Trading of derivatives used to bet on or hedge shipping costs will plunge 53 percent by value in 2012 after charter rates fell to the lowest level in more than three years, according to Freight Investor Services Ltd.
The value of forward freight agreements bought and sold will decline to $7 billion, estimates by the London-based freight and commodity broker show. It projected a 6 percent slide in the number of the contracts traded to 940,000, which would be the fewest since the 511,000 tallied for 2006, according to the Baltic Exchange.
The steeper drop in the value of trading reflects the slump in hire costs, which in March reached the lowest level since December 2008 as the fleet of mineral- and grain-carrying ships expanded amid slowing demand. Trading is down 14 percent in 2012 by volume, less than the drop of about 42 percent in year-to-date average rates for Capesize ships, John Banaszkiewicz, managing director at FIS, said by phone Sept. 17.
“The FFA market is alive and kicking,” he said at a conference in Amsterdam on Sept. 14. “We have volatility and we have liquidity.”
Each contract represents 1,000 metric tons of cargo or a day’s charter of a ship. FFA volumes are reported by brokers to the London-based exchange, which provides assessments of freight rates against which the contracts are settled.
Trading is down by about half since 2008 after the collapse in shipping rates led to contract defaults. Almost all FFAs are now cleared through clearing houses rather than settled by counterparties in the over-the-counter market, according to Banaszkiewicz. Investors bought and sold contracts worth $15 billion last year and $30 billion in 2010.
This year’s trading will equate to about 1.8 billion tons of freight, including 380 million tons in the form of options, Banaszkiewicz predicted. Amounts are calculated using a formula that measures tonnage of commodities carried daily for each of the four classes of dry-bulk vessels tracked by the exchange, FIS analyst Peter Norfolk said by phone yesterday.
FFA trading this year came to 639,800 contracts as of Sept. 14, figures from the exchange showed, against 747,600 lots a year earlier. Daily returns for Capesizes, the biggest commodity carriers, averaged about $5,923 this year through Sept. 13, compared with $10,370 a year earlier, according to data compiled by Bloomberg.
Traders still need to manage freight risk even though lower hire costs reduced the shipping component of commodity prices, according to Banaszkiewicz. More cargoes are linked to daily spot prices, rather than fixed-price contracts between shipowners and customers lasting three to five years, he said.
“More and more people will need to lock in that risk, banks, traders or charterers,” Banaszkiewicz said.