Freight index growth
Zhang Ye, president of the Shanghai Shipping Exchange (SSE), said Thursday that his institution is seeking permission from Chinese authorities to open up its electronic platform for trading container freight rate derivatives to shippers and carriers around the world.
The exchange launched the platform in June 28, and has achieved daily volume of about 100,000 TEUs. It allows shippers and carriers to trade contracts based on where they believe two components of the SSE’s Shanghai Containerized Freight Index (SCFI) will be up to six months in the future. One component tracks the rate of moving a container from Shanghai to the U.S. West Coast; another from Shanghai to Europe.
Zhang said the SSE platform is restricted to the domestic market because of securities regulations, but the exchange is working to open the market up to foreigners.
Mels Boer, a broker with GFI Freight in London, said the SSE platform is currently difficult for many European and U.S. companies that don’t do business in China because it is difficult to get the profits they earn out of China. But he added the SSE success in the derivatives market has been the envy of brokers in London and Singapore, where much smaller volumes of container freight swaps are traded over the counter.
Boer noted that daily volume of derivatives traded on the SSE platform now exceed the physical freight market not just for freight out of Shanghai, but for all of East Asia, that is, Asia excluding India and the Middle East.
SCFI tracks the rate of moving exports containers from Shanghai to 15 world regions. In addition to the SSE’s platform for trading derivatives, swaps based on four components of the SCFI are traded on an over-the-counter basis and cleared in London by LCH Clearnet and in Singapore by SGX.
Those markets have much lower volumes, but Boer said they allow freight to be traded up to three years in the future, and are less restrictive currently to profit-taking European and U.S. companies.
While the SCFI tracks only rates for moving exports from China, Zhang said the SSE is now looking at creating a separate index for imports. That could be potentially useful to shippers of price sensitive commodities from the United States to Asia.
Zhang made his remarks during a joint press conference with Federal Maritime Commission Chairman Richard A. Lidinsky Jr. in Washington where he and a delegation from the SSE have been holding discussions and meetings with members of the shipping industry to publicize the SSE.
The FMC released a proposal on Wednesday for public comment that would amend its rules governing service contracts to make it easier for shippers and carriers — whether vessel operators or non-vessel-operating common carriers — to enter into contracts where rates fluctuate depending on an underlying index such as the SSE’s SCFI or competing indexes created by the Transpacific Stabilization Agreement and an index established by a joint venture of London-based Drewry and the Cleartrade Exchange called the Global Container Rate Index.
While the FMC currently requires indexes used in contracts be widely available in publications or other form, the new regulations would let them be used as long as they are available to the shipper and carrier that have entered into the contract as well as the FMC.
Lidinsky noted before the FMC first met with the SSE in Shanghai last year there was concern by some shippers and carriers about a requirement by the Chinese Ministry of Transport that rate information in confidential contracts be filed with the SSE.
He noted that the SSE has assured the U.S. Maritime Administration that the contract information collected is shared only with the Ministry of Transport and is kept completely separate from the information used to compile the SSE’s freight rate indexes, using separate database systems and separate offices.
The FMC has seen about 50 contracts based on indexes such as SCFI and its competitors.
Lidinsky said the SSE index has been useful in its current study of the European Union’s 2008 decision to end antitrust immunity for liner shipping conferences and that the two agencies are sharing data to encourage compliance in both China and the United States with NVOCC licensing, bonding and filing rules and “work as two agencies to root out corruption and malpractices in the NVOCC community.”
Zhang said the container rate filing can help it identify carriers that are selling freight below cost, but he said so far Chinese authorities have not discovered any below-cost competition.
The exchange also publishes indexes for coastal shipping and has information platforms that can be used for buying and selling ships and hiring.
Zhang noted that while based in Shanghai, the SSE is China’s national shipping exchange for overseas trade. He said there are some other shipping exchanges in other cities, but they are involved in domestic shipping. For example the Congquing Shipping Exchange focuses on the inland barge trade on the Yangze River. — Chris Dupin