So who is likely to use the new contract? Well there are three main user groups who may be interested. The weekly spot assessments are based on a general cargo container and include surcharges related to the “Vessel” side of the transaction – BAF/CAF/PSS/WRS etc and exclude costs related to the “Shore” side – THC, South China Origin Surcharge etc. To begin with, only the four principal routes will be used to set the swaps. The SCFI is published by the Shanghai Shipping Exchange and uses a panel system of Carriers and Non-Carriers (NVOCC’s/Forwarders/Shippers) to provide weekly spot assessments in US$ per TEU/FEU from Shanghai to eventually 15 major trade destinations – the four principle routes being to Northern Europe, the Mediterranean, US West Coast and US East Coast as well as a number of other trade-lanes including the intra-Asia trades. The swap is priced in US$ per TEU/FEU and settled against a freight Index, the SCFI. Simply put, the new Container Freight Swap Agreement CFSA is a forward dated swap allowing users to hedge against volatility in freight rates by off-setting a physical position (a movement of goods by container) against a paper one (the swap agreement) and thereby lock in a guaranteed freight cost. That prompted shippers and producers to use derivatives to hedge against rate volatility such that now forward freight agreements are worth 40% of the physical market. Some 140 million containers now carry around half the world’s seaborne trade as the graph shows, and it should be said the dry-bulk market was also tiny ten years ago before Chinese demand made rates take off. Although tiny at the moment, Alex Gray of Clarksons believes, container derivatives may be worth 5-10% of the physical market by the end of 2011. Since then, two other London-based brokers, ICAP and Freight Investor Services, have also started to offer derivatives products. An Economist article reports that Clarksons, the world’s biggest ship broker, who pioneered derivatives for dry-bulk cargoes like iron ore and coal in the early 1990s, made its first container-derivative trade in January of this year. Is nothing safe from being made into a financial instrument? Well it seems not in the business world. Futures Market for Container Shipping Industry
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