Five container lines have shown “strong interest” in using derivatives, boosting efforts to develop a cargo-box swaps market, according to a trade group.
“Container lines are obviously important for the development of the market and to add liquidity,” Brian Nixon, president of the Container Freight Derivatives Association and an executive director at Morgan Stanley, said in a Sept. 14 interview in Shanghai after the group’s first annual meeting. He declined to name the five shipping companies.
Attracting container lines is key to expanding a derivatives market that the group expects to cover as much as 20 percent of Asia-Europe shipments within five years. So far only two lines, including Compañía Sud Americana de Vapores SA, the largest in Latin America, have used swaps tied to a Shanghai container index set up last year to act as a benchmark, Nixon said.
“It could be challenging if the major lines are not participating,” Johnson Leung, an analyst at Tufton Oceanic Far East Ltd., said from Hong Kong. “What they fear is this derivative will commoditize their services.”
Dealing in derivatives linked to containers is small relative to the trade in contracts used in the commodity- shipping business. About $31 billion of derivatives covering cargos such as coal and iron ore traded in 2009, according to brokerage Freight Investor Services Ltd. The Baltic Dry Index in London tracks dry-bulk cargo rates.
Swaps allow shipping lines and customers to guard against fluctuations in rates. Investors can also speculate in the market.
‘Fear of Change’
In container-shipping, contracts covering a few thousand boxes will likely be traded worldwide in the fourth quarter and first half of next year, Nixon said. The tally may hit 2 million annually on Asia-Europe routes within five years, he said.
The “fear of change” is deterring lines from entering the market, he said. “‘It’s a sensitive issue” for them.
The Shanghai Shipping Exchange draws data from 30 shipping lines and freight forwarders for its weekly Shanghai Containerized Freight Index, which covers spot rates for shipments to markets including Europe, the Mediterranean and the U.S. Clarkson Plc, the world’s largest shipbroker, executed the first swap settled against the index in January.
The index was devised as a benchmark for container-shipping costs, which are more difficult to follow than commodities rates. A container vessel usually carriers a wide variety of cargos for numerous different customers. Bulk ships generally carry one type of freight for one customer.
Japanese shipping line Kawasaki Kisen Kaisha Ltd. has refrained from entering the container-derivatives market as it sets rates itself and signs long-term contracts with customers, said Li Hongmei, senior marketing manager at its Chinese unit.
“We don’t seem to need the product,” she said at the container-derivatives group’s event.
China Cosco Holdings Co. and China Shipping Container Lines Ltd., the two biggest cargo-box lines in China, both said last month that they have no plans to enter the market.
Freight forwarders, who arrange shipments, may be more interested in derivatives than shipping lines, because they have less control over prices, said Simon Wang, vice president for east China at JHJ International Transportation Co., a contributor to the Shanghai freight index.
“The product may prove more useful for middlemen like us,” he said. “We don’t have price-setting power and we need to hedge.”