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ADJUSTING ACCORDINGLY HOW BUNKER ADJUSTMENT FACTOR CLAUSES MAY MITIGATE THE IMPACTS OF IMO 2020
Following the IMO’s decision to implement amendments to MARPOL ANNEX VI (“IMO 2020”), the cost of compliant fuels is likely to rise. How will the cost and risk of price volatility be borne in the global logistics chain? We explore a legal device commonly found in voyage charters and contracts of affreightment attempting to address price volatility: BAF clauses.
IMO 2020’S IMPACT ON FUEL PRICING IMO 2020 aims to reduce the global sulphur cap for marine fuels from 3.5% to 0.5% from 1 January 2020. With more than 90% of global trade of physical goods being transported by sea, its consequences are far reaching across the shipping industry.
The availability of standard specification of compliant fuels or fuel blends in the period immediately prior to and following the implementation is currently unclear.
Question marks also exist regarding the extent to which refineries will prioritise the production of low sulphur fuels, and logistical or capacity constraints at various ports or supply terminals – particularly during the early days of implementation.
IMO 2020 will impact the price of maritime transportation of goods globally – for higher sulphur fuels (sulphur content above 0.5%) burned with scrubber fitted vessels and lower sulphur fuels (sulphur content of 0.5% or less) alike. The latter are expected to be used in the vast majority of vessels following implementation.1
1 Maximum sulphur limits for fuel burned in ECA zones are already capped at 0.1%.
THE POTENTIAL ROLE OF BUNKER ADJUSTMENT FACTOR (BAF) CLAUSES’ ROLE When bunker prices significantly fluctuate, a carrier’s ability to offer its customers a stable base freight rate is reduced. With the price of bunker fuel typically a key cost driver in vessel operation, this is an unsatisfactory scenario for carriers.
A BAF clause addresses this uncertainty by importing a type of cost/bunker surcharge on the base rate freight price, reflecting the increased cost of the voyage(s) to be performed.
The customer could be a voyage charterer and a Cost, Insurance & Freight (CIF) seller of cargo carried on board the vessel. The charterer/seller may therefore wish to pass on any increased costs of transporting its cargo to the cargo buyers under the CIF sale contract. This may be achieved through the use of back-to- back BAF clauses.
Parties’ respective bargaining positions determines the exact drafting of BAF clauses, which will determine the indices to be utilised, degree of any adjustment to be applied and how and when the adjustment computation is to be carried out.
HOW WILL THE COST AND RISK OF PRICE VOLATILITY BE BORNE IN THE GLOBAL LOGISTICS CHAIN?
22 | ADMISI - The Ghost In The Machine | November/December 2018
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