Container shipping lines in the Transpacific Stabilization Agreement (TSA) are sounding a warning to Asia-US freight shippers that runaway fuel costs pose critical operating and financial difficulties for the trade despite fuel surcharges already in place. The lines say fuel prices are rising faster and higher than quarterly adjusted surcharges can adequately address, and that steady, sharp price increases over time leave carriers paying out millions of dollars in advance fuel costs as they recover lower prices that were in effect two to three months earlier.
The problems and related costs have become serious enough that TSA member lines are reviewing current calculation formulas and existing contracts, and will be approaching customers to discuss possible options.
Fuel is currently the number one fixed cost component of a scheduled vessel sailing, and the average price of marine bunker fuel at the nine loading points used by most lines in the transpacific trade lane has risen from $198 at the beginning of 2005, to $344 per ton at present. Highway diesel fuel used by trains and trucks for inland intermodal moves has increased in price from $1.96 to $2.85 per gallon, and much of that increase has been passed on to ocean carriers in the form of rail and trucking fuel surcharges. Ports and terminal operators have also raised their rates or imposed surcharges to recover costs associated with running yard equipment.
“There is an urgent need among carriers to get a handle on fuel costs,” says TSA executive director Albert A. Pierce. “In the past year lines felt their top priority was to address infrastructure and congestion issues. Solutions included all-water Panama Canal services using more and smaller, less fuel-efficient ships, and calling Pacific Northwest port gateways that add sailing time from China and Southeast Asia. Congestion has eased, but the fuel bill per round trip is much higher.”
Pierce noted that fuel surcharges have become a fact of life throughout the transportation and logistics sector. An August Purchasing Magazine survey showed most shippers paying surcharges in the range of 2-10% added onto their freight bills. Air courier services such as United Parcel Service, Federal Express and DHL have reportedly adopted surcharges in the 5-15% range.
Agricultural shippers report long-haul trucking surcharges as high as 25% and West Coast harbor truckers are pushing for increases to 15-17%. The American Trucking Associations estimates US truckers will pay $85 billion in fuel costs in 2005, up $23 billion from 2004, and that every five cents in added cost per gallon of diesel fuel potentially translates into a one cent per mile increase in fuel surcharges. Rail surcharges currently average in the 15-20% range. Union Pacific Railroad, which uses 1.3 billion gallons of diesel fuel annually, has indicated in press reports that every one-cent increase in fuel prices adds $13 million to costs. UP’s surcharge adds an estimated $50,000 to the cost of a unit train between the Midwest and West Coast ports.
Pierce says the convergence of rapidly escalating fuel costs, and the passing through of those costs by rail, truck and other vendors, is creating an unsustainable situation that ocean carriers must address even before a new round of contract talks for 2006-07 begin.