Freight Swaps Trade in Yuan as Brokers See Reversal of Slump

The first yuan-denominated freight swaps traded today, helping brokers of the derivatives as they seek to reverse a 94 percent slump in the value of transactions since the market peaked four years ago.

The forward freight agreement for a Supramax vessel, able to carry cargoes of about 50,000 metric tons, was cleared by the Shanghai Clearing House on the first day the trading was permitted in China, according to SSY Futures Ltd., which brokered the contract. Freight Investor Services Ltd., also a broker of the swaps, said that a yuan transaction it arranged was the first one registered with the clearinghouse.

A record collapse in shipping costs since 2008 helped the volume of freight swaps traded to decline by 57 percent over the period and resulted in a 94 percent slump in the value of transactions, according to data compiled by Bloomberg. Asia accounts for about 20 percent of all FFA trading, a figure that may expand now that contracts are allowed in the Chinese currency, Dunn said. There are 15 companies registered with the clearinghouse, he said.

“Hopefully it will fuel liquidity in the global market because of local trading in Shanghai,” Duncan Dunn, a senior director of SSY Futures, said by phone from London today.

The value of contracts may fall to $7 billion this year, a slide of 53 percent from 2011, because of low shipping rates, Freight Investor Services estimated in September. The market was worth $125 billion in 2008, Celent, a financial consultant, estimated in December that year.

The swaps were settled against prices provided by the Baltic Exchange, a London-based assessor of freight costs. The People’s Bank of China that regulates the Shanghai Clearing House gave permission on Dec. 10 for FFA trading in China to start from today, according to Dunn.

Baltic Exchange

The Baltic Exchange “will be doing somersaults” that its indexes are being used to settle trades, Dunn, a director and committee member of the bourse said. The Shanghai Shipping Exchange started rival freight pricing on Nov. 28.

The shipping exchange in Shanghai introduced the indexes of shipping costs for bulk commodities to China in a challenge to the Baltic, which assesses more than 50 trade routes.

State-owned shipping companies also have permission to resume FFA trading after some widespread losses following the shipping market collapse in 2008, Jeremy Penn, Baltic Exchange chief executive officer, said by phone today.

“We don’t expect it to be a massively, immediately liquid market but we think it will be built up steadily over time,” he said.

Local Clients

There’s increasing interest from a local customer base, Laura Wang, a Shanghai-based broker at SSY Futures, who arranged the trade, said by e-mail.

There have been 886,735 lots traded this year, a 9.3 percent decline from 977,621 in 2011. The record year was 2.14 million in 2008, according to figures collated by the Baltic Exchange from brokers worldwide. One lot equals 1,000 tons of freight or one day’s trading.

The physical market for the shipment of dry-bulk commodities including iron ore, coal and grains is about 3.94 billion tons, Clarkson Plc, the largest shipbroker, estimates.

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