Two new ocean freight futures products underpinned by well-known industry indices that have emerged over the last two weeks seek to succeed where past efforts to provide hedging tools to shippers, forwarders, and carriers have failed.
Both the new indices are based on freight rate data from companies — Freightos and Xeneta — that didn’t exist the last time there was an effort to drive usage of ocean freight derivatives. That initiative, pushed primarily by Morgan Stanley and futures broker Freight Investor Services (FIS) in the wake of the global economic crisis in 2010, fell flat due to a lack of interest from both container lines and shippers. FIS is also involved in the FBX-based futures option.
Container lines didn’t want to participate as they saw derivatives devaluing their business in a high-capital expenditure, low-margin industry, while shippers largely didn’t see value in hedging against rate volatility when ocean freight costs were relatively low.
Meanwhile, Xeneta, a provider of rate benchmarking for shippers and forwarders, earlier this month partnered with financial index provider Compass Financial Technologies to provide a freight-all-kinds (FAK) index based on short-term ocean contracts. Xeneta said in a Dec. 9 statement that its index with Compass, called XSI-C, more accurately reflects what shippers pay for ocean freight.
“Many legacy indices do not reflect the large-scale trades made by some of the biggest companies in the world,” Xeneta said in the statement. “They are mainly based on quoted prices, which are disproportionately indicative. Xeneta works with some of the largest shippers in the world, so XSI’s data is not only timely but also relevant.”
XSI-C rates are available for a 40-foot container on eight main trade corridors, calculated and published daily, with rate validities of less than 32 days. The FBX-CME futures contracts are available for a 40-foot container on six lanes, with a launch date of Feb. 28.
Little experience in hedging
“Remember, people who buy freight are, as a rule, not knowledgeable about derivatives and futures,” he wrote. “Another failure point last time is that people actually thought this was going to save them money. [Sellers of futures contracts] will need to explain very carefully, and in big, bold, red letters, what ‘hedge’ means.”
Jensen acknowledged that broader ocean market dynamics have changed, but questioned whether those changes would be enough to stir genuine demand for futures contracts.
“It has been tried before, and failed miserably, but then again, nothing is like it was before,” Jensen wrote. “It is very important to note that you are not buying space or equipment; you are hedging your cost exposure through a financial instrument. This misunderstanding is exactly what caused the last attempt to fail, when prospective buyers inexperienced with futures eventually realized that they would not be buying a physical service.”
Indices developed over the past decade, including the Shanghai Shipping Index, Drewry’s World Container Index, and those built by Xeneta and Freightos, have largely served as benchmarking or price discovery tools as the process of ocean freight procurement has evolved into the digital age. The advent of online quoting tools and, more recently, a push by container lines to secure multi-year contracts with shippers, has meant these indices have a more direct impact on procurement.
Allied to higher overall freight costs, the appetite to use financial instruments as a tool to hedge has grown, Peter Stallion, container broker at FIS, wrote on LinkedIn.
“Suffice to say the development of new physical contract styles that have been focusing on the guarantee of space on a shorter timeframe have made cash-settled futures extremely attractive for both capacity buyers and sellers,” he wrote.
FIS has been conducting “off-exchange” futures contracts for the better part of 2021, the Baltic Exchange said in a Dec. 16 statement. The underlying catalyst has been the dramatic rise in rates, which has changed market participants’ thinking about hedging, Stallion indicated in the statement.
“The volatility that we have seen in the last 18 months has led many participants in search of hedging tools,” he said. “The launch of these cleared contracts opens up the market to all participants, helping drive forward an efficient and universally beneficial market.”