What are BAF and CAF in Shipping?
BAF and CAF are two crucial charges that shipping carriers use to protect themselves against price fluctuations. These surcharges are levied on the total freight bill and play a significant role in understanding the transport’s final price.
What is BAF?
BAF stands for Bunker Adjustment Factor. Shipping lines levy this fee to make up for the fluctuation in the oil prices while transporting any given shipment
Fuel prices are a critical component of shipping costs. To avoid constant changes in the prices of transporting services, shipping carriers add a percentage of fuel additive to the total freight charge. This creates a hedge against the risk of rising or falling oil prices.
Shipping companies worldwide use different methods for calculating BAF. These companies also have the right to change the calculation method without any prior notification.
BAF fluctuates according to the fuel rates prevailing in the international market. If oil prices soar, BAF charges increase and vice versa. It is usually calculated based on the average wholesale price of 1 m^3 of diesel from the previous month.
The frequency of rate variation differs from company to company. On average, rate changes occur on a monthly or bimonthly basis.
For example, a company ‘ABC’ calculates the proportionate difference between the agreed base fuel price and the current price. Starting from a 6% increase in the fuel price, the fuel gauge value is added for each multiple of 6% difference, suppose 1.5%.
Following this methodology, if fuel prices increase by 18% of the base price, the value of BAF will be 4.5%. If the oil price decreases, the BAF value is subtracted from the price.
What is CAF?
CAF stands for Currency Adjustment Factor. It acts as a variable currency supplement, and shipping lines use it to control losses due to currency fluctuation during shipping. It partially covers the account settlement cost incurred by freight forwarders with other transport enterprises using different currencies.
Like BAF, every shipping company calculates CAF using different methodologies and reserves the right to change it without prior notice. The value is usually determined once a month. If currency rates drop and the value is negative, freight rates decrease and vice versa.
The company chooses a base price, the average exchange rate from last month. The CAF value is calculated based on the difference between current and base rates and other individually selected factors.
For example, if a company in the US buys products from Japan, the shipping cost might be US$ 1800. After adequately evaluating the fluctuation in the currency rates, the shipping company may charge a 12% CAF charge on this shipping cost.
What is the Difference between CAF and BAF?
CAF and BAF are adjustment factors shipping lines use to cover abnormal losses during transportation. The critical difference between the two is that CAF covers the difference in currency value fluctuations, whereas BAF caters to changes in oil prices.
Can we Avoid BAF and CAF Charges?
Offsetting these charges can be challenging because only a few options are available, requiring the supplier to have some bargaining power.
There is no easy way to avoid these fees, but some timely tricks can help. For example, if carriers can get in the shipment before any new CAF and BAF charges apply, the procurers can avoid these charges altogether.
The only other option is to negotiate the prices with the carrier. There is always room for negotiation when it comes to ocean freight.
However, the scope of bargaining depends on the size of the enterprise and the quantity it ships regularly. It might not be possible for a small company that transports small volumes or products to negotiate CAF and BAF charges with the shipping company.
