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China Cosco in Talks to Restart Freight Derivatives Trading

China Cosco in Talks to Restart Freight Derivatives Trading
China Cosco Holdings Co. is China's largest ship owner. Photographer: Jerome Favre/Bloomberg News

China Cosco Holdings Co., the country’s largest ship owner, is seeking permission to resume freight derivatives trading three years after settling losses of at least $166.7 million.

The Chinese government hasn’t allowed state-controlled shipping companies including Cosco to trade the contracts since a market slump in 2008 led to “widespread losses,” Jeremy Penn, chief executive officer of the Baltic Exchange, said at a conference in London on May 15. Cosco is in talks about trading freight derivatives, the company said yesterday in an e-mailed response to questions.

The derivatives, called forward freight agreements, or FFAs, are used to bet on the future price of carrying minerals and grains, and settled against indexes of shipping costs published by the London-based exchange. Vessel operators use the trades as a risk management tool to lock in future hiring costs in case they rise.

“A number of Chinese companies were heavily engaged in the FFA market in the buildup to the 2008 collapse and that caused quite a lot of political fallout,” Penn said.

Cosco said in December 2008 that it might lose 3.95 billion yuan ($577 million) from wrong-way bets on freight rates after shipping costs plunged as much as 94 percent. FFA losses in 2009’s first quarter were $166.7 million, the company said in a preliminary quarterly filing on April 29, 2010.

The Chinese government’s State Owned Administrative Enterprise Committee authorizes trading in FFAs and that’s not being granted at the moment, according to Penn.

International Marketplace

“We understand that Cosco and a number of other major shipping firms are back talking to the committee and discussing the ways in which they might come back into that international marketplace,” he said.

The return of Chinese shipping firms may boost volumes which plunged 46 percent in 2009 after dry-bulk rates slid in late 2008, Baltic Exchange data show. Volumes peaked at 2.1 million lots in 2008, falling to 1.2 million in 2009, and 1 million in 2011, according to the exchange. Each lot represents 1,000 metric tons of freight or one day’s average time charter.

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