BAF is the abbreviation for Bunker Adjustment Factor. The term "Bunker" refers to the Fuel that is used to operate ships. The ship operator is responsible for the payment of these bunkers to the bunker supplier.

As fuel prices are quite volatile, the shipping lines charge a fee called "Bunker Adjustment Factor (BAF)" to cover the fluctuations in global bunker costs.

BAF is charged either as a separate charge or included in the freight charge depending on the trade route and agreement between the carrier and the shipper/BCO.

BAF depends entirely on how oil prices shape up, and there is no fixed recipe for success. But if you consider BAF to be a “concept” rather than a “charge”, there is certainly scope for the customer to customize the concept to suit their business.

To explain further, BAF comes in a few different “flavors” – Fixed, Locked In and Floating.

Fixed BAF means the quantum of BAF that the carriers charge is fixed and does not vary based on market forces or price of fuel. This option is suitable for customers who want to know the exact costs that they will be paying for a shipment.

The opposite of Fixed BAF is Floating BAF which means that the quantum of BAF fluctuates depending on the price of fuel. This option may be advantageous to the shipping line in that, they may not lose money if the fuel price increases or decreases as this surcharge is linked to the price of fuel. However, for a customer, floating BAF may be disadvantageous as significant variations may mean that their product price could increase making them uncompetitive in the market.

As kind of a “compromise”, big volume shippers may choose a third option and “lock in” the BAF quantum with the carrier for a fixed period of time in order to gauge the market and may agree to adjust the terms. This could work in favour of either side as they could gain if the bunker prices go up or down respectively during the “locked in” period.

Whether the liner updates their BAF fee on a daily, weekly, monthly, quarterly or annual basis will depend on the fluctuations of oil prices, the vessels deployed on the various corridors and whether their customers are looking to secure short or long-term rates.

What Does This Mean for BCOs or NVOCCs?

If you are a BCO or Freight-Forwarder / NVOCC, depending on the volumes that you can commit to a shipping line, there may be an opportunity for you to negotiate a fixed BAF quantum for at least a year. Especially, if your freight rate negotiation is based on a yearly tender/bid.

In the past, many shippers have resisted the practice of allowing Floating BAF as they had a suspicion that carriers may be using the BAF amount to compensate for the lack of increase in freight rates.  

Shipping lines like Maersk did try to dispel these suspicions of the customers by ending all-inclusive contract rates and charging BAF using a new formula based on which, the BAF would be determined in a simple and transparent way using calculations provided by independent, third-party shipping industry sources.

This formula was based on The Transpacific Stabilization Agreement which was a discussion group covering the majority of the Eastbound Trans-Pacific carriers. As per this agreement, bunker surcharges were based on average bunker costs in various markets.

Through extensive interaction with their customers, Maersk Line understood that this model could not work because carriers deployed larger ships across the years and the technological advances of ship design actually reduced the impact of bunker costs per container. Also, there was an imbalance between head-haul and back-haul because on the back-haul there were more empty containers.

So, Maersk