IMO 2020 fuel costs in component supply agreements: writing a workable surcharge clause

On 1 January 2020 the global limit on sulphur in ships’ fuel oil fell from 3.50% to 0.50%. The International Maritime Organization’s briefing of 20 December 2019 explains that the limit applies outside designated emission control areas, where a 0.10% limit was already in force, and that ships may instead use exhaust gas cleaning systems, known as scrubbers, where their flag State accepts them.

A second date follows. The IMO’s briefing of 26 October 2018 gave 1 March 2020 as the expected entry-into-force date for a ban on carrying non-compliant fuel for use on board unless a scrubber is fitted. The carriage ban is a tool for enforcement, particularly by port State control. It does not change the date of the 0.50% limit.

Compliant fuel costs more. FreightWaves reported in December 2019 that carriers were seeking to recover an estimated USD 11 billion in higher fuel costs from their customers, that the European Shippers’ Council had criticised the opacity of the surcharge formulas, and that Drewry saw the surcharges lifting spot rates as annual contract negotiations approached.

By February 2020 those surcharges are appearing on invoices. For a buyer of packaging components on a delivered basis, or a distributor publishing its own price list, the issue is no longer how to read one freight quote. It is how a fuel cost that changes over time should move through a supply agreement that runs for months.

Fixed delivered price or fuel adjustment?

When a supplier quotes on a basis where it contracts for the main carriage, such as CFR, CIF, CPT, CIP or one of the D rules, freight is part of its price, and so is fuel. Broadly, a purchasing agreement can handle fuel in one of three ways: two with the supplier arranging carriage and one with the buyer arranging it. Each puts the fuel risk in a different place.

Price structure	Who carries changes in fuel cost	What to watch for
Fixed delivered price for the agreement period	The seller	A risk margin built into the price, or short validity that forces frequent requotes
Delivered price with a fuel adjustment clause	Shared, by the agreed formula	Vague wording such as “plus prevailing surcharges”
Goods price only, with the buyer arranging carriage (EXW or FCA)	The buyer, through its forwarder or carrier contract	The surcharge terms in the forwarder’s own agreement

None of these is right for every buyer. A fixed price is simple to administer and easy to pass on to customers, but the seller has to price in uncertainty. An adjustment clause can be fairer to both sides, provided it is precise enough to check.

What a workable fuel clause answers

A clause that says only “freight surcharges may be passed on” leaves every important question open. A workable one settles six points:

1. Reference. Does the adjustment follow the surcharge actually invoiced by the carrier for the shipment, or a stated published fuel index?
2. Base level. What fuel cost, or which surcharge level, is already included in the agreed price?
3. Review period. Is the adjustment recalculated per shipment, monthly or quarterly?
4. Evidence. What does the seller provide to support a change, such as the relevant line of the carrier’s invoice?
5. Both directions. If the reference falls, does the price fall too?
6. Threshold and notice. Is there a band within which no adjustment applies, and how much notice is given before a new level takes effect?

Dense steel components add one more point. Buckles, clips and seals are heavy for their volume, so a surcharge set per container or per TEU lands differently on a pallet of seals than on a pallet of strap rolls. Agree how any adjustment is converted to the unit you actually buy in, such as a price per thousand pieces or per carton, and check the conversion against real carton weights.

Distributor price lists

Distributors that publish price lists for a season or a year face the same decision one step further down the chain. A list that shows goods and delivery separately can absorb a fuel change by revising the delivery element alone, leaving the component prices untouched. If the list quotes delivered prices, state the validity clearly and say whether a change in fuel cost can trigger a revision before the list expires.

Around 1 March 2020

Whether a carrier reviews its surcharge around the carriage-ban date is a matter for each carrier, and nobody can promise a buyer either way. What a buyer can control is the record: note on each order which surcharge level, or which version of the supplier’s freight quotation, the price was based on, so that any later adjustment can be checked against the clause rather than argued from memory.

Keep fuel out of the specification

A fuel regulation changes cost, not the component. Keep the agreed part, nominal strap width, wire diameter or sheet thickness and finish fixed in the order, and deal with freight and fuel in their own section of the agreement. A lower delivered price that quietly includes a different buckle or seal is not a like-for-like offer. Our international procurement guide explains how to keep the commercial and technical discussions separate.

When you request prices for galvanized or phosphated wire buckles, or for steel strapping seals, state the delivery point and the Incoterms rule you want, ask for freight to be shown separately from the goods, and say how you would like fuel changes handled, through the enquiry page.