Clarkson Securities, which helped pioneer container freight swaps, is getting out of the business because of a lack of volume.
In late April, a joint venture by ACM Shipping and broker GFI Group also exited the container derivatives business.
“We persevered for four years,” said Alex Gray, chief executive officer of Clarkson Securities Ltd. “We ultimately had to take a tough decision… The volume just isn’t there. I suppose if we had felt that having put four years work into it, if we waited another year that it would come, then we would have persevered a little longer. But we felt the industry has to reach a point for itself where the major buyers and sellers on the physical side of the container freight market recognize that there is a need for this kind of product and push it forward.”
In January 2010, Clarkson arranged the first trade of a container freight derivative, an over-the-counter cash-settled swap that settled against the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI).
The Shanghai Containerized Freight Index tracks container rates on export containers from Shanghai to 15 overseas locations and future contracts, based on freight rates for routes from Shanghai to Europe and from Shanghai to the United States which are traded on the Shanghai Shipping Freight Exchange
Gray said he thought container freight derivatives will eventually become more widely used, but “it is going to take quite a long time before they do. When they do, we will be quite happy to resume the good work we have done.”
Gray also said he was “at pains not to start blaming the industry for the fact that we came up with a product which, in fairness to them, they never said ‘you guys go out and build it for us.’ We were not responding to an almighty cacophony from the shipping line or the shippers.”
He noted Clarkson has had success as a broker for derivatives for dry bulk and tanker freight, and “thought the opportunity existed for it to be successful in containers, and my belief is that it still can be, but I do believe that just as in the dry freight business in the 1980s, there are plenty of people at this early stage don’t see the value of the container futures business yet.”
Shippers and carriers sometimes agree to modify freight rates if the terms they had agreed to earlier in a contract year vary widely from current market conditions.
There is a “high level of optionality within container physical contracts,” Gray said. “ By that I mean performance is fairly flexible both from shippers and from lines. As long as there is that flexibility and that is what the industry is used to and that is what the industry wants and accepts, then it is very difficult to come in with a structure which, if anything, restricts that flexibility and says performance is an absolute must.”
Richard Heath, director and head of product at Cleartrade Exchange and its World Container Index joint venture with Drewry, believes that despite the exit of Clarkson and ACM Shipping/GFI Group “there are still people working in this market” and “more container freight derivatives (are) trading in the market now than ever have been previously.”
He said getting statistics, however, is difficult because there are more contracts being traded over the counter than through clearinghouses. He estimated only a quarter of contracts a cleared.
“Growth has been a little bit slow, but there are more adopters coming in,” he said from large non-vessel-operating common carriers, middle-tier carriers, and cargo owners who are experimenting with container derivatives.
He said his firm recently did a survey and found 25 percent of freight forwarders had traded container freight derivatives, including some of the largest forwarders and NVOs.
“We have also seen a number of index-linked contracts, and while the number of index-linked contracts is pretty small in comparison to the number of contracts in the overall market, we understand the percentage of people who have one or more index-linked contracts with the major carriers and major freight forwarders has grown significantly,” Heath said.
Clarkson exits container freight derivatives business
