TSA -- [ Bunker (Fuel) Charges Fact Sheet ]

TSA Bunker Fuel Charges:
A Refined Approach

Fact Sheet

In July 2008 marine fuel prices in the transpacific freight market reached a record level of $767 per ton – up nearly 260% from $296 per ton at the beginning of 2007. That 18-month increase alone raised the fuel-related cost of an average Asia-US sailing from $704,000 to $1.83 million via the West Coast, and from $972,000 to $2.52 million via the East Coast/Gulf.

Since that time bunker prices have fallen just as sharply, and then risen again to reach $702 per ton in April 2011 - reflecting an overall trend of volatility. In addition, IFO 380 bunker fuel faces refining constraints as it competes with cleaner, higher-value fuels for refinery capacity in a market recovery scenario. The key question facing transpacific container lines: How to address this level of volatility in fixed 12-month service contracts?

Full cost recovery with minimal delay is essential for ocean carriers. Shippers expect full transparency in return. TSA member lines have responded by streamlining the calculation formula on which they base their bunker charges, to make it more easily understandable and accessible to the shipping public.

TSA will begin a transition to the new bunker charge formula with their 2009-10 contracts going forward from May 1, 2009. The new formula offers customers visibility into weekly bunker fuel prices over the internet… uses fewer loading ports in its calculation… bases the calculation on clear, simple operational assumptions… fine-tunes tiers to accurately reflect current fuel price sensitivity… establishes separate charge levels for West Coast and for all-water East Coast/Gulf sailings… and adjusts on a quarterly, rather than a monthly, basis.

This latest round of revisions is part of an ongoing effort begun in 2002 to identify and quickly recover the full fuel cost involved in an Asia-US sailing as fuel prices rise, while quickly returning the savings to customers as prices fall.

In a series of group and individual meetings when fuel prices were at peak levels over 2007-08, TSA lines received important feedback from customers regarding bunker charges. Specifically, customers told carriers they wanted to see:

Greater transparency in the bunker charge formula and calculation methodology

A formula that fairly and realistically reflects actual fuel-related costs in a carrier sailing

Less frequent adjustment for maximum all-in price stability over a 12-month contract term

With these principles in mind, TSA lines took a fresh look at its calculation formula and made further refinements, as it has done previously.

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Note to Customers: Slow Steaming

Over the past year or two, many TSA carriers have engaged in the practice of "slow steaming," also called "eco-steaming." By reducing vessel speed on some voyages, slow steaming is intended to reduce carbon and other emissions and thereby reduce the environmental impact of oceangoing vessel operation. Slow steaming has already generated significant environmental benefits. Another benefit of slow steaming is a reduction in vessel fuel consumption as speeds are reduced.

Whether slow steaming ultimately results in cost savings for carriers will depend on a number of factors, including bunker price levels, vessel load factors, and vessel charter rates. A cost factor directly resulting from slow steaming is the asset cost associated with the deployment of additional vessels, which must be purchased or chartered, as well as accompanying container equipment. As part of their bunker
charge analysis, the TSA carriers continue to evaluate the effects of slow steaming and what net savings may result, given changing market conditions.

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A More Transparent Formula

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

We use a publicly accessible web site, http://www.bunkerworld.com/markets/tsaindex/, to track fuel prices.

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

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

We base the weekly weighted average fuel price on a straight average of:
- For the U.S. West Coast:
  Hong Kong + Los Angeles
- For the U.S. East Coast/Gulf:
  Hong Kong + New York

A Few Basic Assumptions

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 TSA members:

Average Vessel Effective Capacity:*: 2,744 40’ containers (FEU) to the WC; 1,928 40’ containers (FEU) to the EC/Gulf
Utilization:: 88.19% to the WC / 91.56% to the EC/Gulf
Average Vessel Fuel Consumption:: 158.45 tons per day to the WC / 127 tons per day to the EC/Gulf
Average One-Way Steaming Time (excluding time in port):: 13.94 days to the WC / 24 days to the EC/Gulf
Empty Reposition Share of Westbound Vessel Deadweight:**: 7.714% from the WC / 8.84% from the EC/gulf

* 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.

** Contribution to a ship’s total westbound deadweight from empty containers being repositioned to Asia, and subsequent reduction of westbound sailing capacity, allocated to eastbound fuel-related cost.

A Simple Calculation

Taking the variables and assumptions described above, TSA developed the following sample calculation of the new bunker charge in late 2008, from posted Hong Kong, Los Angeles and New York bunker fuel prices for July 18, 2008. These averaged $740.65 per ton to the U.S. West Coast, and $735 per ton to the U.S. East Coast/Gulf.

1. Calculate the fuel cost per sailing.: $740.65/ton x 158.45 tons/day x 13.94 days = $1,635,942.50 (WC); $735/ton x 127 tons/day x 24 days = $2,240,280.00 (EC/Gulf)
2. Add the westbound allocation of total fuel cost (for empty repositions).: $1,635,942.50 + $126,196.61 (7.714%) = $1,762,139.11 (WC); $2,240,280.00 + $198,040.75 (8.84%) = $2,438,320.75 (EC/Gulf)
3. Calculate effective capacity at average utilization.: 2,744 FEU x .8819 = 2,420 FEU (WC); 1,928 FEU x .9156 = 1,765 FEU (EC/Gulf); $1,762,139.11 divided by 2,420 FEU = $728.16 per FEU (WC); $2,438,320.75 divided by 1,765 FEU = $1,381.48 per FEU (EC/Gulf)

Price Sensitivity

In order to establish the fuel price tiers which trigger up or down movement in the bunker charge, we must understand the price sensitivity of ocean carriers’ operations in the Asia-US market – how fluctuations in the CS 380 fuel price affect the fixed cost of the sailing per FEU.

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

$617.75/ton x 158.45 tons/day x 13.94 days = $1,364,481.88 + $105,256.13 (7.714%) = $1,469,738.01 divided by 2,420 FEU = $607.33/FEU (WC)

$588.25/ton x 127 tons/day x 24 days = $1,792,986 + $158,499.96 (8.84%) = $1,951,485.96 divided by 1,765 FEU = $1,105.66/FEU (EC/Gulf)

Thus, the fuel price rose by $122.90 to the WC and by $146.75 to the EC/Gulf, while carrier cost per FEU rose by $120.83 and $275.82 respectively. In other words, every $20 increase in the price of fuel translates into another $19.66 in carrier cost to the WC, and another $37.59 to the EC/Gulf.

Rounding to the nearest dollar, we see a consistent relationship between bunker fuel price fluctuations fuel cost impacts per sailing, when the basic cost calculation is applied to any fuel price: When the bunker fuel price rises by $20 per ton, container lines see a $20 increase in cost per FEU ($16 per TEU) to the West Coast, and an increase of $38 per FEU ($30 per TEU) to the East Coast/Gulf.

This forms the basis of TSA’s bunker charge tiers. It would be impractical to set the tiers in increments of less than $20; calculation would be unnecessarily complex, especially over a 13-week period as the charge level would be a constantly moving target. Although it means that the precise cost number arrived at using the full mathematical calculation shown earlier will typically be slightly higher or lower than the actual bunker charge tier price, allowing the fuel price to move up or down by $20 without needing to adjust the bunker charge provides a measure of price stability for carriers and shippers.

A final adjustment to the bunker charge tiers compensates for estimated bunker fuel cost embedded in base rates since bunker charges were first introduced in the Asia-US trade lane (see FAQ section below for details). After arriving at a bunker cost per FEU under the earlier calculation methodology, TSA’s guideline bunker charge table reflects a subtraction of $80 to the West Coast and $160 to the East Coast/Gulf in order to arrive at the final tier levels.

Using the earlier example, the calculation methodology translated average fuel prices of $740.65 per ton (WC) and $735 per ton (EC/Gulf) into bunker fuel costs of $728 per FEU and 1,381 per FEU respectively. Substracting embedded costs results in the following:

$728/FEU (WC bunker fuel cost) — $80/FEU (WC embedded cost) = $648/FEU WC bunker charge

$1,381/FEU (EC/Gulf bunker fuel cost) — $160/FEU (EC/Gulf embedded cost) = $1,221/FEU EC/Gulf bunker charge

Thus, as shown in the table below, a $740.65 per ton fuel price = a $648/FEU West Coast bunker charge, and a $735 per ton fuel price = a $1,221 per FEU East Coast/Gulf bunker charge.

Revised TSA Guideline Bunker Charge

West Coast					East/Gulf Coasts
BUNKER FUEL PRICE	20’	40’	40’ HC	45’	BUNKER FUEL PRICE	20’	40’	40’ HC	45’
(Per MT)					(Per MT)
800.01 - 820	566	708	797	896	800.01 - 820	1098	1373	1545	1738
780.01 - 800	550	688	774	871	780.01 - 800	1068	1335	1502	1690
760.01 - 780	534	668	752	845	760.01 - 780	1038	1297	1459	1642
740.01 - 760	518	648	729	820	740.01 - 760	1007	1259	1416	1593
720.01 - 740	502	628	707	795	720.01 - 740	977	1221	1374	1545
700.01 - 720	486	608	684	770	700.01 - 720	946	1183	1331	1497
680-01 - 700	470	588	662	744	680-01 - 700	916	1145	1288	1449
660.01 - 680	454	568	639	719	660.01 - 680	886	1107	1245	1401
640.01 - 660	438	548	617	694	640.01 - 660	855	1069	1203	1353
620.01 - 640	422	528	594	668	620.01 - 640	825	1031	1160	1305
600.01 - 620	406	508	572	643	600.01 - 620	794	993	1117	1257
580.01 - 600	390	488	549	618	580.01 - 600	764	955	1074	1209
560.01 - 580	374	468	527	592	560.01 - 580	734	917	1032	1161
540.01 - 560	358	448	504	567	540.01 - 560	703	879	989	1112
520.01 - 540	342	428	482	542	520.01 - 540	673	841	946	1064
500.01 - 520	326	408	459	516	500.01 - 520	642	803	903	1016
480-01 - 500	310	388	437	491	480-01 - 500	612	765	861	968
460.01 - 480	294	368	414	466	460.01 - 480	582	727	818	920
440.01 - 460	278	348	392	440	440.01 - 460	551	689	775	872
420.01 - 440	262	328	369	415	420.01 - 440	521	651	732	824
400.01 - 420	246	308	347	390	400.01 - 420	490	613	690	776
380.01 - 400	230	288	324	365	380.01 - 400	460	575	647	728
360.01 - 380	214	268	302	339	360.01 - 380	430	537	604	680
340.01 - 360	198	248	279	314	340.01 - 360	399	499	561	632
320.01 - 340	182	228	257	289	320.01 - 340	369	461	519	584
300.01 - 320	166	208	234	263	300.01 - 320	338	423	476	536
280.01 - 300	150	188	212	238	280.01 - 300	308	385	433	487
260.01 - 280	134	168	189	213	260.01 - 280	278	347	390	439
240.01 - 260	118	148	167	187	240.01 - 260	247	309	348	391
220.01 - 240	102	128	144	162	220.01 - 240	217	271	305	343
200.01 - 220	86	108	122	137	200.01 - 220	186	233	262	295
180.01 - 200	70	88	99	111	180.01 - 200	156	195	219	247
160.01 - 180	54	68	77	86	160.01 - 180	126	157	177	199
140.01 - 160	38	48	54	61	140.01 - 160	95	119	134	151
120.01 - 140	22	28	32	35	120.01 - 140	65	81	91	103
100.01 - 120	6	8	9	10	100.01 - 120	34	43	48	54
80.01 - 100	0	0	0	0	80.01 - 100	0	0	0	0

TSA’s simplified calculation methodology, and the creation of distinct charges via the U.S. West Coast and East Coast/Gulf, affects the overall bunker charge in two ways:

2. There is inevitably a disparity in USWC and USEC/Gulf charge levels due to the actual cost of fuel consumed, as demonstrated previously. East Coast/Gulf 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. However, since many U.S. importers from Asia route shipments to multiple destinations via all coasts, fuel-related transportation costs tend to average out over time.

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 charge.

Quarterly Adjustment

As it implements the new bunker charge formula TSA will return to quarterly adjustment of the bunker charge, a practice that had been in place up until May 2006, when bunker prices had begun to demonstrate significant ongoing volatility. The reasoning behind this change is discussed in greater detail in the FAQ section of this fact sheet below.

For purposes of calculating upcoming charge levels, it is first necessary to know that the effective dates for adjustments going forward will be based on calendar quarters: January 1, April 1, July 1 and October 1.

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

Weekly average West Coast and East Coast fuel prices will be posted on the TSA website each Tuesday. Our source for bunker fuel price data is Bunkerworld, and the same weekly prices will also be available at http://www.bunkerworld.com/markets/tsaindex/.

The simplest way to calculate the charge is to:

1. Track the average West Coast and East Coast/Gulf prices each week during the 13-week periods shown above;

2. Total the prices for the entire period and divide by 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/Gulf 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 (see example at the bottom of page 5, as it relates to the Bunker Charge Table on page 6).

Frequently Asked Questions

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

A: This latest set of revisions to TSA’s guideline bunker charge formula reflect an ongoing refinement process, reflecting changes in TSA membership and service characteristics, as well as incorporating shipper feedback in recent months. Our objective is to achieve as fair and transparent a formula as possible, recovering bunker fuel costs fully as prices rise, and assuring customers that savings will be passed on just as fully when fuel prices turn downward. TSA’s bunker charge formula has been in place for more than a decade. Of necessity it has reflected a weighted average of the vessels, fuel purchasing and consumption patterns, and service characteristic of the varius TSA member carriers. This ‘average of averages’ approach was bound to produce an often complex, unwieldy formula. Until recently, however, fuel prices were low enough that carriers were less focused on full recovery and customers were less focused on transparency. TSA lines pressed hard in their 2008-09 service contracts for full, floating bunker charges, and made significant progress toward that end. TSA understands that achieving full fuel cost recovery in 2009-10 and beyond will in turn require maximum transparency, fairness and price predictability for customers in the charge formula. A committee of TSA lines went to work, stripping out unnecessary variables and steps in the calculation process… clarifying how per-ton bunker fuel price fluctuations translate into per-container cost impacts and charge levels… developing distinct charge levels to the West and East/Gulf Coasts… and returning to quarterly adjustment of the charge to reduce volatility.

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

A: No. The existing formula was initially developed by TSA’s predecessor conference, ANERA, at a time when fuel costs were still folded into, and recovered through, base freight rates. Shippers 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 prices at the time, a single charge simplified public filing of tariffs and contracts. But it is important to stress that bunker charges have routinely been undercollected in recent years. When fuel prices were relatively low, it became a customary practice among many carriers to mitigate their bunker charges in the course of contract negotiations. Reversing the practice proved difficult in recent years as fuel prices have risen dramatically – to the point that container lines have sustained major financial losses that forced a change in behavior. In TSA’s best estimates, undercollection of the bunker charge, along with shippers’ use of multiple routings via all U.S. coasts, has resulted less in an overcharge to West Coast customers than in a steep discount to all customers – but especially East Coast customers – over time.

Q: Hasn’t some portion of bunker cost historically been folded into base rates? If so, how much? If not, why not?

A: Practically speaking, it is hard to argue that base rates at their current levels include any meaningful fuel cost component. Carriers may individually have suggested as much in past contract negotiations, but a more precise characterization is that the bunker charge was being absorbed in whole or in part. Rates did not rise correspondingly to cover any where near actual fuel costs, and if actual fuel costs were stripped out of current base rates, very little would be left to reflect inland transport, cargo handling, security, environmental compliance, information systems and other costs, let alone any degree of profitability. However, when TSA lines went back and reviewed the historical bunker charge, it was found that the original charge was zero up to a fuel price of $80 per ton, meaning that $80 of bunker fuel cost was, in fact, embedded in the charge from the outset. As a result, lines have modified the bunker charge tier levels in their new formula to strip out the cost impacts of that embedded amount. Returning to the price sensitivity model shown earlier, it was determined that there is a 1:1 cost impact to the West Coast as fuel prices rise or fall, so TSA removed $80 per FEU (and $64 per TEU) from the charge at each West Coast tier level in the table. To the East Coast/Gulf, the actual price sensitivity is 1.9:1 but in the interest of simplicity, TSA has opted to strip out $160 per FEU (and $128 per TEU), a 2:1 ratio.

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

A: To the extent that bunker fuel remains a major fixed-cost component of transportation and supply chain logistics services provided, carriers’ ultimate goal is full cost recovery. It is no different, for example, than the need for automobile manufacturers to recover the full cost of steel or glass. 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. Times have changed. Fuel costs are fully decoupled from freight rates, and freight rates are under continuing pressure. The global liner shipping environment has also changed; container carriers today 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. In two respects, however, there already is a degree of cost sharing on bunker fuel – in the $80 embedded in freight rates, and in the float between the time fuel prices rise and the time when those costs are collected through the charge 30-60 days later.

Q: Why does the bunker charge appear to fluctuate independent of crude oil, highway diesel and other similar fuels?

A: IFO 380 bunker fuel is among the lowest-level diesel fuel distillates. From a refiner’s viewpoint it is required in large volumes but generates relatively low margins, and is a relatively thick, dirty fuel that builds deposits in refinery pipes and equipment. When crude oil prices are high, refiners prefer to produce cleaner, higher-value distillates; when prices are low, so are IFO 380 margins. At the same time, shipping operations worldwide consume, in aggregate, a comparable amount of fuel each year to Germany. Most of it is IFO 380. Bunker fuel prices generally track those of crude oil, but isolated factors – speculation in the crude market, refining priorities and capacity constraints, inherent difficulties for vessel operators in either storing or hedging fuel – create pricing distortions. Finally, there is a lag time between the reporting period for calculating the bunker and implementation of the charge itself. This 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, the bunker charge level for a given quarter collects the average fuel price recorded 30-120 days prior, which may have been higher or lower.

Q: If fast, fair recovery of fuel costs is so critical to TSA lines, why have they returned to quarterly adjustment of the bunker charge guideline?

A: TSA had been adjusting its bunker charge quarterly prior to May 2006. By that time, bunker fuel prices were rising so sharply and so rapidly that the lag time between the reporting period and the next effective date, plus maintaining a fixed charge over three months, represented a significant loss of revenue. While we expect bunker prices to remain high, they appear to be stabilizing somewhat as global economic growth moderates and as high prices encourage conservation. At the same time, fuel prices of all kinds on the world market are likely to remain volatile in the foreseeable future. Customers have said they are willing to accept a floating bunker charge which addresses that volatility, but would like to maintain a greater degree of stability in their total freight charges over what is otherwise a largely fixed 12-month contract. TSA’s overarching mission is to foster service and price stabilization in the Asia-US freight market, and toward that end we have agreed to return to a quarterly adjustment approach. It must be emphasized, however, that the quarterly lag time works in both directions: In an environment of rising fuel prices, a quarterly charge tends to hold the shipper’s freight cost lower over a calendar quarter.

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