Meanwhile, fuelling the profits in Oz… 

ID 19021312 © Billdayone | Dreamstime.com

As an off-the-leash Israel threatens to attack Iran’s oil supplies, the fear of oil prices skyrocketing would mean unwelcome news for transport companies, right?

Not so fast trigger-finger! As you will see, every cloud has a silver lining.

Crying wolf?

Earlier this year I wrote about the “crisis” unfolding in the Strait of Hormuz and the short-term spike in shipping rates (as shipping companies are good at using every opportunity to jack up rates).

Predictably, rates settled, and the world’s supply chains recalibrated. The same level of hysteria can be levied at oil futures traders.

With Israel sabre-rattling at Iran and threatening to strike its oil production facilities, oil prices surged 8%.

Given the unrest in the Middle East for the past 12 months, as Israel goes on an unrestrained seek and destroy mission of its enemies*, you would expect oil prices would have skyrocketed.

(*Never mind the awful civilian casualties in Gaza or Lebanon, let alone those poor Israeli hostages held for over a year – collateral damage, eh Messrs Smotrich and Ben-Gvir?)

In fact, oil prices have been falling this year.

Here in Australia, both wholesale and retail prices have been falling since the week of 28 April. Which makes the spike earlier this month driven more by fear than facts. It should be noted that the United States is a net energy exporter, and has been for several years.

And whilst hysterical headlines scream that oil would go to $350 per barrel if Iran blocks the Strait of Hormuz as retaliation if Israel attacks its oil production, the reality is it is unlikely to do so.

Why?

Because most of that oil goes to China, India, Japan and South Korea. I doubt the ayatollahs will want to upset China and India. Then they would also be restricting exports of their Middle Eastern neighbours Iraq, Kuwait, UAE, Saudi Arabia and Bahrain.

In addition to China and India, these are also powerful stakeholders, who at worst are ambivalent regarding their ideologies, and at best, sympathetic. It doesn’t make sense to get these countries offside. Lastly, Iran would risk harming its own exports at a time when it needs the foreign exchange. So, logic (in this admittedly increasingly illogical world) would dictate that Iran would not risk this action.

Smoke and mirrors

In my previous column (read: ‘Payday in Oz‘), I discussed the Australian transport market applying its annual cost recovery rate reviews for its customers. This includes all cost inputs with the exception of fuel. Fuel surcharges (FSCs) are typically calculated monthly, based on the previous month’s prices. There are two types of FSCs – those charged by transport companies to their customers; and those paid by transport companies to their sub-contractors. I am going to discuss the former

Here in Australia, the accepted baseline for calculating fuel surcharges starts with the Australian Institute of Petroleum (AIP) Terminal Gate Price (TGP) for diesel, which you can download here. The baseline figure to calculate the fuel surcharge is the national average across Australia’s seven state capitals for the month. A simple check will see that September’s national monthly average for diesel was materially lower than August’s (by my calculations: around 6.2% lower). So, if you are a customer, you would expect your transport carrier to have reduced their freight surcharge, right?

As reported here and previously flagged, the answer is… NO. In fact, one national transport company, Sadleirs, increased its September fuel surcharge whilst 12 others reduced theirs by less than (my calculated) decrease. As this source asks… “Could fuel levies be a hidden profit centre some carriers don’t want you to notice?”

The short answer? Yes.

And what is more, that profit margin will increase when oil prices increase.

Again, why?

All transport companies will have their own various formulars for calculating customer fuel surcharges. Generally, if customers ask for open book pricing of the transport company’s cost inputs, fuel would be around 22%, based on a mix of a linehaul (interstate long distance) leg and then a local “last mile” leg. Referencing TransEco, which as per my previous column, is the accepted cost indices for Australian transport; fuel represents approximately 28% of linehaul costs and 10% of local last mile transport costs (hence the approx. 22% combination). Now, the price of fuel would be agreed at the start of the contract and then the fuel surcharge (FSC) would vary based on the AIP TGP average for the month across the capital cities.

It’s not the ‘what’ – it’s the ‘how’

But not all transport companies will follow the same formula to calculate the customer’s FSC. For example, look at these two company’s formulas versus this, and at least they disclose it.

Most companies should be disclosing their FSC calculations and customers should ask that they do. Especially if they are not a contracted customer and are seeking a quote. When shippers are seeking a quotation from a transport company, they need to ensure they consider the base freight rate plus FSC to get the actual transport cost. Some companies cheekily quote a freight rate plus fuel (ie base rate plus FSC) but don’t disclose the actual FSC. Sometimes it’s only on the invoice they send to the customer.

Also, the shipper needs to make sure they are comparing ‘apples with apples’ and ensure the quote received isn’t inclusive of the fuel surcharge; in these instances, the quote will look exceedingly high in comparison with transport companies that quote a base rate + FSC.

Of course, shippers should not get too hung up with the FSC, they need to look at the total cost inclusive of all fees and charges.

Would you choose FSC at zero fuel and pay more for your load than someone with a 25% FSC? That is, a choice between A$1,000 base rate plus a FSC of 25%; or a base rate of A$1,500 freight charges and 0% fuel? Shippers needs to know and understand the mechanism of what the total charge is and use that to compare.

Another area where transport companies can make a profit is the difference between what the customer FSC is versus what FSC the transport company pays their sub-contractors. From my experience, the formulas are quite different and the customer FSC charged is almost always higher than the FSC paid to subcontractors.

As demonstrated by this post from Freight Buzz, there appears to be a substantial disparity in the FSC charged by these Australian national linehaul transport carriers. But I would suggest that all of these FSC rates are operating from different base fuel rates selected at different points of time (from when that transporter commenced calculating their FSC rise and falls). So, although this post says that the transport company Roadmaster cut its FSC by 44.94%, I would suggest that from its baseline fuel cost (CPL) that it started calculating its FSC rise, and fall, was quite high. On the other hand, I can’t explain why Sadleirs had increased their levy by 3.06% when fuel prices had dropped. Some companies may not have liked having their FSC compared and published and, as Freight Buzz reports, have since removed this information altogether from their web sites. 

Direction

FSCs should reflect real rise and fall cost changes, but the disparity between them can be incredibly significant.

Many customers may assume that fuel levies are generally quite consistent – which is clearly not the case. To have one charging a fuel levy of over 30% and another zero or close to zero, is hard to fathom if you are a customer.

Clearly there is no consistent approach since the fuel levy should be calculated from fuel price changes. Publicly available indices such as the AIP TPG should be the baseline to measure rise and fall changes, but the reality is that transport carriers all have different starting points of when to apply this rise and fall change. Low fuel levies tend to suggest a baseline of a higher base fuel price, which means carriers aren’t as exposed to fuel price drops.

If fuel prices drop and levies don’t follow suit, there may be a case for negotiation. Customers need to compare rates based on the total cost and not get too caught up on the FSC. When negotiating freight rates, I would recommend that customers insist on an itemized quote, with the fuel levy separately outlined. It’s fair for customers to expect clarity on what Fuel Base Price carriers are using and what the Fuel percentage as a cost factor is in calculating the FSC.

There are several other ‘tricks’ transport companies use to pad their margins using fuel, including paying a lower fuel levy to their subcontractors versus what they charge customers; and what those companies buy fuel for, which I bet will be much lower than the AIP TGP.

Then there can be different FSCs for LTL versus FTL, linehaul versus regional versus metro… so, when the price of oil goes up, just remember: transport companies will be there, ready to clip the ticket…. either way, you will pay in your FSC. It is up to you how much.