Freight futures lose speculative appeal

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Annika Breidthardt
Freight derivatives are falling out of favour as traditionally conservative ship owners and brokers back out of the sort of speculation on volatile freight rates that has just claimed its highest-profile victim.
Speculative capital has evaporated, and the economic crisis has sapped the bullishness that fuelled activity and led to heavy inflow of money from banks' proprietary desks and institutional investors into commodities up until earlier this year.
"The current fiasco will make more people examine speculating, taking big risks," said Jeffrey Landsberg, a freight options broker at Imarex in Singapore.
"Fewer owners and operators will use FFAs to speculate, it is possible more will use them to hedge, like they were initially intended," he added.
China's Cosco, the country's largest shipping group, this week disclosed nearly 4 billion yuan ($585.3 million) potential losses on its freight hedging, making it the latest Asian firm to suffer from wild swings in derivative prices.
And German ship broker Ernst Russ is exiting the forward freight agreement (FFA) market altogether at the end of the year.
"We feel that the unfavourable market conditions created by the financial crisis will not favour the trading of derivative products," the company said on its website.
"In the future we intend to concentrate on our core areas of shipping," it added.
Trade in freight derivatives, in which a buyer takes a position over where freight rates will stand at a point in the future, has halved as the financial turmoil has dried up access to credit, while underlying rates have plummeted by over 90 percent as demand to ship commodities declines.
"Many FFA participants will have made losses through FFAs but I'm surprised that no company has collapsed yet because of them," said a Singapore-based shipping charterer.
"Some are already pulling out and the rest are just becoming a lot more cautious," he added.
Trading volumes in FFAs, which have been around since the 1980s, ballooned since earlier this decade when increased volatility in the underlying market fuelled demand for risk management, attracting speculators.
Many expected that expansion would continue, as the credit crisis initially actually helped FFAs by attracting more banks and hedge funds who went fishing for profits in fresh markets.
However, trade volumes on Norway's Imarex NOS, an ocean freight derivatives exchange, which clears about 50 percent of "wet" FFAs and 10 percent of the dry bulk FFA market, almost halved in November to 32,114 lots traded, down from 60,487 in October and down year on year as well.
Nominal trade value last month plummetted to $467 million from $1.2 billion in October. In September, Imarex clocked a record $2.1 billion in nominal trade value.
There is little official data for FFA volumes as the bulk of trades are done over the counter.
--Reuters