Probe into freight rate derivatives

Federal maritime regulators in the United States have launched an inquiry into the growing use of freight rate derivatives by shipping lines and exporters and importers on the international container shipping trade, reported the South China Morning Post.


The Federal Maritime Commission began the investigation, following the rising use of index-based derivatives for containerised shipments by container lines.


Container shipping derivatives were pioneered over the past two years by organisations such as the Shanghai Shipping Exchange and British consultant Drewry.


They are used in the dry cargo market to hedge against volatile charter rates. Most shipments, especially across the Pacific, are governed by service contracts between the shipping line and exporter or importer.


These contracts lock in exporters or importers to pay a specific rate to container lines such as Orient Overseas Container Line or Cosco Container Lines to move an agreed volume of containers.


But the global financial crisis coupled with a drop in consumer demand and increased competition has led to increased volatility in rates.


As a result, container lines and cargo owners are moving towards using a flexible charter rate within their service contracts based on an index of charter rates.


Figures from the Shanghai Shipping Exchange show the spot rate to ship a 20-foot container from Shanghai to Europe fell to US$900 at the end of last month against $1,650 in September last year.


Similarly, rates to send a 40-foot container from Shanghai to the US West Coast dropped to about $1,600 against $2,400 in the period.


There have been concerns about how commercially sensitive information given to the Shanghai Shipping Exchange by container lines is used. There have also been worries that the Exchange's Shanghai Containerised Freight Index only covers part of the container trade.


One senior shipping executive said: "It is compiled based on container rates from Shanghai to Europe and the US, not shipments into Shanghai. Neither does it cover other mainland ports.


"While perhaps providing a useful hedge, the index is focused on spot rates when the majority of cargo is shipped against long-term contracts. It is also based on a single 20- or 40-foot container and not volume shipments. Therefore it can be slightly misleading."
(Source:http://www.cargonewsasia.com)