Bunker Adjustment Factor (BAF) Definition
The Bunker Adjustment Factor (BAF) refers to a high-cost expense, payment, or surcharge to individuals shipping on ocean vessels. This is an additional charge to the base rate of ocean freight. This additional charge reflects the costs of fuel otherwise known as bunker oil. The bunker adjustment factor reflects the adjustment price of fuel (bunker oil) which is often done on a quarterly basis.
The Bunker adjustment factor is not the same as the dase fright rate, it is an additional charge. Voyage on ocean vessels by individuals often attract BAF and this is subject to fluctuations.
A Little More on Bunker Adjustment Factor in Shipping on Vessels
Bunker oil, otherwise called fuel is the most critical cost of shipping on ocean vessels. It is often higher than the carrier costs, sometimes, it might rise up to 50% of the cost. Bunker oil cannot be separated from the shipping industry, it is the power source for the engine of vessels. As a result of increase in the use of shipping, the use of bunker oil is essential. In some cases, carriers incur more bunker cost than that base freight rate. Bunker oil is crude and polluting, also, before it can be used in the vessels’ engine, it must be heated. The cost of storing and transporting this oil among other factors are responsible for the expensive nature of bunker oil.
The increased costs resulting from fluctuation of the price of bunker fuel for vessels gave rise to the development of Bunker Adjustment Factor. This is high cost surcharge to individual shipments which differ from the base freight rate.
However, the fact that bunker oil is crude does not mean that there is a correlation between its prices and prices of crude oil. That is, fluctuations or changes in oil prices do not affect the price of bunker oil, they are not directly related. The way bunker oil is made useful for engine vessel (refined), its storage and transportation is quite different from other oils.
In the shipping industry, the bunker adjustment factor determines the high cost surcharge that carriers add to the base freight rates. This is additional expenses that cover the expense of bunker oil (fuel used by engine vessel). BAF is an effective way of accurately calculating annual and quarterly costs related to freight.
References for Bunker Adjustment Factor
Academic Research on Bunker Adjustment Factor
An analysis of bunker adjustment factors and freight rates in the Europe/Far East market (2000–2004), Cariou, P., & Wolff, F. C. (2006). An analysis of bunker adjustment factors and freight rates in the Europe/Far East market (2000–2004). Maritime Economics & Logistics, 8(2), 187-201.
Risk management methods for the liner shipping industry: the case of the Bunker Adjustment Factor, Menachof, D. A., & Dicer, G. N. (2001). Maritime Policy & Management, 28(2), 141-155.
The rationale behind and effects of Bunker Adjustment Factors, Wang, D. H., Chen, C. C., & Lai, C. S. (2011). Journal of Transport Geography, 19(4), 467-474.
Container freight rates and the role of surcharges, Slack, B., & Gouvernal, E. (2011). Journal of Transport Geography, 19(6), 1482-1489.
Slow steaming in container liner shipping: is there any impact on fuel surcharge practices?, Notteboom, T., & Cariou, P. (2013). The International Journal of Logistics Management, 24(1), 73-86
Bunker costs in container liner shipping: are slow steaming practices reflected in maritime fuel surcharges, Cariou, P., & Notteboom, T. (2011). Current issues in shipping, ports and logistics, 69-82.
The organizational and geographical ramifications of the 2008-09 financial crisis on the maritime shipping and port industries, Notteboom, T., Rodrigue, J. P., & De Monie, G. (2010). Integrating Seaports and Trade Corridors, 31-46.
Determinants of European freight rates: The role of market power and trade imbalance, De Oliveira, G. F. (2014). Transportation Research Part E: Logistics and Transportation Review, 62, 23-33.
Risk management methods for the liner shipping industry: the response to customer service demands for simplified tariffs, Menachof, D. (1996). Journal of Business Logistics, 17(1), 259.
Forecasting bunker prices; A nonstationary, multivariate methodology, Stefanakos, C. N., & Schinas, O. (2014). Transportation Research Part C: Emerging Technologies, 38, 177-194.