Freight rate derivatives may not be as far out of reach for the ocean shipping industry as it may seem. Derivatives are basically changes in quantity in response to other changes in quantity. Derivatives are financial instruments whose values are changes based on other variables, such as indexes, demands, etc. The payoff depends on the behaviors of benchmarks and other fluctuations of the market.
TBB Logistics, a small US freight forwarder started offering derivatives as a hedge to its customers on its US import routes this year, according to an article on The Journal of Commerce site. TBB Logistics became one of only a few companies in operation to offer derivatives as a part of its shipping portfolio.
Philip Damas, Drewry’s Director of Liner Shipping and Supply Chains, says “Despite the very slow take-up of derivatives in the year since they were introduced, we thought that we could foster development of this fledgling hedging tool if we could develop a different and better index.”
“Dry bulk shipowners and shippers routinely hedge their contracts against rate volatility by trading derivatives on several global futures exchanges. The contracts traded on dry cargo alone cover shipments with more than twice the actual volume of dry cargo shipped globally every year and run into the hundreds of billions of dollars,” according to an article on The Journal of Commerce site.
“The big lines are very negative, but I think the market is changing more quickly than people think, because the rates for container shipping are being set more by the spot market in many ways,” said Brian Nixon, Executive Director of Commodities at Morgan Stanley in London, which trades the swap agreement. “From what I can see, freight forwarders and shippers are basically working through the spot markets for their rates anyway because of the short visibility of the rates being handed out by the lines,” he said.
Many ocean shipping companies have dismissed the idea thinking that ocean freight shipping price volatility will increase and benefits will be minimal if not absent all together. “We are not interested in this market,” said Nicolas Sartini, Senior Vice President for Asia-Europe Liner Trade at CMA CGM, calling it a “speculative tool … that is not demand driven but supply driven.”
“There is no doubt that there is considerable cultural resistance in the carrier camp to this kind of financial tool,” Philip Damas said. “The carriers spend their entire lifetime trying to control the market, but this type of product is the opposite. It means that carriers will have to follow the market and all they can do is to hedge it or not hedge it.”