In late April, a joint venture by ACM Shipping and broker GFI Group exited the container derivatives market.
A GFI spokeswoman said the firm might return someday to the business, but today there were “not enough willing participants to trade.” Together with ACM and McQuilling, GFI continues to offer tanker and dry bulk derivatives.
“It is very tough times if you are a broker out there. The setup and market share that GFI had was not sustainable,” said Benjamin Gibson, a broker at Clarksons Shipping.
Gibson said Clarksons has “a fairly small, but good group of customers with which we are working that we want to continue to develop things with.”
“We think the industry does need to take a more proactive stance on what they are doing in regard to indexation and risk management, and it could be a potentially worrying sign for the container industry that they have chosen to drag their heels with regards to all this stuff,” Gibson said.
When we spoke with Gibson he was just back from the Global Line Shipping Conference in London where he had chaired a roundtable discussion on “how to manage freight rate volatility.”
Gibson singled out Maersk for praise, but asked why, despite continuing volatility in container shipping prices, “are there no other shipping lines out there that are prepared to take a really proactive stance on how to develop stronger contracting measures whether it is backed with a hedging program or not.”
Brokers are trying to promote the use of container freight swaps as a tool that both carriers and shippers can use to reduce their exposure to rate volatility.
One executive told American Shipper he had “done everything I could not to support” container derivatives.
“It’s unhealthy. The industry has enough problems getting its act together and figuring out how to price its product than to be a pawn in the game of speculators.”
Gibson said there is also a “big issue with commitment in this business” by shippers and, during his roundtable, “it became quite clear that there are plenty of shippers out there that are quite happy in their normal course of business to shop contracts and renegotiate rates if the market falls, which is what we are seeing at the moment.
“We have done a lot over the past two or three years to try and educate people within the container market on how they could use trade indices and hedging contracts to stabilize their business and manage their exposure to rate volatility. But the next stage has to come from the industry itself.”
Michael Rainsford of Morgan Stanley cautioned against making too much out of ACM/GFI’s exit from the market, saying his firm, Clarksons, and ICAP Shipping are having more success.
“Whether the container shipping lines are willing to come out and show their support for the market is not our decision,” he said. “It would be valuable to the market for them to be publicly supportive, but it’s not our decision.
“As much as brokers and others can provide the infrastructure for this to be an opportunity for them to hedge their risk, it ultimately comes down to the carriers and the freight forwarders and the shippers to utilize the market. The hedging market will be theirs to develop,” Rainsford added.
The Shanghai Containerized Freight Index (SCFI) tracks box rates from Shanghai to 15 overseas locations.
Future contracts based on rates from Shanghai to Europe and Shanghai to the United States are traded on the Shanghai Shipping Freight Exchange.
Trading on this exchange is restricted to the Chinese, though there have been reports it’s interested in making it easier for foreign companies to trade there or even opening another platform in Hong Kong.
Outside China, container derivatives are traded on a bilateral basis or through clearinghouses, but Rainsford said there isn’t good transparency on how much volume is traded this way. But he said the two different venues can exist together and both allow participants to hedge forward freight.
Rainsford estimates that 60-65 percent of his company’s business is in the Asia-Europe trade and the remainder in the transpacific. “We also have quite a bit of interest in other trade lanes that are not hedge-able currently,” he said.
He believes there is room for more hedging because, in his view, “contract rates are now close to being 100 percent correlated to spot rates. There is no such thing as a fixed rate unless your rate doesn’t move in spite of any GRI.”
That’s particularly true because fuel has become such a big cost for container shipping companies.
“For carriers it is their biggest concern. A lot of the increases that are coming into the market are usually an expense of a different surcharge. Even if a carrier pushes through an increase in the bunker charge, in a weak market it is usually at the expense of a lower base freight rate. In my mind all that matters is an all-in rate,” he said.
“Everybody is essentially playing spot; everybody essentially has index- linked contracts,” Rainsford said. “So it is just a matter of when those players want to formalize it with a more efficient mechanism. When that happens there’s not going to be two to three brokers there will be 50.”
Today when a shipper and carrier meet to discuss what an appropriate freight rate for shipment moving between Asia and Europe a year from now might be, their starting positions might be as much as $1,000 apart, he said.
Contrast that with futures for oil or foreign exchange, where the difference is measured in decimal points.
As container derivative volumes increase, Rainsford said the difference between bid and asking prices for future freight will narrow and discussion about a future freight rate might be whether it should be $1,450 or $1,460 per TEU, instead of $1,000 or $2,000.
He believes companies would benefit even by just dipping their toes in the market, he contended.
“You get used to how this market works on small volume and you increase exposure to the market as you get more comfortable with it,” he said. “The control still comes down to that carrier, that forwarder, that shipper taking more control over what is an increasing risk, a freight rate that is bouncing around all over the place.”
Does container industry want this market?
