This month we are celebrating 30 years of Baltic index production writes Baltic Chairman Guy Campbell. For an organisation with over 250 years of history this may seem a small milestone, but it is a hugely important and visible part of what we do today.
The seeds were sown in 1984. At that time there was no recognised pricing mechanism for measuring the dry bulk or tanker markets and therefore little transparency. Up until this point there had been no reason for the Baltic to publish benchmark rates, since the Baltic Exchange floor provided a venue for shipbrokers and commodity traders to gather and share market information face to face as they fixed their cargoes and ships. Being on the floor offered you all the information you needed. It was a Google like search engine of physical bodies, circulars, pen and notepad to get where you wanted!
The telex machine probably changed all of that, and the mobile phone, computer, worldwide web and e-mail fast tracked communications way before the current generation of FaceTime, Facebook, WhatsApp and Skype.
The forward thinking minds that laid down the framework for the Baltic indices may or may not have thought that decision making and chartering decisions of the future would take place beyond the confines of St Mary Axe, but they certainly understood the need for some transparency in the market.
Driven by Baltic director Paul Vogt, the Baltic Freight Index (BFI) was launched on 4 January 1985. The starting point was a score of 1000 points, a score set against the evaluation of 13 voyage routes. The routes behind this freight index were comprised of capesize, panamax and handymax voyages ranging from 14,000 mts of fertilizer through to 120,000 mts of coal. If you feel the modern time charter averages by vessel size are a dirty hedge today, imagine the basis risk of measuring your ship or freight exposure against the BFI in these early days!
Once published, the idea of creating a futures market quickly evolved. This was driven by the commodity and grain houses who already had the ability to hedge their price exposure in the potato, grain, soya-meal, pork, beef and lamb markets, but not the freight element of moving those and other cargoes.
And so, after discussions between the Baltic Exchange, the London Clearing Exchange and GAFTA (the Grains Association), on 5 May 1985 the Baltic International Freight Futures Exchange, BIFFEX, was launched on the floor of the Baltic Exchange with the first trade initiated by a broker called James Gray, working for GNI.
This was an exciting time, a physical ring with open outcry and all trades cleared by the London Clearing House. The brokers included Cargill Investment Services, Clarkson Wolff (a joint venture between Clarksons and Rudolf Wolff), GNI, Merrill Lynch, Giles Pritchard Gordon and Galbraiths (Marine and General Investment Co).
The BIFFEX floor moved to Commodity Quay in January 1991 (Baltic Futures Exchange merged with London FOX and in 1996 this too merged with LIFFE). In the meantime, it was quickly recognised just what a bad hedge the BFI offered. The basis risk was so great you could argue almost all trading at the time was purely speculative. So began a chapter of looking to produce products that were more reflective of the physical market.
1992 saw the launch the benchmark 52,000 mts HSS USG/Japan route, and between 1992 and 1995 there was an overlap between trading the BFI and USG/Japan.
This period between 1992 and 1995 is important to remember. The market was being persuaded to migrate to a time charter index. Understanding risk management in $/day rather than $/pmt saw the creation of the dry bulk cape, panamax and handymax indices. By February 1993 the first panamax time charter average was calculated and in 2001 BIFFEX closed and the derivative market migrated totally to FFAs.
It is rather ironic that the market also migrated away from cleared trading to over-the-counter and it was not until 2005 that traders began to acknowledge the counter party risk they were exposed to, and begin a move via amended FFABA contracts to an ISDA linked contract and eventually back to the cleared model we recognise today.
Traders have come and gone. Routes have come and gone. The Baltic International Tanker Routes (BITR) and the Baltic Liquefied Gas Route (BPLG) have joined the list of daily publications, as well as an S&P index. The Guide to Panellists has evolved to meeting the regulatory expectations of the International Organization of Securities Commissions (IOSCO), ensuring the regulatory burdens sits with the Baltic Exchange, not the panellists themselves. The importance of the physical market trading so much index linked business has evolved considerably.
However what has remained a constant in this 30 year journey is the Baltic Exchange. In hosting, producing and managing the regulatory changes imposed on benchmark production so as not to place that burden on the panellist. What has also remained a constant are the shipbrokers contributing as panellists to our indices. Those panellists are all independent brokers, all Baltic Exchange members and all taking a moment in their busy day to carefully consider their analysis of the routes they contribute to in making up our daily indices. I know I speak for many users in acknowledging the work of the panellists, but as a shipbroker at heart, I am well aware of the value of being a contributor to these benchmarks to our clients and the market.
I look forward to the next 30 years!