Starting from Monday this week (3 August 2015), the Cape Time Charter Average has been based on five routes assessed on the basis of a 180,000 dead weight tonne vessel. The 172,000 vessel average of four time charters is no longer being calculated – its value is now derived from the new Cape indices. For those involved in trading Capesize bulk carriers and the staff, directors and members of the Baltic Exchange, this change is the culmination of several years of hard work.
In a nutshell, the Baltic Indices must represent the reality of the underlying freight markets and as dry bulk and tanker fleets are dynamic and constantly changing, so the Baltic Indices must adapt to accurately reflect their composition and the routes they trade. The FFA markets – and as index-linked floating rate time charters become more common, the physical shipping markets too – must rely on increasingly complex index production.
Changing the composition of the index is a difficult process and relies on the market representatives who work with the board of the Baltic’s subsidiary, Baltic Exchange Index Services Ltd (BEISL), and form the Freight Index and Futures Committee (FIFC). The people / organisations included in this process are The Baltic Panellists, The Freight Market Information Users Group (FMIUG) and The Forward Freight Agreement Brokers Association (FFABA).
As a London-based but international membership organisation, the Baltic has a vested interest in maintaining the transparency of its index production and the market’s trust in them.
The City of London used to boast a reputation for managing precisely this sort of mechanism. However, whilst in response to changes in the Capesize market the Baltic committees pored over the detail of the Cape index and separately reviewed and rewrote their manual for panellists, many of the leading indices published in the City of London fell prey to scandal and criminal investigation. The London Interbank Offered Rate, The London Gold Fixing, the foreign exchange and energy markets, principally traded in London, were rocked as the world looked on.
So when Forward Freight Agreement Brokers at Simpson Spence Young’s SSY Futures Ltd recently concluded a trade in the new Cape Time Charter Average, covering a period of four years out to the end of 2021, it was good for Simpsons, good for the Baltic and no bad thing for the City of London.
The FFA market demonstrated its faith in the Cape 180,000 vessel description and the new Capesize Time Charter Average FFA. At Simpsons, where chartering brokers contribute to the Baltic Indices, FFA Brokers contribute to the Baltic Forward Assessments and SSY Consultancy and Research supply insight into global bulk trade flows to the FIFC, we recognise that this is just the beginning of the migration of FFA interest from the old Cape contract to the new. We feel that it has been an important milestone and will show the way forward for Capesize market participants.
The Capesize FFA contract currently has more than 450 years of exposure open in the market. These contracts are secure and can be left to settle against the old Cape Time Charter Average. However, I anticipate that increasing volumes of new business will now move to the new contract as confidence builds and the market migrates to a vessel description that is a more accurate benchmark for a modern cape.
The ground work has been done, the way has been marked by the pathfinder trade and the future is looking bright for the Cape 5 TC Average. To borrow a well-known quote: “This is not the end, it is not even the beginning of the end, but it is perhaps the end of the beginning.”
Duncan Dunn is a Senior Director at SSY Futures Ltd and a board member of the Baltic Exchange, Baltic Exchange Index Services Ltd and Baltic Exchange Derivatives Trading Ltd.
SSY Futures Ltd is one of the largest Dry Bulk and Freight derivatives brokerages in the World, with 30 brokers in London, Singapore and Shanghai. SSY Futures specialises in iron ore, coking coal and steel swaps, futures and options as well as Forward Freight Agreements.
It is a wholly owned subsidiary of Simpson Spence Young. Founded by Ernest Simpson, Lewis Spence and Captain William Young , Simpson Spence Young has remained an independent private partnership for more than 130 years and is today one of the world’s largest shipbroking organisations.