Derivatives: Curse or blessing, useful tool or dangerous distraction

REPRESENTATIVES of a major carrier and shipper dismissed freight rate derivatives while a big forwarder and a famous maritime consultant defended them at the recent Containerisation International shipping conference in London.

Nicolas Sartini, senior vice president, CMA CGM Group, said derivatives had little value and were based a questionable data in the Shanghai Containerised Freight Index (SCFI). Agreeing was Jean Louis Cambon, head of the ocean management at Michelin, who said derivatives would lead to market volatility commoditise liner shipping.


Opposing this view were Kerry Logistics UK commercial director Brian Dempsey who found the SCFI a reliable indicator, matching his own price tracking over two years, and Lars Jensen, CEO of Denmark`s SeaIntell Maritime Analysis consultancy, who said freight derivatives had a "collosal" value in hedging against rate volatility.


Agreeing, Mr Dempsey said: "Derivatives have huge potential and I reject claims that they will contribute to the commoditisation of the liner industry."


Said Mr Jensen: "A lot of education is needed, but it is not a question of if, but when and how container lines will enter the [derivatives] market."


Disagreeing, CMA CGM`s Mr Sartini said derivatives are "not demand driven but supply driven, and as a speculative tool can lead to huge levels of volatility".


Mr Sartini also distrusted the Shanghai index: "It is largely based on port-to-port traffic, which does not reflect the complexity in the business and on pricing information from a small group of forwarders in China active in the most volatile part of the industry."


Agreeing, Michelin`s Mr Cambon said: "The SCFI is not a true reflection of industry conditions since it is calculated according to cost, insurance and freight prices that only relate to a small part of the trade."


Mr Cambon also said derivatives would encourage commodisation of shipping services. "Rates would be set by speculative activity rather than through negotiations between ocean carriers and their customers and would therefore not reflect the finer service elements in contracts."


But Kerry`s Mr Dempsey said: "I have plotted our rates for 24 months against SCFI, and while it may not be bang on the dollar, they are very definitely on the trend line."


Mr Dempsey said Hong Kong`s Kerry Logistics moves 60,000 TEU a year on the Asia-Europe trade lane. "It has been incredibly volatile over the past two years with rates as cheap as chips - US$353 per TEU in 2009 and back in July and August nearer to $2,400 per TEU," he said.


"This is a roller coaster ride that no one wants. Cargo owners want predictability and the ability to manage costs and shipping lines a favourable return on investment," said Mr Dempsey.


Agreeing, SeaIntell`s Lars Jensen said: "Brent Crude is a specific type of North Sea oil that makes up a very small proportion of global production, yet the majority of oil futures are settled against it.


"The opportunity for carriers to reduce freight rate exposure through the use of derivatives is colossal and derivatives can be used to mitigate against financial losses when spot rates fall below break even levels," he said.