complete guide to container freight derivatives

Complete Guide to Container Freight Derivatives

Clarkson Securities Limited

Contents

Section 1 – Introduction to Container Fundamentals

Section 2 – Introduction to Derivatives

Section 3 – Introduction to the SCFI

Section 4 – Introduction to Clearing

Section 5 – Introduction to Swaps

Section 6 – Introduction to Options

Section 7 – Introduction to Hedging with Swaps

Section 8 – Introduction to Index-Linked Service Contracts

Section 9 – Introduction to Hedging an Index-Linked Service Contract

.

Section 1

An Introduction to Container Fundamentals


World Container Trade

0

20

40

60

80

100

120

140

160

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(e)

2010

(e)

2011

(f)

Source : Clarkson Research Services

m TEU

-10%

-5%

0%

5%

10%

15%

20%growth

Trade Growth %

Global Box Trade 1996-2010● The period 1997-2008 saw average growth

in container trade of 9% per annum, with 6 years of consecutive double-digit growth 2002-2007.

● Growth slowed in 2008 to 4.3% from 11.4% in 2007 following the impact of unpredicted changes in world economic and financial conditions.

● With the global economic crisis biting hard, 2009 witnessed an estimated 9.0% contraction in global container trade to 124m TEU.

● Recovery in volumes on a wide range of trades in 2010 led to estimated growth in global terms of more than 12.9% in the full year to 140m TEU, with current projection of 9.2% growth in 2011.

Global Demand Projection

Mainline Trades; through the years

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan

-06

Ap

r-06

Jul-0

6

Oct

-06

Jan

-07

Ap

r-07

Jul-0

7

Oct

-07

Jan

-08

Ap

r-08

Jul-0

8

Oct

-08

Jan

-09

Ap

r-09

Jul-0

9

Oct

-09

Jan

-10

Ap

r-10

Jul-1

0

Oct

-10

Jan

-11

Source : CRSL, PIERS, FEFC, ELAA, CTS

% change yoy

Asia - US E/B container trade Asia-Eur W/B container trade

• 16.3 million TEU of container capable capacity on ‘liner’ vessels at the start of 2011.

• 14.1 million TEU of this provided by fully cellular containerships.

• Today’s fleet dominated by fully cellular containership capacity; other container capable supply playing a diminishing role.

• Container capacity on order also dominated by fully cellular containership capacity.

Global Container Capacity

Supply; Container Capable Capacity

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

m TEU, start year

OtherMPPContainership

Containership Orderbook

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2011 2012 2013 2014+


m TEU

0

50

100

150

200

250no.100-999 TEU

1000-2999 TEU3000-7999 TEU8000+ TEUNo. of ships

Containership Orderbook● The total containership orderbook that remains at start of June 2011 is still large, with 4.1 million TEU on order -equivalent to 27.7% of existing containership capacity – the 10,000+ TEU orderbook numbers 144 vessels of a combined 1.9m TEU, equivalent to 165% of the 10,000+ TEU fleet.

● Includes 1.1 million TEU scheduled for delivery in the remainder of 2011 and 1.5 million TEU for 2012 delivery.

● However, the containership orderbookhas been subject to significant ‘erosion’ as well as delivery slippage.

Carrier Capacities; growth June 2010 – June 2011

Source: ASX

● May deliveries: approx 130,000 TEU● Jan – Jun 11: approx 625,000 TEU

● Average size to date: just under 7,000 TEU

● Average size 2010: approx 5,250 TEU

Orderbook Imbalance

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

100-999 TEU 1000-2999 TEU 3000-7999 TEU 8000+ TEU


Containership Orderbook As % Of Existing Fleet

251 ships

2.8m TEU

Slippage & Cancellation; Overview

Scheduled vs Actual Deliveries 2009-10 ● Graph shows scheduled vs actual deliveries.

● ‘Non-delivery’ of 45% in 2009.

● Final figures for 2010 estimate at around 40%.

● This factor has made a huge difference to the supply side of the container shipping industry compared with original expectations.

● Ytd 2011 non-delivery currently running at c.30%.

0

500

1000

1500

2000

2500

2009 2010 2011 ytd

000 TEUScheduled Actual

Cascading Trends

0%

10%

20%

30%

40%

50%

60%

70%

80%Ja

n-06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11


8k+ TEU share of Transpac.

3-8k TEU share of North-South

1-3k TEU share of Intra-Regional

% of TEU Deployed

How Much Slow Steaming Today?

0

2

4

6

8

10

12

14

16

18

20

stan

dar

d

+1 s

hip

+2 s

hip

s

+3 s

hip

s

no. of services

Far East-Europe Services, Q1 2011 Transpacific Services, Q1 2011

02468

10121416182022242628

stan

dar

d

+1 s

hip

+2 s

hip

s

+3 s

hip

s

no. of services

traditional service of 8 ships traditional USWC service of 5 ships; USEC service 8 ships

Idle Boxship Capacity

● Having built up dramatically in 2008 and 2009, in 2010 the majority of the ‘idle’fleet was returned to service.

● Idle capacity fell from near to 600 ships / 1.51 m TEU to around 150 ships in December 2010, moving from 11% to less than 3% of the fleet.

● Currently less than 1% of the fleet remains idle.

● As of June 2011 only 63 ships/80,000 TEU are idling - all less than 3,300 TEU capacity 0

50

100

150

200

250

300

350

400

450

500

550

600

Oct

-08

Dec

-08

Feb

-09

Mar

-09

Apr

-09

Jun-

09A

ug-0

9S

ep-0

9N

ov-0

9D

ec-0

9F

eb-1

0M

ar-1

0A

pr-1

0Ju

n-10

Jul-1

0S

ep-1

0N

ov-1

0Ja

n-11

Feb

-11

Source : Clarkson Research/AXS

no ships

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6m.TEU

Idle Containership Development

Million TEU idle

Operator

no. of shipsCharter owner

Section 2

An introduction to derivatives and hedging


Derivatives; a brief history

The use of derivatives has been around for centuries with its origins found in commodities, farming and agriculture.

Futures/Forwards developed around producers of commodities and goods looking to hedge prices for their wares and remove their exposure to the volatility associated with

supply and demand market characteristics.

Trading became more sophisticated with the introduction of exchanges, in 1710 the Dojima Rice Exchange transformed Japan bringing the conversion from rice to coin as currency. Later, in 1848 the Chicago Board of Trade was established and became the

world’s oldest Futures and Options Exchange.

The later 20th and 21st Century saw enormous growth in the derivatives markets worldwide with a multitude of products and markets that are traded through exchanges,

dealers, brokers, screens and online.

Derivative; A security whose price is dependent upon or derived from one or more underlying assets

“Derivative” is a generic term for a number of different contracts, the three most common being:

• Futures/Forwards – An agreement to buy or sell a specified quantity, at a specified future date, at a price agreed today. The difference being that futures are exchange traded, whilst forwards are traded directly between two parties (OTC Over the Counter,) with more flexibility.

• Options – Gives the Buyer (Holder) the right but not the obligation, to buy or sell an asset at a specified time in the future. The Holder pays the Seller (Writer,) a premium for having this option (right.)

• Swaps – The exchange of floating for fixed cashflows at a specified time in the future, at a price agreed today, based on the value of the underlying,

Derivatives; the Long and the Short of it

When talking about our relationship with the underlying asset it is defined as either –

Long: we own the underlying asset, and our risk is of prices falling

Short: we want to own the underlying asset, and our risk is of prices rising

The position we take in derivatives to hedge is the opposite (in nearly all cases) of the one held in the underlying asset

Long underlying (Carrier has capacity) = Short hedge (sells to get offset if prices fall)

Short underlying (3PL wants capacity) = Long hedge (buys to get offset if prices rise)

Volatility; tending to be subject to large price fluctuations

The Container Freight Market is subject to volatility, and in recent years this has been on an unprecedented scale.

According to SCFI Data, the USD Per TEU rate on the EUR Route rose from $353 in March 2009 to $2,164 in March 2010, an increase of 613%.

Since March 2010 it has fallen from $2,164 to $1,342 in January 2011, a decrease of 62%

Hedging; a strategy designed to offset or reduce the effect of price fluctuations in an asset.

Price

Loss

Pro

fit

10090 110

10

10

A farmer (long underlying) sows his wheat crop, after production costs his break-even is $100/ton.

Any price above $100/ton will generate a profit and any price below $100/ton will generate a loss.

He is currently at the mercy of the market for the eventual sale price of his wheat.


Price

Loss

Pro

fit

10090 110

10

10

To hedge his exposure to wheat prices the farmer looks to the futures market .

The Farmer (long underlying) can sell (short) wheat futures at $110/ton.

Any price below $110/ton will generate a profit and any price above $110/ton will generate a loss.


Price

Loss

Pro

fit

10090 110

10

10

Combining his long underlying @ $100/ton and short future position @ $110/ton, shows he has secured a $10/ton profit on the wheat he produces.

If the price of wheat falls to $90/ton, he will lose $10/ton on his production cost but gain $20/ton on his future position, keeping his net profit of $10/ton.

If the price of wheat rises to $120/ton, he will make $20 on his production cost and lose $10/ton on his future position, keeping his net profit of $10/ton.

Section 3

The Shanghai Containerised Freight Index


The SCFI is a weekly index produced by the Shanghai Shipping Exchange (SSE) covering covers 15 major tradelanes ex Shanghai, each of which is given a weighting in

order to calculate the Comprehensive Index.

Each route is given a USD rate per TEU or FEU depending on the particular trade.

It is representative of the current CY/CY cost of exporting one TEU (or FEU) of general cargo and includes: OFR, BAF/FAF, EBS/EBA, CAF/YAS, PSS, WRS, PCS, SCS/SCF,

PTF/PCC.

The Ocean Freight (OFR) portion will always be prepaid. The Surcharges may be prepaid or collect.

SCFI; Shanghai Containerised Freight Index

15 route assessments given in USD per box format.

The unique Supply and Demand panel structure gives the SCFI balance and neutrality.

It is independently audited by KPMG.

It is in essence a spot market barometer allowing the physical market to benchmark their contracts and assess the market potential.

0

500

1000

1500

2000

2500

3000

Mar-09

Apr-09

May-09

Jul-09

Aug-09

Sep-0

9Oct-0

9Nov-09Dec

-09

Feb-10

Mar-10

Apr-10

Jun-1

0Jul-

10Aug

-10

Sep-1

0Oct-1

0Nov-10Dec

-10

FE-Eur, $/TEU

Transpac., $/FEU

FE-S.Am, $/TEU

SCFI; Shanghai Containerised Freight Index

SCFI Panellists; Carriers

CMA-CGM

COSCO

CSCL

Hanjin

HASCO

Hapag Lloyd

Jin Jiang

SITC

K-Line

Maersk Line

MOL

NYK

OOCL

PIL

Sinotrans

SCFI Panellists; Non-Carriers

Orient Intl Logistics

UBI Logistics

JHJ Intl Transport

SIPG Logistics Co

Orient Express Intl

Huaxing Intl

Shanghai Jinchang

Shangtex

Viewtrans

Richhood Intl

Ever-leading Intl

ADP Logistics

Sunshine-Quick Group

COSCO Logistics

Sinotrans Eastern Co Ltd

SCFI; Why do we need an index?

In an opaque market a neutral index allows Shippers, 3PLs and Carriers to benchmark their performance so even if you are not shipping ‘spot’, the SCFI can show you how your

contract rate compares.

The spot market can give a valuable indication of where rates might be headed –particularly when combined with forward freight rates from ClarksonBoxClever.

An index also allows the development of Index-Linked Service Contracts (ILSCs), where freight rates are pegged against the SCFI.

Section 4

An introduction to clearing


The Clearing House

Clearing houses perform a vital role within derivatives markets, both for exchange and OTC traded products. Acting as a central counterparty to trades, the clearing house

assumes the counterparty risk for trades and their settlement.

Trading on a cleared basis has become much more prevalent in freight markets following the financial crisis and the effects which it had on the drybulk market. Today sees the

overwhelming majority of freight derivative trading take place on a cleared bas

Minimising Risk

The clearing house, acting as a central counterparty, guarantees the settlement of traded positions in the event of default by one of the parties to the trade.

It uses a system of margining requirements, position offsetting/netting and contains sufficient residual capital so that it can meet its obligations in the event of a default or

market crash.

The two types of Margin are –

Depository Margin – An amount of cash placed with the clearing house when a trade is executed, based on the nominal value of the trade which is refundable on settlement.

Variation Margin – This is cash which is either paid to or received from the clearing house on a daily basis. Your trading position is marked against the current market to determine

if it is in profit or loss and accordingly you will either pay or receive cash. In this way settlement is also effected during the active tenor of your trade.

LCH Clearnet and SGX AsiaClear

There are two clearing houses which offer clearing for CFSA contracts, LCH Clearnet in London and SGX AsiaClear in Singapore.

www.lchclearnet.com

www.sgx.com

How to get cleared?

In order to place trades with a clearing house it is necessary to open an account with General Clearing Member (GCM).

The GCM is a financial institution which manages and administers margin requirements for its clients.

Each clearing house has a specified list of GCMs which are authorised to enter their clients business into the clearing house and these are available on the clearing houses

webpage.

Section 5

An introduction to swaps


Swaps; the exchange of cash-flows

A swap contract provides buyers and sellers the opportunity to exchange fixed for floating cash flows.

In Container Freight Swap Agreements (CFSAs) the Buyer and Seller agree a Contract Price which is fixed and receive a floating price through the settlement of the contract.

They then offset the cash received or paid through the settlement against their physical freight position to level up their overall profit and loss.

The bottom line; back to basics




The position we take in options to hedge is the opposite of the one held in the underlying asset

Long underlying = Short hedge (sells to get offset if prices fall)

Short underlying = Long hedge (buys to get offset if prices rise)

The mechanics; what makes a Container Freight Swap Agreement (CFSA)

Contact Price: The price agreed between Buyer and Seller. The Buyer believes it will be above this value, while the seller believes it will be below.

Route: CFSAs are traded against the Routes which the SCFI Index reports freight data on.

Contract Period: The period over which the CFSA is settled, with the minimum being one month.

Volume: CFSAs are traded for a specified volume of TEU or FEU per Month.

Settlement: CFSAs are settled against the monthly average of the relevant SCFI Route.

Swaps; how it works

To hedge against freight rates rising, we can buy a CFSA contract, we will use the gain made on our swap contract to offset the higher physical spot price of freight. With an agreed contract price of $1,650/TEU we can see the profit/loss below.

Price

Loss

Pro

fit

16001550 1650

50

50

1700

We can see that the maximum theoretical loss this position can sustain, is $1,650 (if it fell to 0.) The maximum theoretical profit this position can make is unlimited.

The settlement works such that, for every $1 decline, the position will lose $1, and for every $1 rise, the position will make $1.

Swaps; how it works

To hedge against freight rates falling, we can sell a CFSA contract, we will use the gain made on our swap contract to offset the decreased revenue from the lower spot price of freight. With an agreed contract price of $1,650/TEU we can see the profit/loss below.

Price

Loss

Pro

fit

16001550 1650

50

50

1700

We can see that the maximum theoretical loss this position can sustain is unlimited. The maximum theoretical profit this position can make is $1,650 (if it fell to 0.)

The settlement works such that, for every $1 decline the position will make $1, and for every $1 rise, the position will lose $1.

.

Section 6

An introduction to options


Options; the right but not the obligation

An option provides the buyer with the right, but not the obligation, to buy or sell an asset or product when certain criteria and market conditions have been met.

There is a price to pay for having this right, the premium, which is payable to the seller that grants the option.

Options are very much like insurance, a premium is paid, so that should an event occur, the buyer of the policy is re-compensated by the seller.

The bottom line; back to basics




The position we take in options to hedge is the opposite of the one held in the underlying asset

Long underlying = Short hedge (sells to get offset if prices fall)

Short underlying = Long hedge (buys to get offset if prices rise)

Calls and Puts; the two types of option

Some may wish to protect again the market rising, whilst others may wish to protect against the market falling.

A quick recap: Buyers benefit from a rising market / Sellers benefit from a falling market.

Call Options: Gives the buyer the right, but not the obligation to buy an asset.

Put Options: Gives the buyer the right, but not the obligation to sell an asset.

The mechanics; what makes an option

Container Freight options share many similarities with a CFSA contract such as Volume, Route, Settlement. Below however are the characteristics which make them different.

Strike Price: The price agreed between Buyer and Seller, upon the assets value reaching this point, the option can be exercised (depending on the exercise conditions, see below.)

Exercise Type: Defines when, and how the Option is exercisable. Container Freight options are “Asian” – the strike price is determined using an average of the asset value over the contracted period, with the Option being automatically exercised if it settles above (Call Option) or below (Put Options) the strike price.

Premium: The premium is the price payable by the buyer, to the seller. The premium is calculated using a pricing model. In Container Freight Options this takes the form of a USD per TEU/FEU format i.e $15 per TEU.

Options; the benefits

Flexibility – By being able to choose which strike price is best fitted to manage each risk accordingly, there are opportunities that can be gained which are not available in the

swaps market.

Risk – As a buyer of options, the only capital placed at risk is the premium that is paid to the seller, should the strike price not be reached and your option remain un-exercised,

then the most you can ever lose is the premium.

This means you can create floors or ceilings for container freight prices, at a level which is appropriate to your needs with the only, at risk capital, being that of the premium.

Call Options; how it works

To hedge against freight rates rising, we can buy a Call Option (which gives us the right, but not the obligation to buy.) With a Strike Price of $1,600 and a Premium payable to the Seller of $50/TEU, the profit/loss is displayed below.

Price

Loss

Pro

fit

16001550 1650

50

50

1700

We can see that the maximum loss sustained from this strategy is the $50/TEU Premium that we pay the Seller. Once the Contract settles we receive a pay out from our options position on any rate above $1,600 – In order to return a profit we must also recoup the capital spent on the Premium, so our break even is $1,650, with anything above being profit.

Put Options; how it works

To hedge against freight rates falling, we can buy a Put Option (which gives us the right, but not the obligation to sell.) With a Strike Price of $1,650 and a Premium payable to the Seller of $50/TEU, the profit/loss is displayed below.

Price

Loss

Pro

fit

16001550 1650

50

50

1700

We can see that the maximum loss sustained from this strategy is the $50/TEU Premium that we pay the Seller. Once the Contract settles we receive a pay out from our options position on any rate below $1,650 – In order to return a profit we must also recoup the capital spent on the Premium, so our break even is $1,600, with anything below being profit.

Section 7

An introduction to hedging with swaps


Hedging with swaps; an example

We will now take a look at how to construct a hedge position using a swap contract; first from the perspective of a buyer and then a seller of ocean freight.

Buyers of ocean freight face the risk that this cost will rise. To mitigate this risk they will hedge using a long position, that is they will buy a swap contract.

Sellers of ocean freight face the risk that their revenue will fall. To mitigate this risk they will hedge using a short position, that is they will sell a swap contract.

The buyers hedge; an example

The buyer faces uncertainty regarding the potential for rises in freight cost during the typical peak season of Q3.

Having budgeted for 12 months of freight cost with a premium weighted on the peak season period, but being unable to fix their freight exposure, they remain at risk of

exceeding their costing and eating into their profit margins should freight rates rise above their estimates.

To mitigate this risk they will hedge their Q3 position using a swap contract.

The background; planning and analysis

The buyer will import 500 TEU/Month during Q3 from China to the UK.

Their analysis of the market means that the budget for Q3 shipments is $1,500/TEU.

They will hedge 70% of their total volume during the Q3 period, 1,050 TEU, which equates to 350 TEU/Month.

The remaining 30% of the volume will not be hedged so they can gain a small amount of downside potential should rates not rise above their budget.

The Trade; managing the risk

The buyer calls Clarkson Securities Ltd. (CSL) to place an order to buy a Q3 contract on the SCFI EUR Route for 350 TEU/Month.

CSL markets the buyers interest and finds a suitable counterparty for him to trade with.

A trade is then agreed as follows –

Contract Route: SCFI EUR

Contract Period: Q3 2011 (July 2011/August 2011/September 2011)

Contract Price: US$ 1,500 / TEU

Volume: 350 TEU / Month

Settlement; the Buyers result

In order to settle the contract, the average of the SCFI EUR over the corresponding month is used (this average is known as the Settlement Price) and then marked against

the Contract Price. If the Settlement Price is above the Contract Price, the buyer receives the difference from the seller and vice-versa if it is below.

The sellers hedge; an example

The seller faces uncertainty regarding the potential for declining freight revenues during the winter period of Q4.

Having forecast the potential supply/demand characteristics of the market and facing the typical lull after the peak season, they remain at risk of freight revenue falling to the

extent that it would eat into their profit margins.

To mitigate this risk they will hedge their Q4 position using a swap contract.

The background; planning and analysis

The Seller has 9 vessels of 9,000 TEU, homogenous intake 7,200 TEU, on their Weekly Asia/Europe Service during Q4.

They have 40% of each vessels capacity which is exposed to spot cargo and will hedge 80% of this capacity during the Q4 period. The remaining 20% of the capacity will not be hedged so they can gain a small amount of upside potential should rates not fall below

their breakeven.

With 13 weeks in Q4, this means there will be 13 WB vessel sailings during that time.

13 x 7,200 TEU = 93,600 TEU

40% of 93,600 TEU = 37,440 TEU

80% of 37,440 TEU = 29,952 TEU

29,952 TEU / 3 (Months/Quarter) = 9,984 TEU / Month, rounded to 10,000 TEU

Their breakeven even return per TEU is $1,250 and they wish to try and secure a profit margin on top of this figure.

The Trade; managing the risk

The seller calls Clarkson Securities Ltd. (CSL) to place an order to sell a Q4 contract on the SCFI EUR Route for 10,000 TEU/Month.

CSL markets the sellers interest and finds a suitable counterparty for him to trade with.

A trade is then agreed as follows –

Contract Route: SCFI EUR

Contract Period: Q4 2011 (October 2011/November 2011/December 2011)

Contract Price: US$ 1,400 / TEU

Volume: 10,000 TEU / Month

Settlement; the Sellers result

In order to settle the contract, the average of the SCFI EUR over the corresponding month is used (this average is known as the Settlement Price,) and then marked against the Contract Price. If the Settlement Price is below the Contract Price, the seller receives

the difference from the buyer and vice-versa if it is above.

Section 8

An introduction to Index-Linked Service Contracts


Indexation; flexible pricing

One of the problems with typical container freight contracts is that they are designed to offer no flexibility in pricing once they have been agreed.

This means they come under increasing stress the further the spot market moves away from the contracted price. Carriers feel pressure to take higher paying spot cargo, or will

introduce additional surcharges in a rising market, while Shippers prefer to move their cargo to another Carrier offering cheaper rates in a falling market.

The way to overcome this is to use a system of flexible pricing which pegs freight prices to the prevailing market conditions and thus provides both sides with the opportunity to

benefit from market conditions which favour them.

A typical year; the ups and downs

Below is a diagram of a fairly typical year in container freight. The blue line represents the fixed rate contract and the red arrow the stress which it faces as spot rates diverge

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Time – 1 year duration

Spot freight rate



Spot freight rate

Contract Stress; how & why

As seen on the previous page, fixed rate contracts come under pressure the more the spot rate diverges from them.

With little to prevent either Carriers or Shippers taking advantage of the market conditions despite their contracts, the stress of volatility is all it takes for the relationship to be

broken. It follows then, that the greater and more frequent the volatility, the greater and more regularly this stress is felt with the resultant breakdown of contracts.

Whilst in a perfect world a fixed rate contract would offer stability, the reality is vastly different, even contracts between big players in the market are often not worth the paper

they are written on.

Evolution; the ability to adapt

Price volatility is a result of markets which are driven by supply and demand fundamentals.

The container shipping industry has seen changes recently to bring about greater competition in the market, such as the removal of certain conferences.

Long-held ideas such as engaging in long-term fixed rate contracts are proving to be unsuited to the new dynamics of the market.

With volatility here to stay and further anti-trust regulation being almost inevitable, index linked pricing mechanisms represent an efficient and cohesive response to the changing

nature of the market

In practice; how it works using the SCFI

Carrier and Shipper enter into an Index Linked Service Contract for an agreed period.

Volume is committed for the agreed period, with a weekly volume entitlement being specified, incorporating both a minimum and maximum volume.

Individual vessel volumes to be advised prior to sailing, as per Carrier guidelines.

The base freight level is ‘all in’and calculated from the relevant weekly SCFI Route(s), as published by the SSE.

Freight is calculated with an agreed percentage variation, or an agreed discount / premium, to the SCFI Route price.

Section 9

An introduction to hedging Index-Linked Service Contracts


Having agreed an Index Linked Service Contract (ILSC) both Shipper and Carrier are now in a position to look at hedging against the parts of they year when the fundamentals

will not be in their favour. Shipper hedges are in red and Carrier hedges are in blue.



Spot freight rate



Spot freight rate

Hedge Positions; timing

Hedging tools; swaps and options

In order to create positions which either limit cost or secure revenue in conjunction with an ILSC, Shippers and Carriers can use swaps or options.

Shippers need to protect against rates rising so they will either buy swap contracts or buy call options (the right but not the obligation to buy,) for the appropriate period

Carriers need to protect against rates falling so they will either sell swap contracts or buy put options (the right but not the obligation to sell,) for the appropriate period.

Shippers; a rising market (swaps)

Jan Feb Mar

1000

1100

1200

The Shipper buys a swap contract to cover Q1 (Jan/Feb/Mar) @

$1,000 / TEU.

Jan settles below the level he bought. He uses the cheaper spot cost of Index-Linked freight to off-

set the swap loss.

Feb and Mar settle above the level he bought. He uses the cash made on the swap contract to off-set the higher cost of Index-Linked freight.

Shippers; a rising market (options)

Jan Feb Mar

1000

1100

1200

The Shipper buys a call option to cover Q1 (Jan/Feb/Mar) @ $1,000 / TEU Strike for $25 / TEU Premium.

Jan settles below the level he bought. He only loses the cost of

the premium whilst still getting some benefit of the cheaper spot

cost of Index-Linked freight.

Feb and Mar settle above the level he bought. He uses the cash made

on the call option to off-set the higher cost of Index-Linked freight.

Carriers; a falling market (swaps)

Oct Nov Dec

1000

1100

1200

The Carrier buys a swap contract to cover Q3 (Oct/Nov/Dec) @ $1,200 /

TEU.

Oct settles above the level he sold. He uses the higher spot revenue of Index-Linked freight to off-set the

swap loss.

Nov and Dec settle below the level he sold. He uses the cash made on

the swap contract to off-set the lower spot revenue of Index-Linked

freight.

Carriers; a falling market (options)

Oct Nov Dec

1000

1100

1200

The Carrier buys a put option to cover Q4 (Oct/Nov/Dec) @ $1,200 / TEU Strike for $35 / TEU Premium

Oct settles above the strike price. He only loses the cost of the

premium whilst still getting some benefit of the higher revenue of

Index-Linked freight.

Nov and Dec settle below the strike price. He uses the cash made on the put option to off-set the lower revenue of Index-Linked freight.

Clarkson Securities LimitedSt Magnus House, 3 Lower Thames Street, London, EC3R 6HE, United Kingdom

Tel: +44 (0) 207 334 3151 Email [email protected]

Benjamin GibsonTel Direct: +44 (0) 207 334 4712

Email: [email protected]

Mobile: +44 (0) 7920 454712

David BarnesTel Direct: +44 (0) 207 334 4821


Mobile: +44 (0) 7920 454821

Nadia MirzaTel Direct: +44 (0) 207 334 5490


Mobile: +44 (0) 7771 395490

www.clarksonsecurities.com Bloomberg – CLRK <GO> Twitter @FFAExperts

CLARKSON SECURITIES LIMITED ARE AUTHORISED AND REGULATED BY THE FINANCIAL SERVICES AUTHORITY.

ANY RESEARCH AND/OR ANALYSIS CONTAINED IN THIS REPORT HAS BEEN PROCURED BY US AND MAY HAVE BEEN USED BY US FOR OUR OWN PURPOSES AND HAS NOT BEEN PROCURED FOR THE EXCLUSIVE BENEFIT OF CLIENTS. ANY INFORMATION SUPPLIED HEREWITH IS BELIEVED TO BE CORRECT BUT THE ACCURACY THEREOF IS NOT GUARANTEED AND THE COMPANY AND ITS EMPLOYEES CANNOT ACCEPT LIABILITY FOR LOSS SUFFERED IN CONSEQUENCE OF RELIANCE ON THE INFORMATION PROVIDED.

THIS REPORT IS DIRECTED ONLY AT NON-PRIVATE CUSTOMERS AND IT MUST NOT BE PASSED ON TO ANYONE WHO IS NOT SUCH. NOTHING CONTAINED IN THIS REPORT SHALL BE CONSTRUED AS PART OF OR CONSTITUTE AN OFFER ON OUR PART TO BUY OR SELL ANY COMMODITY OR FUTURE REFERRED TO HEREIN. THE INFORMATION IS FOR THE USE OF THE RECIPIENT ONLY AND IS NOT TO BE USED IN ANY DOCUMENT FOR THE PURPOSES OF RAISING FINANCE WITHOUT THE WRITTEN PERMISSION OF CLARKSON SECURITIES LIMITED, ENGLAND, NO. 3052018. AUTHORISED AND REGULATED BY THE FINANCIAL SERVICES AUTHORITY. REGISTERED OFFICE AT ST. MAGNUS HOUSE, 3 LOWER THAMES STREET, LONDON, EC3R 6HE.

complete guide to container freight derivatives

Documents

teu fleet

global container trade

container fundamentalssection

teu average size

teu orderbook numbers

container capable supply

average growth

estimated growth