ChinaÆs freight rate index
Shanghai Shipping Exchange plans derivatives for container shipping.
The Shanghai Shipping Exchange, in revising its Shanghai (Export) Containerized Freight Index (SCFI), is making plans to offer trading of derivatives on the index.
The new SCFI was launched Oct. 16, replacing the original index published by the exchange in 2005.
'The launch of new SCFI is a first step toward derivatives trading of containerized freight indices,' said an article in the online edition of Shipping Exchange Bulletin.
'The new spot market freight indices not only practically, objectively and timely reflect market ups and downs that serves as a necessary tool of market analysis, but also target a function of investment for public trading as clearing benchmark for derivatives, which improves the right of words and power of pricing of Shanghai international shipping center in the international liner service circle and fills the blank of international container freight derivatives,' the article said.
'There is still a lot of work to do, e.g. selection of index product, design of contract, etc. It will probably be traded on international market about six months after the official launch and there is no definite timetable for domestic trading,' the article continued.
Another article reported the committee meeting in Shanghai has discussed several options for developing futures transactions based on the SCFI with either an international organization, the Shanghai Futures Exchange, China Finance Future Exchange or 'commodities e-platform.' It said the Shanghai Shipping Exchange has been discussing the idea since 2003.
Derivatives based on dry bulk and tanker indexes compiled and published by the Baltic Exchange have been traded since 1985. Today they are traded over the counter and settled principally in London, Oslo and Singapore. Their volumes have increased in recent years.
Freight futures based on those indexes were traded in the 1980s and early 1990s on the Baltic and London International Freight Futures and Options Exchange, but dropped in favor of over-the-counter trading because volumes at that time were low.
Container freight derivative products have been discussed for many years.
Jeremy Penn, chief executive of the Baltic Exchange, said his organization has had extensive conversations with the Shanghai Shipping Exchange about its plans to possibly offer derivatives.
He said a major problem is to obtain 'truly independent' information about the cost of moving a container. He said the exchange has put a lot of effort and thought into ensuring its index is independent
But he wondered if futures would attract wide interest noting that by entering into long-term contracts, a shipper can hedge against rising freight rates and a carrier protect itself from falling rates.
Barry Parker, a New York-based shipping consultant and expert in freight futures, also noted that liner transport is far less of a commodity than bulk shipping.
Cost is only one of many elements in a typical service contract, so derivatives on container transport might make it a less effective hedging instrument than derivatives on bulk freight.
And Parker said shippers and carriers already have the ability to hedge against one of the big unknowns they face in other markets ' the cost of fuel.
One liner executive noted that most liner contracts are far from ironclad. If freight rates rise significantly, carriers will seek to raise rates through general rate increases or other charges; if they fall, shippers will seek to recast contracts at lower rates.
Jacques Goudchaux, a shipbroker at Barry Rogliano Salles in Paris, said his firm had been in discussions with Enron about creating a derivatives product for the container shipping industry before the Houston-based energy and trading company filed for bankruptcy in 2001.
'I still believe there is huge potential there, but we haven't been actively digging into it,' Goudchaux said. Chinese exporters are probably among the shippers who would be most interested in such an instrument, he added.
| Damas |
'There has been interest from the industry for quite some time, but nobody has managed to make it happen,' said Philip Damas, division director at Drewry Supply Chain Advisors in London. 'At Drewry we think it would be a good idea. The container shipping market is so volatile and so crazy that it is really making it impossible for anyone to do a two-year planning of their landed costs.'
In 2006, Drewry launched its Container Freight Rate Insight global freight rate database, which monitors and publishes freight rates on 200 trade routes globally. The company's weekly Hong Kong-to-Los Angeles freight rate is published by a number of publications around the world, said Damas, including the Hong Kong Shippers' Council.
He said Drewry has had discussions with various market exchanges about derivatives for container freight, but to make the product work, there would be a need for a lot of liquidity.
An alternative Drewry has discussed with shippers and shipping companies is to have the two parties agree in a contract that if the spot market as monitored by Drewry goes below a certain level, they go back and amend the freight rate.
Damas said one European retailer has incorporated Drewry indexes from China to Europe and from India to Europe in a contract with one carrier.
The Shanghai Shipping Exchange said the new freight index includes a comprehensive index and the freight rates of 15 individual shipping routes that cover all the major foreign trade zones of Shanghai:
' Mediterranean Sea.
' Europe.
' U.S. East Coast.
' U.S. West Coast.
' Australia-New Zealand.
' West Africa.
' South Africa.
' South America.
' Persian Gulf.
' West Japan.
' East Japan.
' Southeast Asia.
' Korea.
' Hong Kong.
' Taiwan.
The freight information used to create the index is provided by 30 panelists, 15 from liner companies and 15 from shippers and freight forwarders.
The indexes are in dollars per TEU and includes both ocean freight and surcharges. They are based on spot rates rather than long-term contract rates in order to be 'more sensitive to spot market tendency and more understandable and straightforward to users.'
It's not clear if the exchange would offer derivative products on several routes or on the overall product. According to Zheng Xie, an attorney with the Washington law firm Rodriguez, O'Donnell, Gonzalez & Williams, the head of the exchange indicated in an interview that theoretically 15 derivative products could be offered.