German container line Hapag-Lloyd is introducing a marine fuel recovery (MFR) scheme for freight pricing, aimed at passing on to shippers the cost increases associated with the global 0.5% sulphur cap, which goes live in January 2020.
The new formula, which will be applied from next year, calculates the full average fuel cost per carried teu on specific trade lanes based on representative service features that include a vessel’s fuel consumption per day, fuel types and prices, sea and port days, and carried cargo volumes, Hapag-Lloyd said.
From 1 January 2019, the new mechanism (marine fuel recovery = fuel price per ton x fuel consumption/carried teu) will displace step by step all other bunker additionals that are currently applied across its network. The key change from today’s pricing practice is that with the MFR, the bunker cost element will be completely excluded from the freight rate and thus not be up for negotiation. At present, bunker additionals cover the excess fuel cost only above a certain base level, which is still included in the box freight rate.
Rolf Habben Jansen, chief executive officer of Hapag-Lloyd, said the new MFR is “a system for our customers that we think is fair as it allows for a causal, transparent, and easy-to-understand calculation of fuel costs”.
The scheme will work both for the carrier and shippers, rising or falling in line with actual market fuel prices.
Based on a price premium of USD250/tonne for low-sulphur fuel oil (LSFO, 0.5%) versus today’s standard high-sulphur fuel oil (HSFO) product, Hapag-Lloyd estimates that its additional cost for compliance with the 2020 sulphur cap will be about USD1 billion over the first five years.
Based on an LSFO price of USD650/tonne (versus about USD480/tonne for HSFO at Rotterdam today), the marine fuel recovery element for Hapag-Lloyd’s customers would be USD264/teu in the Far East/Europe trade, USD321/teu in the Far East/US East Coast trade, or USD184/teu in the transatlantic westbound trade (Europe to US East Coast).
The German carrier said it is studying other technological options to meet the 0.5% sulphur cap, as well as conducting tests with exhaust gas-cleaning systems on two vessels next year.
The company also plans to convert one of its 15,000 teu ships to operate with liquefied natural gas (LNG) in 2019. Through its merger with the United Arab Shipping Company (UASC) in 2017, Hapag took over 17 ships that are considered to be LNG-ready – 11 15,000-teu and 6 20,000-teu ships.
However, at USD20–25 million per vessel, mainly for retrofitting new tanks, it will be costly to upgrade the ships for LNG operation, a Hapag-Lloyd representative told IHS Markit.