NEW MARKET DYNAMICS DRIVING DEMAND FOR FREIGHT FUTURES
Two newoceanfreightfutures products underpinned bywell-knownindustryindices thathave emerged overthe lasttwo weeks seek to succeed where pastefforts to provide hedging tools to shippers,forwarders,and carriers have failed
The indices enterthe frayina marketturned upside downbyoceanfreightcapacityshortages drivenbya demand surge and equipment dislocationthathas sucked awayas muchas 20 percent of effective vessel capacity
Boththe newindices are based onfreightrate data fromcompanies — Freightos and Xeneta — thatdidn’texistthe lasttime there was aneffortto drive usage of oceanfreightderivatives Thatinitiative,pushed primarilybyMorganStanleyand futures brokerFreight InvestorServices (FIS) inthe wake of the globaleconomiccrisis in2010,fell atdue to a lack of interestfrombothcontainerlines and shippers FISis also involved inthe FBX-based futures option Containerlines didn’twantto participate as theysawderivatives devaluing theirbusiness ina high-capitalexpenditure,low-marginindustry,while shippers largelydidn’tsee value inhedging againstrate volatility whenoceanfreightcosts were relativelylow
Butthatpicture has changed markedlysince the onsetof the COVID-19 pandemic Rate levels,bothcontractand spot,have mushroomed in2021 with little sign of easing in 2022 Service levels,measured in sailing schedule reliability and the availabilityof containers atport, have declined,creating a double whammyforsupplychainmanagers to explainto theirC-suites
As freightcosts have risen,and the need to carrymore inventoryto accountforlongertransittimes forshipments has grown,shippers and forwarders are increasinglymore opento tools thathelp themhedge risk againsta sea of uncertainty,principals withthe Baltic Exchange told JOC.comthis week.The BalticExchange produces the Freightos BalticIndex(FBX) intandemwithFreightos,operatorof anonline internationalfreightmarketplace FISsaid ina statementDec 17 it will offer container freight rate futures on the Chicago Mercantile Exchange (CME),one of the largestfutures and commodities exchanges inthe world The dailyprice of the futures contractwill settle againstthe FBX
Meanwhile,Xeneta,a providerof rate benchmarking forshippers and forwarders,earlierthis monthpartnered with nancialindex providerCompass FinancialTechnologies to provide a freight-all-kinds (FAK) indexbased onshort-termoceancontracts Xeneta said ina Dec 9 statementthatits indexwithCompass,called XSI-C,more accuratelyre ects whatshippers payforoceanfreight
“Manylegacyindices do notre ectthe large-scale trades made bysome of the biggestcompanies inthe world,”Xeneta said inthe statement “Theyare mainlybased onquoted prices,whichare disproportionatelyindicative Xeneta works withsome of the largest shippers inthe world,so XSI’s data is notonlytimelybutalso relevant”
XSI-Crates are available fora 40-footcontaineroneightmaintrade corridors,calculated and published daily,withrate validities of less than32 days The FBX-CME futures contracts are available fora 40-footcontaineronsixlanes,witha launchdate of Feb 28
Little experience inhedging
Shippers incharge of freightcapacityprocurementare generallynotexperienced inusing hedging tools,a factthathas hindered demand forprevious derivative and futures products,BjornVang Jensen,vice presidentof advisoryservices/globalsupplychainatSeaIntelligence Maritime Analysis, wrote in a LinkedIn post aboutthe FBX-CME contracts
“Remember,people who buyfreightare,as a rule,notknowledgeable aboutderivatives and futures,”he wrote “Anotherfailure pointlast time is thatpeople actuallythoughtthis was going to save themmoney [Sellers of futures contracts] willneed to explainverycarefully, and inbig,bold,red letters,what‘hedge’means”
Jensenacknowledged thatbroaderoceanmarketdynamics have changed,butquestioned whetherthose changes would be enoughto stirgenuine demand forfutures contracts
“Ithas beentried before,and failed miserably,butthenagain,nothing is like itwas before,”Jensenwrote “Itis veryimportantto note thatyouare notbuying space orequipment;youare hedging yourcostexposure througha nancialinstrument This misunderstanding is exactlywhatcaused the lastattemptto fail,whenprospective buyers inexperienced withfutures eventuallyrealized thattheywould not be buying a physicalservice”
Aside fromthe questionof whetherthis iterationof oceanfreightderivatives willgainnecessarytraction,the use of two relativelynew indices plays onanunderlying theme in container shipping: mostpricing indices are based onthe rates paid byforwarders,ratherthan those paid byshippers Freightos’rates are based onthose transacted byforwarders using its rate managementsoftware,while Xeneta’s is primarilybased oncontractrates fromshippers using its benchmarking products
Indices developed overthe pastdecade,including the ShanghaiShipping Index,Drewry’s World ContainerIndex,and those builtby Xeneta and Freightos,have largelyserved as benchmarking orprice discoverytools as the process of oceanfreightprocurementhas evolved into the digitalage The adventof online quoting tools and,more recently,a pushbycontainerlines to secure multi-yearcontracts withshippers,has meantthese indices have a more directimpactonprocurement
Allied to higheroverallfreightcosts,the appetite to use nancialinstruments as a toolto hedge has grown,PeterStallion,container brokeratFIS,wrote onLinkedIn
“Suf ce to saythe developmentof newphysicalcontractstyles thathave beenfocusing onthe guarantee of space ona shortertimeframe have made cash-settled futures extremelyattractive forbothcapacitybuyers and sellers,”he wrote
FIShas beenconducting “off-exchange”futures contracts forthe betterpartof 2021,the BalticExchange said ina Dec 16 statement The underlying catalysthas beenthe dramaticrise inrates,whichhas changed marketparticipants’thinking abouthedging,Stallionindicated inthe statement
“The volatilitythatwe have seeninthe last18 months has led manyparticipants insearchof hedging tools,”he said “The launchof these cleared contracts opens up the marketto allparticipants,helping drive forward anef cientand universallybene cialmarket”
PostCredit: Joc com