Freight futures surge as funds seek refuge

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

27 Feb 2008

Freight derivative volumes have soared this year as banks and hedge funds have turned to a market that has not been affected by the credit crunch or economic slowdown. Freight forward contracts, which allow shipowners and operators to lock in prices in advance, grew 150 per cent over the past year as market volatility and a sharp rise in shipping costs created opportunities for speculation and made hedging vital.  Michael Gaylard, strategic director at the Freight Investor Services, one of the market’s leading brokers, said: ''Banks and hedge funds have helped drive this market as they now make up a large slice of the volumes.''Citigroup, Merrill Lynch, Macquarie Bank, Goldman Sachs, Credit Suisse, Lehman Brothers, Morgan Stanley and hedge funds GMI and Akuila Okeanos have set up freight derivatives desks in the past year.Interest in the field has grown as the credit crisis has in effect closed other markets, such as asset-backed securities, forcing banks and funds to look for other ways to make profits.Citigroup, which established its desk in the summer around the height of the credit crisis, said demand from shipowners and investors wanting to use the product for speculation and hedging was a big factor behind its decision to enter the market.According to the Freight Investor Services, the market is now worth $125bn, up from $50bn at the same time in 2007. Banks and hedge funds account for 40 per cent of this value compared with only 15 per cent in the middle of last year. The price of renting a ship to transport raw materials such as iron ore or coal has risen from $30,000 a day in 2004 to more than $100,000 today, although costs have fallen from the highs seen in November.Costs have been driven higher by demand for ships from emerging markets, such as China and India, which need to import raw materials to drive their expanding economies.The market has also become more volatile as bad weather in Asia and Australia has closed ports, while energy shortages in South Africa and infrastructure problems in Russia have led to shipping delays, creating uncertainty over future prices. Bankers and brokers predict the derivatives market will continue expanding at a fast pace, with some forecasting that it will grow larger than the underlying physical market in freight, which is worth $150bn, by the end of the year.