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SHIPPERS VOICE


Carriers are cool on container derivatives


That, at least, was one of the arguments put forward at the recent 13th Global Liner Shipping Conference held in London, England, which saw delegates from both sides of the industry express scepticism about the increasingly-promoted concept of trading derivatives to hedge against rate swings.


The background to that debate and the reasons for it were summed up by Jeremy Nixon, chief operating officer of NYK Line. “We face a fundamental problem in our industry today and that is the extent of the volatility we have in our markets. We have to take collective ownership for that, both on the carrier side and when it comes to working with customers. We have to try and reduce that volatility.”


FEU, though, that could trigger a change in the contract rate (effectively the MAF) of up to, for example, $400 per FEU. In other words, the rate paid by the shipper


in that particular


contract could go up to a maximum of $2,800 per FEU or down to a minimum of $2,000. “The trigger points are agreed between the carrier and the shipper and can of course vary between contracts,” Sartini.


explained


However, regardless of how much further the general market price moved in either direction during the period of the contract, the


shipper would never pay more than $2,800 per FEU or less than $2,000. “Of course the numbers are negotiable for each different trade,” added Sartini. Expanding on the definition of “market price” in the context of such contracts, he said that could be determined in several ways. “It could involve taking the shipper’s view and the carrier’s view and deciding the average, it could be based on an index or it could be a combination of all those.”


Nicolas Sartini (above), senior vice president of French global shipping group CMA CGM in charge of its Asia-Mediterranean, Asia-North Europe and North Africa lines, suggested that one solution would be for major multinational shippers and container shipping lines to move towards agreeing a new type of longer-term business contract. Basically, he explained, that would involve drawing up a two or even three-year contract which included a base rate per container coupled with a MAF (market adjustment factor). So, for example, if a shipper and shipping line agreed a contract base rate of US$2,400 per FEU (forty-foot equivalent unit), excluding BAF (bunker adjustment factor), as long as the relevant general market price only moved, say, $200 above or below that figure – in other words, up to $2,600 per FEU or down to $2,200 – the shipper would continue to pay $2,400. If the relevant market rate rose or fell more than $200 per


Sartini claimed that the key requirements of major shippers spoken to by CMA CGM – specifically, those sourcing and distributing goods in various parts of the world – were “stable and


fair prices. Their prime


concern is that the supply chain works, goods must reach their destination in good condition and in time.” He


rates going up and down, who adopt an opportunistic approach and play the market to get the best deals, and that will remain part of the market,” he said. “What we are trying to do is address the needs of the larger customers, for example in the retail industry, who are more and more important in the major trades because they have a policy of increasingly controlling their own sourcing and bringing more volumes out of the speculative market and into a more contractual world.” However, when it came to the concept of using ocean freight derivatives to hedge against rate swings, Sartini questioned the validity of the initial basis for that market when it was launched last year, the Shanghai Shipping Exchange’s containerised freight index.


“Data is provided by a group of small local Chinese forwarders who are only active in the most volatile segments of the industry. Carriers also transmit their tariffs but they can easily decide for whatever reason to file inaccurate data,” he claimed.


added that the new concept for shipper/shipping line contracts being introduced by CMA CGM had been well received by customers “because they see the benefits of stability over time and still have a reference to the markets”. He subsequently revealed that CMA CGM had already signed such a contract with one customer, although he would not name the company concerned, and was talking to several others about similar agreements. However, Sartini also admitted that the new type of contract being promoted by CMA CGM would not suit all shippers. “We are not going to change shipping overnight. There will still be a number of customers who like


Container transportation was not a single commodity, continued Sartini.”We have seen that it has some of the characteristics of a commodity, in particular the influence of supply and demand on price, but at the same time a shipping contract is much more complex than just carrying the goods from one port to another,” he stated.


“Another factor which inhibits carriers from using this new product is the parallel it draws with other derivatives. It is well known that large bunker brokers have lost fortunes with derivatives. It is only logical that lines are reluctant to use what they see as a highly speculative product. Currently, we don’t see the need for them.” NYK’s Nixon said he agreed that the Shanghai spot rates used for the initial ocean freight derivatives


ISSUE 3 2011


A new type of business contract between carriers and shippers currently appears to be a better bet than using ocean freight derivatives when it comes to trying to reduce global container shipping market volatility, reports Phil Hastings from the recent Global Liner Shipping Conference.


also sceptical about the use of derivatives. He said that following a “thorough review” of the merits and drawbacks of that concept, his organisation had for now decided not to pursue that option. One of several reasons for to


coming


market represented only a very small percentage of global container shipping business. “Somehow we need to get market rates which are more visible and cover the different commodities, markets and customer segments, short-term and long-term. That would allow for better contracting and better understanding. There is an open space for someone who can come in and provide that clarity on market rates.” A leading shipper, Jean- Louis Cambon, head of the ocean management committee, at


global tyre manufacturer


Michelin, which expects to ship something like 190,000 TEUs around the world this year, was


that decision, he


continued, was that the index used for the derivatives market concerned was based on quoted CIF (cost, insurance, freight) spot rates “which is not the full reflection of the market reality which should cover contract rates as well”.


Cambon also argued that ocean freight derivatives had the potential to accelerate commoditisation of the container shipping business rather than stopping it. “We are concerned that the introduction of speculators to the container freight market will result in more rather than less volatility by decoupling pricing from the supply and demand for capacity.”


However, he conceded that some shippers might find that adoption of derivatives would remove uncertainty over the development


of their ocean


freight costs and added that “most of us probably need to learn more about the concept”. *Subsequent to the Global Liner Shipping Conference, UK- based global shipping industry research/consultancy


company


Drewry and Singapore-based electronic marketplace for OTC freight


and commodity


swaps Cleartrade Exchange announced in early May the launch of a weekly index covering 11 routes on the major east-west container shipping trades.


The World Container Index (WCI), “a global index which can be used by physical and derivative market participants to manage freight risk”, will cover trade in both directions on routes between Asia, North America and Europe.


Airfreight not ready for a re-think yet


Senior international airfreight industry executives were divided on the feasibility of using derivatives or other measures to try and reduce market volatility in their sector.


Speaking at the recent Air Cargo Europe conference in Munich, Germany, CEO and chairman of German carrier Lufthansa Cargo Karl Ulrich Garnadt, suggested that air cargo market volatility was


inevitable due to the


unpredictability of demand. “We are absolutely dependent on the overall development of the market, on how the final consumer changes his


behaviour, and even for most shippers that is not really predictable,” he stated. “The simple reality is that today, in our industry, we do not know what will happen in two weeks’ time.”


President of North American GSSA Network Cargo Systems


Howard Jones, added that the only element of the air cargo


market which service providers could


control was capacity


and that picture fluctuated according to cargo


volumes.


“Prices go along with capacity. It is supply and demand – end of story,” he stated. However, senior executives of


Above: Karl Ulrich Garnadt, CEO and chairman of German carrier Lufthansa Cargo Below: Remo Eigenmann, Damco’s global head of airfreight


Danish global forwarder Damco International suggested the airfreight industry should now be looking at ways to reduce market volatility, potentially including the use of derivatives to help hedge risk.


“More and more customers are looking for a year-long rate, which is extremely difficult to do,” stated Remo Eigenmann, Damco’s global head of airfreight, during a company press briefing at the same Munich event. “We can shut our eyes and look in the other direction but this issue keeps coming back on us and I think we definitely have to address it.”


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