Are container freight derivatives the solution to the continuing problem of excessive freight rates volatility or are they a casino, 'as reliable as rolling a dice'?
Shippers' Voice is encouraging shippers, freight forwarders, carriers and others to enter the debate and has published on its website a white paper 'Container Freight Derivatives Helping Shippers Manage Risk'.
"One of the greatest problems for shippers is determining an accurate budget forecast for the cost of ocean freight transport," says Andrew Traill, Managing Partner, Shippers' Voice. "Promised rates are valid for only a month or two, a plethora of surcharges are added seemingly at will, and, even if rates are adhered to, shipping lines will simply leave that cargo on the dock and select the highest-paying cargo to carry."
He does not dispute that shipping lines need to operate at a profit and that they too are subject to significant cost volatility, especially related to fuel. "But that is simply all the more reason why using a system such as container freight derivatives should be seriously discussed for the sake of both shippers and shipping lines."
There are many misunderstandings about container freight derivative contracts and the White Paper is designed to help explain the concept and consider the pros and cons, when and where it works and when and where it doesn't.
"Many people do not realise that the derivatives contracts exist completely separately from standard service contracts for the shipment of containers," explains Dr Traill. "Derivatives contracts are a 'paper' market only. They are not a contract for physical delivery of vessel space or cargo."
So the derivative contract does not affect which shipping line a shipper (exporter, importer, manufacturer, wholesaler) chooses or what rate the shipping line receives. Contracts in the 'paper' market do not result in physical delivery of transport; nor do they directly influence the contract unless explicitly agreed by the contracting parties.
"There is a strong argument to suggest that hedging your rates can allow you to build contracts with more emphasis on service than rates," says Dr Traill.
"It is quite a complicated subject for people not used to working with these financial instruments, so we are helping explain the concept so that all those potentially involved can understand exactly how it works."
About 40% of dry bulk market works through derivatives, so many people ask why not use it for containerised traffic?
The white paper, written in conjunction with Freight Investor Services Ltd, is available now (Link to paper). Shippers' Voice encourages shippers and suppliers and anyone with an interest in reducing the volatility of freight rates to read it and make comments.
"We want to encourage an open discussion which will contribute to the on-going debate about container freight derivatives," says Dr Traill.