Swap market

making slow
but steady
progress
Despite their resistance
to derivative markets,
some container lines are
starting to show interest

STEVE MATTHEWS

DEVELOPMENT of the container freight

swap market is proceeding positively,
though slowly, and continues to be
hampered by controversy about the
attitude of carriers.
Publicly, container lines have
expressed criticisms of container freight
swaps and their value. However, there
are indications that despite their public
scepticism, some container lines are
increasingly taking part in transactions
in private.
Speaking at last weeks Marine Money
London Ship Finance Forum, Arthur
Worsley, senior broker at Freight Investor
Services, said: Although the container
market is relatively modern compared
with other shipping sectors, it is still very
conservative. One of the problems is fear of
the unknown, but we are trying to educate
the market.
He said container lines were price
setters and there was some resistance by
them because one of the features of
derivative markets was price discovery.
There was a challenge in trying to explain
to box lines the upsides of using swaps.
Lars Jensen, director of marketing and
IT at recent container line entrant The
Containership Company, said: We are
not among those saying this is a bad thing,
but we understand where the lines are
coming from.

The liner trade is based on

relationships with shippers and on
contracts, so why do they need derivatives?
There is still a lot of opposition to using
derivatives by lines, though activity under
the surface suggests otherwise.
He added that in reality, all participants
in the physical market were aware of what
the market price was in each sector. There
was thus a question of whether the index
and derivatives trading would actually aid
price discovery.
He pointed out that liner contracts were
an illusion because if the freight price
dropped, shippers would try and
usually succeed in renegotiating rates. If
the price spikes, lines would try to recoup
the difference through surcharges. This
has been going on for decades.
The nature of competition in the liner
sector is a key issue for derivatives.
Although it is two years since rate-setting
liner conferences were outlawed in
Europe, the underlying culture has not
entirely disappeared.
Pierre Aury, partner at broker RS

FORWARD CURVES SHANGHAI TO

NORTHWEST EUROPE
Container freight (mid-point)
$ per teu

1,600
1,550
1,500
1,450
1,400
1,350
1,300

Jan
11

Feb
11

1Q
11

2Q
11

3Q
11

4Q
11

December 17, 2010 January 7, 2011

January 24, 2011
Source: FIS

Despite expressing public scepticism about container freight swaps, some lines are increasingly taking part in transactions in private.

Platou, explained to Lloyds List: Liner

operations are still basically a cartel, with
a lack of transparency. This means they
are not acting genuinely independently
with independent risk, so they are not
interested in participating.
This is causing frustration on the part
of some major shippers who are keen to
take part and are looking for counterparties. Lines are not playing ball.
Michael Rainsford, container freight
trader at Morgan Stanley Commodities,
related that despite its problems, the
development of the container freight swap
market was similar to the experience of
other freight derivatives. He confirmed
increasing interest from major shippers.
Another outstanding issue is trust in
the Shanghai Containerised Freight Index,
against which trades are settled. Mr Jensen
said there was still an issue about the
accuracy of the SCFI in reflecting
container movements and rates.
In reality, rates will differ between
shippers, though all will be subject to the
same pressures and movements. However,
hedging would reduce the likelihood of
lines and shippers breaking contracts.
Mr Rainsford said one of the first things
Morgan Stanley did was to understand
and trust the SCFI. We have been in
communication with the Shanghai
Shipping Exchange and seen
improvements in the way they conduct the
monthly index. The Container Freight
Derivatives Association meets monthly
and also communicates with the SSE.
The index was recently independently
audited and it is becoming more
transparent. A key issue is education and
building trust in the index.
Speaking to Lloyds List, Mr Rainsford
said the container freight market was
likely to remain volatile and risks for the

first half of this year were generally on the

downside. Swaps provide a hedge for that
volatility and provide a useful tool for
container lines.
He said current rates on the index
pointed to approximately a breakeven
level for lines, with downside risks going
forward. Otherwise there was a prospect of
container lines incurring losses in 2011.
Mr Rainsford said todays market was
not liquid enough to project the forward
curve very far ahead. It currently extends
only about 12 months forward. I hope that
as volumes increase, it will be extended.
Mr Worsley said it was relatively easy to
add new periods and new routes if there
was demand and liquidity to justify them.
Mr Rainsford described the carriers
attitude towards container freight swaps as
somewhere between neutral and negative,
but we see significant and growing
interest to start using it for hedging.
He suggested carriers that regard
hedging as a competitive opportunity were
not going to hold back. If you have a
good idea of future rate levels, then you
can lock it in for one month or more. But it
is natural for carriers not to say what they
are doing.
He said there were a number of carriers
that had participated to varying degrees.
This is a big change for the container
market and carriers need to be ready
before embarking on hedging
programmes, such as having a sales force
to sell index-linked contracts. There are
potentially large shippers willing to do
deals. It is a matter of who goes first, Mr
Rainsford said.
But it is a crucial feature that offers are
like-for-like swaps with the physical
market.
He said although transaction volumes
were still relatively few, the numbers were

Container freight swaps

Hedge against price movements in
Asian container export markets
Settled against weekly Shanghai
Containerised Freight Index compiled
by the Shanghai Shipping Exchange
SCFI covers 15 export routes from Asia
Four routes are cleared by
LCH.Clearnet Asia to US west coast,
US east coast, northwest Europe and
Mediterranean
Lot sizes are one teu for Europe trades
and one feu for US trades, priced in
dollars

increasing and importantly, the size of

deals were getting bigger as players
became more comfortable.
Michael Heath, a container derivatives
broker at FIS, confirmed container swap
transactions were increasing, but were
still small in number. He told Lloyds List
that although he could not give definitive
figures, there had been fewer than 100
trades done so far. He said early trades
were very small in terms of teu, but deal
sizes were increasing and were now
typically in the 100 teu-300 teu range.
Mr Rainsford suggested that the market
was not far away from taking the next
stage of offering options in addition to the
current swaps. Carriers see benefits of
price floors and ceilings. But for options,
volumes need to be higher than they are at
present.
He added that ship finance providers
would be more attracted to the sector if
companies had some form of risk
management in place, such as using
container freight swaps. n
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