In this week’s issue of the SeaIntel Sunday Spotlight we have analyzed the developments in BAF (bunker surcharges) as they respond to the decline in oil prices.

The conclusion is that part of the recent rate decline is purely a reflection of lower oil prices, and not of the overall market health.

Overall, bunker prices have declined by US$150/ton in the past couple of months. As the carriers’ BAF formulas are based on past bunker price developments, it means that the effect is only now beginning to impact the overall freight rate levels.

In the Asia-Europe trade, the decline in oil prices will result in freight rates declining by $165 per teu in total across the months of June, July and August compared to the peak levels in May.

In July we have seen rates decline for the past three weeks, however 26% of the decline is purely due to declining BAF and is hence not a reflection of supply/demand fundamentals nor of carriers’ rate discipline.

Going from July into August, we expect a further rate decline of $90 per teu due to declining BAF levels – possibly to be offset by the newly announced rate increases .

In the Transpacific eastbound trade, the BAF formula is only adjusted quarterly, hence the sharp decline in oil prices will only be reflected in the BAF in fourth quarter 2012.

Should the present oil prices levels prevail, then the Transpacific BAF will decline by $84 per FFE in Q4.

The challenge for the carriers is the fact that these declines only reflect the oil price changes, and neither reflects the supply/demand balance nor the rate discipline amongst the carriers. Hence any market observer and analyst must take this fact into account in order to avoid interpreting a reduced BAF component as an indication of market weakness.

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