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Bunker prices-Bunker Adjustment Factor and
charter rate-freight rate relationships in the
Europe/Far East container market (2000-2004)
Pierre CARIOU World Maritime University
(Sweden) Francois-Charles WOLFF - University of
Nantes
IAME 2006 - Melbourne
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Objective
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• A contribution to the debate on the review by the
  European commission of immunity given to liner
  shipping conferences. Shippers and ship-owners
  disagree on
• the impact of shipping conferences on service
  stability
• the impact of shipping conferences on tariff
  stability
• the use of official tariffs as a benchmark
• the justifications from carriers of the changes
  in tariffs due to market conditions.

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Objective
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• Using public information from the Far East
  Freight Conference, Drewry Monthly Report, and
  Harper Petersen Co., is it possible to
  establish
• 1. a relationship between changes in BAF and
  average bunker prices?
• 2. a relationship between changes in freight
  rates and charter rates?
• 3. And have a contribution to the general debate?

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1. BAF and bunker prices
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• We assume that the public BAF announcements by
  FEFC, during the November 1999 (reintroduction of
  BAF by FEFC) to March 2005 period, should follow
  the main changes in average bunker prices (ABP)
  on the Europe/Far East market.
• The deviation between the change in BAF and in
  Bunker prices can also be explained by
  developments in two main elements
•  
• The fuel consumption of ships deployed in the
  market
• The location and amount of bunkering.

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1. BAF and bunker prices
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1. BAF and bunker prices
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Methodology Time series analysis 1. Use
conventional Augmented Dickey-Fuller and
Phillips-Perron tests to find if both variables
are stationary in levels, in first difference
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1. BAF and bunker prices
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2. We use VAR model and Akaike's information
criterion (AIC), the Bayesian information
criterion (BIC), and the Hannan and Quinn
information criterion (HQIC). A VAR model was
estimated for D.BAF and D.ABP with one lag.
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1. BAF and bunker prices
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3. We rely on causality in the sense defined by
Granger (1969), which is inferred when lagged
values of a variable, say xt, have explanatory
power in a regression of, say yt, on lagged
values of xt and yt. D.BAFt0.005 - 0.212
D.BAFt-1 1.475 D.ABPt-1 D.ABPt 0.004
0.235 D.ABPt-1 - 0.068 D.BAFt-1
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1. BAF and bunker prices
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A Granger causal relationship exists between
average bunker price and the BAF announced by the
FEFC during November 1999- March 2005. A
coefficient higher than 1 (equal to 1.5) suggests
that the BAF is over-reacting to up and down
movements.
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2. Freight rate and charter rate
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Far East Freight Conference public notice on 14th
January 2005 At present, freight rates are at
their lowest level ever, while lines are facing
unprecedented increases in their costs caused by
the following factors a) Increase in charter
rates which have risen by as much as 40 over the
last 12 monthsb) Increasing congestion at a
number of container terminals, both in Europe and
Asiac) Increased cost of containers, both owned
and leasedd) Ever increasing container
imbalancee) Increased feeder costs both in
Europe and Asia.
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2. Freight rate and charter rate
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For the above reasons, and in order to maintain
the viability of the trade, member lines of the
FEFC wish to re-confirm their commitment to
increase tariffs (as outlined in the 2005
Business Plan) by USD50/Container on 1st February
2005. (FEFC Website) We select one specific
justification for freight rate changes, i.e.
changes in charter rates (around 40-60 of the
liner shipping fleet operated by the main
shipping lines is chartered-in - Alphaliner,
2005).
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2. Freight rate and charter rate
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2. Freight rate and charter rate
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• Results from the different VAR models and Granger
  causality tests (Table 5) suggest that
• a Granger causality exist between HARPEX and
  AVERAGE and between HARPEX and WEST.
• conversely, HARPEX exerts no significant impact
  on the eastbound freight rate.
• the different freight rates have no causal
  influence on HARPEX.

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2. Freight rate and charter rate
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Shipping lines would mainly use Westbound freight
rate to cover the impact of charter costs rather
than the eastbound freight rate, a weaker trade
where the utilisation ratio is rather low and
demand is more price sensitive. This finding is
similar to the results of Hinten-Reed et al.
(2004) on the impact of FEFC activity on prices
in the North Europe-Asia trade, conference rate
announcements contain information about market
fundamentals, especially in the westbound cargo
movements.
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3. Policy implications
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Our conclusion is that for both issues we
examined (BAF and freight rate), a relationship
with market fundamentals (Bunker prices and
charter rates) exists. Nevertheless, the lack
of information reduced the accuracy of findings.
Whatever the limitations, we may wonder in
which way our results could be used within the
general debate on shipping conferences?
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3. Policy implications
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In our view, they can be used when considering
the three alternatives that could be imagined in
the near future. 1. The carriers could provide
to shippers more information to link cost
variations and changes in respective surcharges
or rate restoration. It could lead ship-owners
belonging to shipping conferences to provide
confidential information and/or to create new
specific surcharges similar to BAF and CAF such
as a Charter Rate surcharge (a CHarter Adjustment
Factor - CHAF?).
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3. Policy implications
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2. Secondly, carriers could decide to eliminate
all surcharges or the rate restoration system and
bear the risk of potential deviations from
pre-announced freight rates. Are shippers ready
to pay more to eliminate the uncertainty stemming
from unanticipated announcements in BAF
surcharges for instance? 3. A mixed solution
where only surcharges that can be justified and
clearly linked to cost elements would subsist.
This would not lead automatically to a reduction
in freight rate levels or volatility, but it
might have the advantage of restoring confidence
between shippers and carriers.
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Conclusion
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Contrary to some of the shippers arguments used
against liner shipping conferences, we do not
consider that the absence of a clear relationship
due to missing information is enough to deny any
stabilising impact of shipping conferences. And
we even try to establish that using public
information, a Granger causality relationship
still exists. At the same time, we call on
shipping lines to present more transparent price
information, the only way to restore confidence
between shippers and carriers.
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References
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Thank you for your attention QA Session