China plans container freight derivatives

China plans container freight derivatives    On the heels of new regulations requiring container carriers to file information about freight rates with the Shanghai Shipping Exchange, and revisions of its Shanghai (Export) Containerized Freight Index (SCFI), the exchange apparently plans for trading derivatives on the index.
   The new SCFI was launched Oct. 16, replacing the original index published by the exchange in 2005.
   “The launch of new SCFI is a first step toward derivatives trading of containerized freight indices,” said an article in the online edition of Shipping Exchange Bulletin.
   “The new spot market freight indices not only practically, objectively and timely reflect market ups and downs that serves as a necessary tool of market analysis, but also targets a function of investment for public trading as clearing benchmark for derivatives, which improves the right of words and power of pricing of Shanghai international shipping center in the international liner service circle and fills the blank of international container freight derivatives,” the article said.
   “There is still a lot of work to do, e.g. selection of index product, design of contract, etc. It will probably be traded on international market about six months after the official launch and there is no definite timetable for domestic trading,” the article continues.
   Derivatives based on dry bulk and tanker indexes compiled and published by the Baltic Exchange have been traded since 1985.
   Today they are traded over the counter and settled principally in London, Oslo and Singapore. Their volumes have increased in recent years. Freight futures based on those indexes were traded in the 1980s and early 1990s on the Baltic and London International Freight Futures and Options Exchange, but dropped in favor of over-the-counter trading because volumes at that time were low.
   Container freight derivative products have been discussed for many years.
   Jacques Goudchaux, a shipbroker at Barry Rogliano Salles in Paris, said his firm had been in discussions with Enron about creation of a derivatives product for the container shipping industry before the Houston based energy and trading company filed for bankruptcy in 2001.
   'I still believe there is huge potential there, but we haven't been actively digging into it,' Goudchaux said. Chinese exporters are probably among the shippers who would be most interested in such an instrument, he added.
   “There has been interest from the industry for quite some time, but nobody has managed to make it happen,” said Philip Damas, division director at Drewry Supply Chain Advisors in London. “At Drewry we think it would be a good idea. The container shipping market is so volatile and so crazy that it is really making it impossible for anyone to do a two-year planning of their landed costs.”
   In 2006, Drewry launched its Container Freight Rate Insight global freight rate database, which monitors and publishes freight rates on 200 trade routes globally. The company’s weekly Hong Kong to Los Angeles freight rate is published by a number of publications around the world, said Damas, including the Hong Kong Shippers Council.
   He said Drewry has had discussions with various market exchanges about derivatives for container freight, but he noted to make the product work, there would be a need for a lot of liquidity.
   An alternative Drewry has discussed with shippers and shipping companies is to have the two parties agree in a contract that if the spot market as monitored by Drewry goes below a certain level, they go back and amend the freight rate.
   Damas said one European retailer has incorporated Drewry indexes from China to Europe and from India to Europe in a contract with one carrier.
   The Shanghai Shipping Exchange said the new freight index includes a comprehensive index and the freight rates of 15 individual shipping routes that cover all the major foreign trade zones of Shanghai, namely Mediterranean Sea, Europe, U.S. East and West coasts, Australia-New Zealand, West Africa, South Africa, South America, Persian Gulf, West and East Japan, Southeast Asia, Korea, Hong Kong and Taiwan.
   The freight information used to create the index is provided by 30 panelists, 15 from liner companies and 15 from shippers and freight forwarders.
   The liner companies are CMA-CGM, COSCO, China Shipping, Hanjin, Shanghai Haihua Shipping Co., Hapag-Lloyd, Jin Jiang Shipping, 'K' Line, Maersk, MOL, NYK Line, OOCL, Pacific International Lines, Sinotrans Shipping and SITC Shipping.
   Shippers-freight forwarder panelists are Orient International Logistics; UBI Logistics (China); JHJ International Transportation Co.; SIPG Logistics Co.; Shanghai Orient Express International Logistics Co.; Shanghai Huaxing International Container Freight Transportation Co.; Shanghai Jinchang Logistics Co.; Shanghai Shenda International Transportation Co.; Shanghai Viewtrans Co.; Shanghai Richhood International Logistics Co.; Shanghai Ever-leading International; Shanghai Asian Development Int'l Trans Pu Dong Co.; Sunshine-Quick Group; COSCO Logistics (Shanghai); and Sinotrans Eastern Co., Ltd.
   The indexes are in dollars per TEU and includes both ocean freight and surcharges, and are based on spot rates rather than long-term contract rates in order to be “more sensitive to spot market tendency and more understandable and straightforward to users.”