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Time to start worrying again about rising cost of ship fuel

At this time four years ago, before the pandemic and the Ukraine-Russia war stole the headlines, the cost of fuel was the big topic in shipping.

The industry was about to implement a sweeping new global regulation, IMO 2020, requiring the use of more environmentally friendly and more expensive very low sulfur fuel oil (VLSFO), with a sulfur content of 0.5%. Added fuel costs would be passed along to cargo shippers, and ultimately, consumers.

Fuel costs spiked as predicted after the regulation went into force on Jan. 1, 2020. Then COVID struck. Demand for gasoline and diesel collapsed, the price of oil plunged, and with it, the cost of ship fuel. By mid-2020, vessel fuel was 30% cheaper than it was prior to IMO 2020. Fears over regulatory fallout waned.

Fuel costs started rising again in the second half of 2020 and through 2021, but by that time, containerized cargo shippers had a much bigger worry: Freight rates were skyrocketing to unprecedented levels. The supply chain crisis forced shippers into the ultra-expensive spot market. Fuel surcharges on contracts rose, but they were a much smaller component of the overall cost mix.

Fuel costs shot to historic highs after Russia invaded Ukraine in 2022, then fell back as global markets adjusted. But even as fuel costs spiked during the war, ocean contract rates were still exceptionally high, continuing to overshadow the fuel factor.

Now, ship fuel costs are rising yet again. The cost of VLSFO is back near highs reached soon after the IMO 2020 first came into effect. Bunker adjustment factors (BAFs) — the fuel surcharges shipping lines levy on their customers — are headed up. And the cost of freight is all the way back down to where it was before COVID — and before IMO 2020 —  meaning the pass-along cost to shippers from expensive VLSFO is now a much higher proportion of their total cost.

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