price can be volatile due to factors such as changes in crude oil prices, geopolitical events, and environmental regulations.

BAF is usually expressed as a percentage of the base freight rate. It is based on the Twenty-foot Equivalent Unit (TEU), which is a standard measure of cargo capacity and varies according to the trade route.2

Types of bunker adjustment factor (BAF)

There are three types of BAF that are levied on ocean freights:

1. Fixed BAF

A fixed BAF is the charge that has to be paid for the bunker, no matter how oil prices develop. This option is widely favored by traders who want to estimate the total shipping cost accurately before dispatching the shipment.

2. Flexible BAF

Unlike fixed BAF, flexible BAF is linked to real-time developments in oil prices. This helps the carrier avoid financial losses as they can adjust the BAF based on oil price fluctuations. However, this means less certainty for the trader as the final cost of the shipment cannot be determined beforehand.

3. Locked-in BAF

In this type of BAF, the trader and carrier agree on a locked-in bunker price for a specific period. This creates some stability for the trader as they can predict shipping costs for the agreed period. It also grants flexibility to the carrier as it allows them to adjust the BAF based on market changes after the fixed period.3

Who determines the bunker adjustment factor (BAF)?

In the past, the Transpacific Stabilization Agreement (TSA) standardized the bunker adjustment factor (BAF) every quarter, determining prices and coordinating shipping lines’ activities. However, the TSA was disbanded in 2018.

Presently, shipping lines set their own BAF rates independently. This process is now monitored by the European Commission to ensure fairness and transparency.4

How to calculate the bunker adjustment factor (BAF)?

Two factors must be considered when calculating BAF: fuel price and trade factor.

BAF = Fuel price x trade factor

The cost of fuel is determined by averaging fuel prices in major bunkering ports worldwide. The trade factor reflects the average fuel consumption for a particular trade and varies based on the following factors:

• Weight of the load
• Build of the ship
• Fuel efficiency
• Container size
• Vessel direction
• Trade route
• Distance and transit time, etc.5

What is IMO 2020 and how does it affect BAF?

IMO 2020 refers to a global regulation introduced by the International Maritime Organization (IMO) that came into effect on January 1, 2020. The regulation mandates that harmful sulphur oxide emissions from ships must be reduced to 0.50% (from 3.50%).6

This regulation has prompted shipping lines to invest in green technologies and adopt low-sulfur fuels. The shift to low-sulphur fuels affects BAF charges as it now needs to be calculated based on the new fuel prices, resulting in an increase in BAF charges worldwide.

The bunker adjustment factor (BAF) is a critical element determining international shipping prices. With fluctuating fuel prices, regulatory shifts such as IMO 2020, and the industry's commitment to sustainable practices, it is crucial for exporters to gain a thorough understanding of BAF dynamics. E-commerce exporters shipping products via ocean freight must carefully examine BAF policies of various carriers and make informed decisions to maintain their margins.

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Frequently Asked Questions

Who pays the bunker adjustment factor charges?
The shipper or trader pays the BAF charges.
What is the bunker adjustment factor?
The bunker adjustment factor (BAF) is a floating freight charge or a surcharge applied to shipping freight rates to account for fluctuations in fuel prices.
What is the difference between a bunker and a BAF?
The term bunker is used to refer to the fuel used in shipping operations.7 On the other hand, bunker adjustment factor (BAF) refers to the additional charge levied on shippers to compensate for variations in fuel prices.
Published on March 19, 2024.

Sources:
1. https://lot.dhl.com/glossary/bunker-adjustment-factor/
2. https://www.dripcapital.com/en-in/resources/blog/bunker-adjustment-factor-baf
3. https://www.dripcapital.com/en-in/resources/blog/bunker-adjustment-factor-baf
4. https://lot.dhl.com/glossary/bunker-adjustment-factor/
5. https://www.cogoport.com/en-IN/knowledge-center/resources/shipping-terms/bunker-adjustment-factor-baf-56
6. https://www.imo.org/en/MediaCentre/PressBriefings/pages/34-IMO-2020-sulphur-limit-.aspx
7. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Glossary:Bunkers#:~:text=Bunkers%20includes%20all%20dutiable%20petroleum,used%20to%20power%20these%20ships

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