Fuel uncertainty impacts contract talks

Figure of the week

The number of companies planning to share any tariff refunds with customers, according to a recent CNBC survey. 12 of 25 CFOs surveyed said they planned to apply for tariff refunds. None of the recipients said they would share any refunded money with customers.

Quote of the week

“This is a pretty big insult to a pretty big injury. I wouldn’t be surprised to see him give it up by midweek especially if oil prices keep going up.” Energy analyst Michael Lynch, of the Washington DC-based Energy Policy Research Foundation, believes President Donald Trump’s blockade of the Strait of Hormuz could add $5 to $10 per barrel to the price of oil and prove short-lived.

Fuel uncertainty impacts contract talks

Uncertainty about how much bunker fuel prices will rise is beginning to impact new Transpacific service contract negotiations . Higher bunker fuel prices are generally passed on to shippers via two mechanisms. One is a quarterly BAF (bunker adjustment factor). Another is emergency bunker fuel surcharges. US regulations limit carriers’ ability to place emergency surcharges at short notice but do not affect BAFs. However, a big problem for transpacific contract negotiations is that it is unclear how high bunker fuel prices will rise. It is also unclear how carriers will calculate their quarterly BAFs. Some shippers are becoming concerned that even contracted rates may offer little certainty. This is because carriers will have a relatively free hand to pass on additional fuel surcharges. Even if contracts appear to restrict carriers’ ability to impose bunker fuel surcharges, they can still find means to circumvent these clauses, said industry insiders. Shippers are therefore seeking increased certainty about how much exposure they could face from future bunker fuel price rises. Whether they will get it is another question. Adding to the complications is the fact that some carriers are trying to shift from calculating BAFs from a quarterly to a monthly basis. Some shippers have complained that this effectively nullifies the main advantages of securing longer-term rates, namely stability and visibility. So what can shippers expect given the current fuel situation? Q2 BAFs are expected to be relatively moderate for shippers, as they will reflect relatively mild fuel price increases in January and February. However, the expense will start to hit home in Q3. Shippers may then try to front-load cargo to avoid potentially higher surcharges in Q4. That could lead to extra volatility earlier in the year, further spot rate increases and capacity shortfalls .

Delta brings mixed blessings for air freight shippers

Delta has announced plans to cut services on lower-yield routes in response to rises in jet fuel prices . Jet fuel prices have surged as a result of the war in Iran, leaving many global airlines worried about both operating costs and fuel availability. Delta said in an earnings call that while it planned to cut capacity on unprofitable routes, it anticipated that higher-yield routes could remain untouched. The war in the Middle East has driven an unprecedented spike in jet fuel prices. But Delta added that the best way to mitigate fuel costs was “not to purchase the fuel in the first place.” The airline said it saw no immediate supply issues and did not expect to face any fuel supply issues over the next 30 days or so. Most US airlines are more exposed to the rise in jet fuel prices than they would have been several years ago. This is because they have largely abandoned fuel hedging policies, which would have given them a buffer against sudden moves in prices. As airlines typically negotiate their own fuel purchasing agreements directly with suppliers, risk profiles vary among individual airlines. Therefore, shippers should be cautious about reading too much into Delta’s announcement. Nevertheless, the fact that a major US carrier does not anticipate jet fuel shortages over the next month is likely to be reassuring to air freight shippers .

Tariff refund questions multiply

CBP has announced that its new system for processing tariff refunds will go live on April 20, but many questions remain . The agency said the first phase of the system rollout would handle entries liquidated in the previous 80 days. “This will allow sufficient time for CBP to process and re-liquidate entries by the 90th day to meet the agency’s legal timeframe for voluntary re-liquidation,” it said. Pete Mento, director of global trade advisory services at Baker Tilly, said the process itself is straightforward. “You pull entry numbers together, drop them into a template, convert it into a CSV file and upload it into ACE. From there, CBP runs validations on the file. If everything lines up, format, entry numbers, importer of record, the submission moves forward into batch processing. If it doesn’t, it gets kicked back.” So far, so straightforward. What is not clear, however, is how CBP will evaluate these claims. Questions such as what legal standards will be applied, what supporting documentation will be required, and many questions about file format remain unclear. There are also question marks about how long the refund process will take. CBP had initially said it would take up to 45 days between accepting applications and delivering refunds; now it has extended that timeline to between 60 and 90 days. Importantly, that timescale could be extended indefinitely if CBP assessors are not satisfied with the figures submitted. Nevertheless, many shippers are likely to be pleased that at least the process is moving forward, however sluggishly. They will be hoping for quick clarification of the remaining questions so they can move forward with the refund application process .

🤔 Did you know ?

As if shippers didn’t have enough uncertainty on their plate, weather forecasters have warned of a strong risk of low water levels in the Panama Canal. The US National Oceanic and Atmospheric Administration, NOAA, said in its monthly weather bulletin that it saw a 61% chance of an El Niño weather event emerging this summer and a 50% risk that this could significantly reduce the water levels at the canal.

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