Not Logged In, Login,

Wednesday, October 17, 2018


Are freight futures catching on at last?

Simon Toyne from Hess Energy Trading Company told delegates at this week’s Tanker Operator Conference in London that in the last 12 months the traded volume of Freight Future Agreements has increased 500% across the board with oil traders, oil majors and financial institutions joining in. These new players will allow development to continue by increasing the liquidity of the market.

How much can they develop? While paper oil trades represent ten times the physical volumes traded, paper freight trades right now represent only 10% of tanker shipping. So there is room for growth. “In fact, growth in FFAs will astonish you,” said Toyne bullishly.

Pierre Aury, former Head of Freight trading for Enron in London and now managing director of Clarkson Capital, was on hand at the same conference to extol the virtues of a new futures market – second-hand tankers. Forward Ship Value Agreements (FOSVAs) allow players to buy as little as a 5% share in a notional vessel, each vessel being split into 20 units.

Four five-year-old ship types are available to trade: double-hulled VLCC, double-hulled aframax, capsize bulk carrier, panamax bulk carrier. Ten S&P brokers make up the panel, which meets twice a month to assess current values rather than simply using ‘last done’. “This (price assessment) is an art, not a science,” says Aury. “It’s about creating trust that the result is not manipulated.” Settlement is made against the average of the six indices during the quarter of settlement.

Is it speculation? “Actually buying a (physical) ship is sheer speculation,” says Aury. Going the paper route allows one to take a position at any moment on the time line, whereas physical S&P only allows intervention on prompt dates (i.e. a second-hand purchase) or in 2007/8 (i.e. a newbuilding).

However, London-based shipping accountant and business consultant Moore Stephens sounds a note of caution and says that the freight futures market “remains as yet immature and illiquid” and that “shipowners should enter it with care.

MS partner David Anstis points to a new dimension in today’s shipping markets with freight derivatives as well as the freight markets themselves booming together for the first time – some brokers are reporting that freight futures have recently been turning over as much in a month as they used to in a year. “As a result, a lot of owners and charterers are seeing big physical gains and losses in the freight markets magnified by paper trading .... and a number of well-known owners and charterers are thought to have massive losses in futures.”

How come? Because “the freight derivatives market is very illiquid and, when the real market moves suddenly and quickly, parties holding paper can find themselves locked into either major gains or major losses.”

Reflections from London this week and New York last week …

A handful of reflections from the Tanker Operator, 2nd Annual London Conference and the New York DNV Classification Society Forum  …  the image story from the industry stakeholders in 2004.

  • “When the light shines on us we cast dark shadows. And shadows are followers and not leaders”.
  • “We are an invisible industry.  We need to make the connections visible”. 
  • “Some stakeholders have selfish missions but we all have common goals”.
  • “Shipping is considered a high risk investment”.
  • “With flagging out and subsidies we are looked upon as a cheap industry”
  • “We have a reputation for lack of accountability and opaqueness’”.
  • “Within the industry blame is always cast at others”.
  • “We need to oppose excessive liabilities and blame culture. Promote cohesion in the industry”.
  • “There is a lack of awareness of the importance of shipping in everyday life”
  • “More effort is needed to promote shipping as the trading highway of the world”
  • “It is not the industry that creates the bad image. It is the ship that creates the bad image”.
  • “The overall image of the tanker industry is formed of a the cumulative impacts of perception and interpretations of the performance of the different stakeholders”.
  • “The industry needs to be able to demonstrate that it is in control of its risk issues”.
  • “We need to educate the public about the ships and the difficult and hostile environment the ship has to operate in”.
  • “It is the ship that is the focal point of both the negatives and positives”.
  • “What we have to do is to improve the image of the ship.  Tell people what it does.  Explain the working environment onboard”.
  • “We will never achieve zero accidents.  We must acknowledge that we will always be dealing with the aftermath of an incident”.
  • “One of the goal-based standards that we should set ourselves is to attract the best and the brightest to the industry”.
  • “Young people need to be attracted in the industry. We have a poor attraction for jobs”.
  • “Too much energy is expended arguing amongst ourselves and not enough on telling the outside world about the role of the tanker”.
  • “Our mindset remains within national terms on what is an international shipping issue”.
  • “We need strategic thinking, expedient, progressive and cost efficient initiatives”.  
  • “Image building is a long-term process and as such frequently receives less attention from the participants than short-term targets”.
  • “We need an agenda for change”.
  • “We need direction for the industry”.
  • “Why do we spend time talking about image? Because we all want to contribute to making a difference to what will happen in the future”.
  • “Stand up, do the right thing and be seen as doing the right thing”.
  • “Spend cash, sort out class and flag and love your regulator”
  • “Engage with the public and celebrate success”
  • “Shipping is a service”.
  • “It’s all about mindset”.

Contact: Sally Woulfe