Dry Cargo Forward Freight Agreements

Transcription

1 Dry Cargo Forward Freight Agreements

2 Simpson Spence & Young Ltd Established 1880 Largest privately owned shipbroker in the world Worldwide network of 15 offices Represented on all major shipping committees & indices. Expertise in:- Dry Cargo Tankers FFAs Research and Consultancy - Sale and Purchase Agency and Towage 22 FFA Brokers in London & Hong Kong Team of 10 analysts on tanker & dry bulk markets

3 Introduction to Dry FFAs. Four Baltic Type Vessel Sizes: Capesize: Basis a Capesize 172,000mt dwt, not over 10 years of age,190,000cbm grain max. Loa 289m,max.beam 45m, draft 17.75m, 14.5knots laden, 15.0 knots ballast on 56mts fuel oil no diesel at sea. Panamax: Basis a Panamax 74,000mt dwt, not over 15 years of age, 89,000cbm grain max. Loa 225m, max. draft 13.95m, 14.0knots 32/28 fuel oil laden/ballast and no diesel at sea. Supramax: Standard Tess 52 type vessel with grabs as follows: 52,454 mt dwt self trimming singledeck on 12.02m ssw189.99m loa m beam 5ho/ha 67,756 cbm grain 65,600 cum bale 14L/14.5B on 30mt (380cst) no mdo at sea Cr 4 x 30 mt with 12 cum grabs Max age 10yrs. Handysize: Basis a 28,000mt dwt, self trimming single deck bulkcarrier on 9.78mssw 169m LOA 27m beam. 5 ho/ha. 37,523 cum grain 35,762 cum bale 14 knots average laden/ballast on 22 mt ifo (380) no diesel at sea. 4 x 30mt cranes. Maximum age 15 years.

4 THE BALTIC PANELLISTS The Baltic carries out annual audits on independent ship brokers. Companies who are doing sufficient business fixing individual routes and who demonstrate competence are invited to become panellists. The panellists make daily professional assessments of where routes should be priced. The Baltic oversee the assessments, calculate averages and publish results.

5 Baltic Capesize Time Charter Average Component Parts C8: mt - Transatlantic RV - 25% C9: mt - Cont/Med - Far East - 25% C10: mt - Pacific RV - 25% C11: mt - China Japan - Med/Cont - 25% The Capesize Time Charter Average is an unweighted average of four standard voyages. The dry cargo FFA markets trade principally in forward rates on the time charter averages.

6 Capesize Voyages Pac-Round Vs Timecharter Average TC avg 99% Correlation to Individual routes

7 The Capesize Forward Curve - Basis 6th Oct Forward pricing is derived from the cash or spot market. FFA Brokers discover the price of the different periods by calling the market participants. The Bid is the price of the highest buyer. The Offer is the price of the lowest seller.

8 Elements of a Time Charter Average FFA Buyer /Seller - Freight exposure / market view Vessel Type - Cape, P max, S max, Handy Period - month / quarter / year Quantity - number of days Contract Price - Level traded Contract Form - FFABA / ISDA Clearing - LCH/NOS/SGX

9 BUYER: Charterer SELLER: Shipowner TYPE: BSI TC AVG Q3 09 RATE: USD 14,000 QUANTITY: 92 days FFA SWAPS PERIOD: July, Aug, Sep 09 SETTLEMENT: Avg of all index Days SETTLEMENT DATES: Last Day of each Month. Example 1 Market Rises July Settlement = USD 15,000 Sett. value = 15,000-14,000 X 31 Days = USD 31,000 BUYER PROFITS Example 2 - Market Falls Aug Settlement = USD 13,000 Sett. value = 13,000-14,000 X 31 Days = USD (31,000) SELLER PROFITS

10 Trading Example - A Floating Rate Time Charter An owner agrees a two year time charter with a charterer for 2009/20010 Each month the charterer pays using a floating formula. The formula is the monthly average of the Baltic Index with an adjustment factor. This is agreed by both sides and reflects the vessels in questions differences with the Baltic standard description. The Owner has secured employment for the vessel but watches the FFA market in case his earnings fall below an acceptable level. He then sells FFAs to fix a price for all or part of the charter period as follows.

11 Trading Example the Cape time charter average for the period so far.

12 Trading Example Continued earnings displayed as monthly averages.

13 Trading Example Continued.. At the beginning of 2010 the FFA available for the balance of the year is $37,500 a day the owner sells this locking in his earnings on the Charter.

14 Trading example continued. The decision was good - the FFA gives a higher rate, than the spot average.

15 The decision to take the FFA price at the beginning of the year turns out to have been a good one - adding around $5,000 a day..

16 Trading Example Continued of course looking at the two peaks in the market with hindsight there appear to be some obvious opportunities to lock in high FFA rates.

17 How Can we Close our FFA? An FFA can run until it settles or it can be closed early. Example: March 4th 09 A ship owner sells Cal 10 at $14,250 opening an FFA. The market falls quickly - by the 18th March Cal 10 is trading at $12,000. The owner Buys Cal 10 at $12,250 closing the FFA and adding $2,000 a day to his 2010 earnings for in just two weeks. 4th March Sell: $14,250 Opens FFA Position 18th March Buy: $12,250 Closes FFA Position Profit: $2,000 per day banked.

18 Options Hedging Example A Cape owner wants to cover himself against a fall in the year ahead. However he doesn t want to lock in a rate. The FFA price for Cal 11 is $26,500 a day. The owner needs at least $21,000 a day. He buys a $23,000 put at $2,000 a day. His minimum earnings are locked at $21,000. If spot earnings improve he only loses $2,000 a day.

19 Combined Long FFA/Ship and Long Put. Profit Loss Long FFA/Ship Position with added Long Put Breakeven With an added long put the profit potential is reduced and the breakeven is increased but losses are limited.

20 The Clearing Process E X E C U T I O N BUYER FFABA Broker (ii) SELLER C L E CLEARING MEMBER (iii) Clearing House LCH/NOS/SGX (iii) CLEARING MEMBER A R I (iv ) (iv ) N G BUYER SELLER

21 Benefits of Clearing Virtual Elimination of counterparty risk Multilateral netting Free up bilateral credit lines Standardised Contracts Daily Realisation of P&L (due to mark-to-market) profit taking Increase liquidity via introduction of non-shipping market participants Level playing field for all players anonymity can be requested A cleared price is closer to true market value of a contract, excludes any additional (counterparty) risk costs

22 The Cost of Clearing. Clearing Example: Initial margin requirement. A Cape Q4 position for all the days = $5,700 x 0.64 = $3,648 X 91 days = $331,968 +/- Variation margin, marked to market each day. LCH.Clearnet margins as at 15th September 2010

23 How Do The Volumes Stack Up? Share By Size. Cape - 50% P max - 40% Supra - 8% Handy - 2% Type of trades. 60:40 Spec vs Hedge 50:50 Trade vs Financial Cleared OTC Total Q , , ,650 Q , , ,809 Q , , ,649 Q , , ,275 Q , , ,015 Q , , ,455 Q , , ,364 Q ,245 83, ,155 Q ,939 39, ,628 Q ,640 19, ,588 Q ,062 9, ,368 Q ,894 10, ,991 Q ,094 5, ,677 Q ,256 4, ,533

24 Transition of Market from OTC to Cleared.

25 Clearing Members A list of all LCH.Clearnet clearing members is available from the website General Clearing Members active on FFA Clearing: UBS Mark Hubbard +44 (0) ADM Richard Mayhew +44 (0) BNP Paribas - John Cunningham +44 (0) New Edge - Chris Bartlett +44 (0) Deutsche Bank- Peter Osborne +44 (0) JP Morgan Alex South +44 (0) Macquarie Mark Fitzpatrick +44 (0) M F Global Ltd Ben Few-Brown +44 (0) RBOS- Douglas Garnsey +44 (0)

26 Forward Freight Agreements Duncan Dunn, Director SSY Futures Ltd duncandunn@ssy.co.uk