Freight futures plan provokes split
Shippers call into question the transparency of a freight rate index as proposed by the container lines, writes Janet Porter

Container lines and shipper representatives are split on the merits of a futures market that would enable users to hedge against freight rate swings.

But some experts doubt if there is sufficient transparency on freight rates to ever establish derivatives trading.

Ken Soerensen, executive director of the European Liner Affairs Association, believes it would be helpful for the container industry to have a hedging tool.

On the other hand, Dr. Andrew Traill of the Freight Transport Association, is more skeptical about the concept.

And whether a workable market could ever be devised is questionable given the confidential nature of freight rate negotiations, Howe Robinson’s director of research Paul Dowell warns.

The differences emerged at Containerisation International’s Freight UK 2005 conference in Liverpool at a time when the possibility of establishing derivatives trading in both freight and charter rates is being studied.

The ELAA has put forward the idea of creating a freight rate index in its proposal to the European Commission on the future regulation of liner shipping. The association, which represents the world’s biggest container shipping lines, thinks a price index would provide a useful tool that could be used as the basis for a forward market for both hedging and speculative purposes.

But while acknowledging that shippers do hedge against currency and fuel price fluctuations, Dr Traill said cargo interests would be wary of using a price index since it could develop from a freight rate benchmark to a starting point for freight rate negotiations. There would also be concern about using an index published by carriers, he added.

From a broker’s point of view, the biggest problem would be the lack of transparency in this sector of the market and how to form an independent industry panel and settlements mechanism.

Mr Dowell said the increasing length of fixtures in the containership charter market also made it more difficult to establish a charter rate futures market which would need a shorter time horizon to work effectively.

Although a number of shipbrokers are exploring the idea of setting up derivatives markets for the container trades, Howe Robinson is not participating in the initiative.

Elsewhere, opinion is also mixed.

Professor Hercules Haralambides, director of the maritime economics and logistics department at Rotterdam’s Erasmus University, told Lloyd’s List he thought the ability to hedge against future freight rate or charter rate fluctuations would be an asset in the liner trades. "...unlike other sectors of shipping, no-one wants volatility in this business...” said Haralambides.

But the chartering director of a large Hamburg group expressed doubts about whether German owners would take readily to the idea since “it’s a difficult concept to grasp” for those brought up in shipping rather than banking or trading.

Separately, Mr Soerensen and Dr Traill again clashed on the controversial issue of container lines’ antitrust immunity.

While the ELAA is lobbying hard for continued exemption from EU competition law so that carriers can discuss supply and demand and be able to collect data for forecasting purposes, Dr. Traill said that this could be done without any special legal concessions.

European shippers are adamant that they want no replacement for Regulation 4056/86 that contains the exemption, he told the Liverpool conference.

There are “numerous sources of information” to analyse market trends, and make investment decisions, Dr. Traill claimed.

But these alternative sources usually obtain their raw data from carriers, and that would be lost if the conference system was outlawed in Europe, Mr Soerensen warned.

Source: Lloyd's List