Interest has grown from non-traditional shipping traders, such as funds and algorithmic trading firms.
The freight market is critical to global trade and SGX Group provides a range of shipping derivative contracts including Forward Freight Agreements (FFAs) which can be used to hedge against volatility in rates. Freight rates have become increasingly volatile since the financial crisis due to factors such as demand and supply and the number and types of shipping vessels.
At the SGX Commodities Day in London on 17 October a panel highlighted that more fund managers are beginning to trade freight derivatives.
Matthew Cox, Baltic Exchange
Matthew Cox, Head of Benchmark Production at Baltic Exchange, said: “We are seeing more people request curves and the actual physical data that goes behind them. We are also seeing lots of interest from non-traditional shipping traders, such as funds and algorithmic traders, for FFAs and more participation will lead to more volume and liquidity.”
Kenny Groth, Global Co-Head – Commodity Sales at SGX Group, also highlighted that the biggest growth in users of freight derivatives at the exchange has been from the buy side, especially commodity trading advisors (CTAs), as they look for uncorrelated returns
In order to help manage risk, SGX provides a range of shipping derivative contracts on the Capesize, Panamax, Supramax and Handysize time charters, as well as key individual voyage routes. In July 2021 SGX expanded its offering beyond dry bulk freight with three LNG freight contracts. Since February 2023 SGX’s FFA offering has included container freight contracts, covering four main East-West which reference the Freightos Baltic (FBX) container index.
However, options are less than 20% of trading volume in the freight derivatives market.
Jeffrey Yao, Managing Director at Profision Capital, said the asset manager is an active user of freight options. Yao argued trading volumes will only increase if physical participants of the FFA market, such as ship owners, chartering and trading companies, users of iron ore and thermal coal, start to more widely adopt freight options as a risk management tool, which requires a more extensive introduction and education process, including for example, how margining process works. The Baltic Exchange provides shipping data for physical and derivative contracts and Cox agreed that more education is needed, but said the benchmark data provider is also reviewing how it reports option curves so they are easier to use.
Sustainability
The panel also discussed how the shipping industry could become more sustainable as the EU ETS, a carbon tax on shipping, comes into force on 1 January 2024.
Lars Jensen, CEO of Vespucci Maritime, said in a report that carriers are expected to introduce new surcharges to cover this tax. Maersk and Hapag-Lloyd were the first movers to announce this in September, although they have not published the actual amount of the charge.
The Baltic Exchange has been in discussions with many market participants about the ETS, and Cox said, “through these interactions it is evident that there are many in the industry who remain skeptical that it would ever be implemented in shipping and this is having a knock-on impact on the industry’s preparedness. There are still a lot of questions over how the market is going to recognise and settle the costs of the EU ETS.”
For example, the EU ETS requires a carbon price of $300 per tonne to meet its carbon reduction targets, compared to the current price of $100 per tonne. The Baltic Exchange is consulting with the market on how to assess carbon costs in shipping from next year.
Many industry participants are looking at alternative fuels and Cox believes that for the shipping industry to decarbonise, a full range of options will have to be explored, including nuclear. Colin Hamilton, Managing Director and Commodities Analyst at BMO Capital Markets, said his team had been getting numerous questions about uranium and that small modular nuclear reactors would free up cargo space and eliminate refueling time, but incur a high capital cost.
“One thing that could be looked at more is simple industry practices that can be used to reduce carbon emissions, such as slowing ships down so they arrive at discharge and go straight into the port,” Cox added.
