- Nadia Mirza talks LNG and LPG
The journey through shipping has been one with plenty of twists and turns for Nadia Mirza. Over a 20-year career, the Baltic’s lead on New Markets has worked in container and dry bulk shipping in London, Singapore and Hong Kong. There was also a spell in Rome with the UN World Food Programme thrown in for good measure.
Today, based in London, Nadia is responsible for developing the Baltic’s recent move into containers and gas. The Baltic publishes three LNG assessments and has just announced trials of two new LPG routes. Rising to the challenge of the gas markets is a key remit for Nadia.
“I’ve found learning about the gas markets really fascinating. I have been lucky enough to sit with some great people in the industry and be fully primed. It’s a fast-growing market and one which is seeing changes to the way it manages its risk.”
Focus on LNG
Over the past 12 months London FFA brokers in particular have been extremely active, opening LNG futures desks. SSY, Clarksons, Affinity and Braemar are all offering clients LNG FFA services. The first swap was announced between Total and Glencore in July 2019, brokered by Affinity and settled against BLNG1 (Gladstone to Tokyo).
Now the push is on to develop a liquid cleared market for LNG. In December clearing house CME was the first to launch contracts based on the Baltic LNG assessments. She notes that the listing has led to a lot of test trades going on, especially on BLNG2 (Sabine to Europe).
“There’s been a lot of interest focused on this route, primarily because a lot of the authority for LNG globally is based out of London, and the Atlantic is mainly what they cover out here.”
Wider themes impacting LNG
Nadia notes that there has certainly been a lot of buzz around LNG due largely to the need for industrial decarbonisation. LNG, although still a fossil fuel, is clean. It emits virtually no sulphur or nitrogen when burnt and has a lower carbon footprint than other energy sources such as coal and oil. As such it is seen as step towards a zero-carbon world. For the shipping industry, LNG is both a cargo and a fuel.
“We are seeing a lot more dual-fuel ships capable of being powered by LNG and traditional compliant fuel. This is certainly the case in the container markets. I think this is because these ships are on the frontline: they’re moving finished goods, so they’re feeling consumer pressure to reduce their environmental impact first-hand.”
The glut of low-priced LNG has of course been an important spur for take-up and Nadia acknowledges that in the short term, cheap oil may negate the move towards LNG. However, she thinks that LNG’s environmental credentials underpin its future.
“There is an overall move toward LNG as an option due to its long-term impact on shipping emissions.”
Looking at LPG
LNG isn’t the only gas game in town. The boom in shale gas extraction has increased the supply of Liquified Petroleum Gas (LPG) which is used in a range of applications in business, industry, transportation, farming, power generation, cooking and heating. In the competition for shipping’s best alternative to high sulphur fuel oil, LPG has seen increased interest due to its ready availability globally, clean qualities and affordability. LPG is also less challenging to handle since it has a higher boiling point and, unlike LNG, is not stored at cryogenic temperatures.
The Baltic is already running one LPG route, BLPG1, Middle East Gulf to Japan. Plans to expand this are in the pipeline, with two new routes currently being trialled, BLPG2 (Houston to Flushing) and BLPG3 (Houston to Chiba (Japan) via Panama). Both the BLPG2 and BLPG3 have been on Private Trial since 12 February 2020 and commenced Public Trial reporting on 1 April 2020. Once established, these new routes could open the door to a derivatives market for this segment.
Supporting the entire market is confidence in the underlying assessments. Thanks to the Baltic’s recent authorisation as a Benchmark Administrator by the UK’s Financial Conduct Authority (FCA), users of the Baltic’s gas assessments are assured of the Baltic’s strong governance, robust benchmark design, transparent methodologies and clear accountability. The Baltic Exchange is the only provider of freight assessments with this status.
The Baltic will continue to support the market not only with reliable assessments, but also through engagement with companies. With the world currently in Covid-19 lockdown, the planned series of face-to-face round table talks and conference presentations are clearly on hold. Educating potential market participants is a critical part of the Baltic’s role. But according to Nadia, this won’t hold her back.
“We want to continue to grow our understanding of what is needed from the Baltic Exchange. What people in the room can learn from each other. Our aim is to gauge from the market how they’re doing and what the barriers are for them to actually be participating in the market.”
The Baltic LNG Index is published Tuesdays and Fridays.
BLNG1 Gladstone to Tokyo RV BLNG2 Sabine to UK/Cont RV BLNG3 Sabine to Tokyo RV
A daily LPG assessment (Middle East Gulf to Japan) is published at 1600 (UK), with two further routes (Houston to Flushing and Houston to China via Panama) currently on trial.
- Understanding the Baltic Exchange Operating Expenses Index
Baltic CEO, Mark Jackson, previews the new Baltic Exchange Operating Expense Index (BOPEX).
In addition to exploring the thinking behind BOPEX, Mark provides in-depth insight into what is included in the assessments, who makes the assessments and how panellists benefit.
Mark also discusses how the methodology is calculated, how investors have received the new index, and finally, plans to expand the index beyond dry bulk vessels.
Watch the video in full below.
Note: filming took place before current coronavirus (covid-19) guidelines on social distancing.
- Free access to the Baltic Exchange App to all members
Given the current disruption we have decided to provide free access to the Baltic App to employees of every member company, regardless of whether the individual employee is a member or not. During this difficult time, we want to ensure members are still able to access market information while so many of us are working away from our offices.
For those unfamiliar with it, the Baltic App is designed for both Android and iOS operating systems. The app provides instant access to a wide range of Baltic information including rates, fixtures, member contacts, news and much more.
Key features include:
- Live market data, including all historical Baltic indices & assessments and charts
- Live and historical FFA data, including forward assessments and volumes
- Push notifications for all Baltic spot data upon publication
- Member search facility. All company and individual contact details easily accessible
- Market intelligence including daily & historical fixtures, market reports, circulars and news
- Listings of all Baltic Exchange meetings, social and educational activities
Users can customise data notifications to receive the information they need as it’s published.
To take advantage of this opportunity, sign up here.
- John Kartsonas: Breakwave
The Breakwave Dry Bulk Shipping ETF (ticker: BDRY) is the first and only Exchange Traded Fund (ETF) dedicated to dry bulk shipping. It offers investors the ability to invest directly into dry bulk freight through freight futures, a market that is quite difficult to access for most market participants. BDRY trades like a stock, is listed in the New York stock Exchange, and it is an easy and efficient way for every investor to invest in dry bulk shipping. Although the mechanics for such an innovative product is complex, the idea behind it is very simple: Provide an instrument to access the freight futures market in such a simple manner as buying or selling a stock.
BDRY, which is issued by ETFMG, does not track a specific index, rather it follows a pre-determined methodology that provides no discretion in what the fund holds. BDRY owns futures on Capesize, Panamax and Supramax freight futures with a breakdown of approximately 50%, 40% and 10%, respectively. In addition, the average tenure of the underlying futures is about 60 days. As a result, BDRY follows the direction of spot rates, to the extent that futures tend to react to spot rate movements. Over the last two years, the weekly correlation of BDRY to the Baltic Dry Index, the main dry bulk spot index, has been approximately 75%. Directionally, it is easy to see the relationship between the two, as the chart below describes.
The advantages of BDRY for the shipping investor are numerous. First, unlike the only alternative out there, namely shipping equities, BDRY is not affected by broader stock market volatility, as it is priced against the dry bulk freight futures market. Given that the correlation of freight futures to other major asset classes is extremely low, BDRY is a very good diversifier for investor portfolios. In addition, as a commodity ETF, BDRY does not have risks such as equity dilutions, company-specific risks, management decisions, operational issues, etc. It basically tracks the freight futures market through pre-determined parameters and a specific methodology. Secondly, BDRY is a simple to use product. Opening and maintaining a freight futures account is extremely difficult and costly for individual investors and very cumbersome even for professional investors. BDRY gives every investor the opportunity to participate in the freight market in a very simple way, just like investing in a stock. Lastly, BDRY invests in freight futures that settle in cash and thus imply full utilization and obviously no operational risk, as there are no assets involved. Compare that with operating actual ships, and one can see the benefit of BDRY versus even physical shipping investments.
BDRY was designed with simplicity and wide investor appeal in mind. It is an instrument to invest in an industry that has a lot of particularities when it comes to different asset classes, sizes, trade routes, etc. BDRY is not an instrument for precise hedging, but it is a very good proxy to take a view on the broader dry bulk shipping sector. It is a volatile investment, and riskier than the average ETF, but that reflects the underlying volatility and risk of dry bulk shipping. However, with higher risk usually come higher returns, and thus investors must adjust their risk tolerance and return expectations accordingly.
BDRY is a very innovative product as it opens a hard to access, non-listed market to all market participants. Over the years, dry bulk shipping has provided exceptional returns, but also significant drawdowns. Unfortunately, until BDRY, there was no easy way to capture such moves. BDRY aims at becoming the leading instrument for investors who view shipping as an important part of their portfolio and have been disappointed with the ability of shipping equities to capture the cyclicality of the industry.
Investing in freight futures can be volatile and is not suitable for all investors.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This material must be accompanied or preceded by a prospectus. Please read the prospectus carefully before investing.
The Fund is distributed by ETFMG Financial LLC, which is not affiliated with Breakwave Advisors LLC.
- Member Update: 15 April
The following company has applied for Corporate Membership:
Company Individual Daewoo Logistics Corp
Mr G S Kim Miss M J Kim Mr P S Kim Mr J H Yoon
The following individuals have applied for membership of an existing Member Company:
Individual Company Ms A Baroun Kuwait Petroleum Corporation
Ms M Al Failakawi
Any comments should be passed to Karen Karanicholas by 22 April 2020.
- Careering towards a crippling recession
What a difference a quarter makes. The International Monetary Fund last released its bellwether World Economic Outlook (WEO) in January. Back then it anticipated global growth would reach 3.3 percent this year. There was even consternation at the time of the slight – 0.1 percentage point – downgrade of global growth projected for 2020.
Skip forward three months and a 0.1 percent decline is a distant dream. The IMF’s latest WEO foretells of global growth dropping to -3 percent for 2020, with the Covid-19 pandemic to blame. This is, says IMF chief economist Gita Gopinath, “the worst recession since the Great Depression, and far worse than the Global Financial Crisis”.
Ms Gopinath describes the magnitude and speed of collapse in activity as a result of the great global lockdown as “unlike anything experienced in our lifetimes”.
“There is,” she continues, “considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown.”
There is some good news though: the IMF projects global growth to rebound to 5.8 percent in 2021. However, there are a number of caveats to that prediction. First is the assumption that the pandemic fades in the second half of 2020. Second is the assumption that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains.
Add to this that the projected recovery for 2021 is only partial as the IMF expects the level of economic activity to remain below the level it had projected for 2021, before the virus hit. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could reach around $9 trillion, said the IMF. That’s greater than the economies of Japan and Germany combined.
“This is a truly global crisis as no country is spared,” says Ms Gopinath. “For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession.”
Breaking down the data, growth in advanced economies is projected at -6.1 percent this year, while emerging and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020. This falls to -2.2 percent if China is excluded. The IMF projects that income per capita will shrink for over 170 countries, nearly 90 percent of the world.
There are specific, local challenges to consider as well when it comes to predicting the scale and scope of any recovery. For example, countries reliant on tourism, travel, hospitality, and entertainment for their growth have experienced particularly large disruptions and recovery may take longer, while emerging market and developing economies face the combined challenges of unprecedented reversals in capital flows, currency pressures, weaker health systems, and limited fiscal space to provide support.
Commodity prices have already reacted to the downturn. From mid-January to end-March,
natural gas prices declined by 38 percent, and crude oil prices dropped by about 65 percent – representing a fall of about $40 a barrel. The IMF points to the futures markets for indications that oil prices will remain below $45 a barrel through to 2023 on the back of persistently weak demand. “These developments are expected to weigh heavily on oil exporters with undiversified revenues and exports — particularly on high-cost producers — and compound the shock from domestic infections, tighter global financial conditions, and weaker external demand,” said the IMF. However, it did concede that lower oil prices will benefit oil-importing countries.
Worst case scenario
But what happens if the recovery is not as voracious as anticipated? To answer this the IMF has modelled alternative, more adverse scenarios where the pandemic does not recede in the second half of this year. Unsurprisingly, in this scenario global GDP will plumb greater depths, dropping an additional 3 percent in 2020. If Covid-19 is still changing the way we live in 2021 global GDP could fall an additional 8 percent in 2021 compared with the IMF’s baseline scenario.
In the WEO, Ms Gopinath calls for multilateral co-operation in financing to bolster a global recovery. Specifically, she urges spending support in developing countries through concessional financing, grants, and debt relief from bilateral creditors and international financial institutions. The activation and establishment of swap lines between major central banks may also need to be expanded to more economies. “Collaborative effort is needed to ensure that the world does not de-globalise, so the recovery is not damaged by further losses to productivity,” she says.
For its part, the IMF is deploying its $1 trillion lending capacity to support vulnerable countries. Speaking last week, IMF managing director Kristalina Georgieva said that the organisation had received an “unprecedented number of calls for emergency financing” from over 90 countries.
For a small spot of hope for seaborne trades, the IMF projects that ‘Emerging Asia’ will be the only region with a positive growth rate in 2020 at 1.0 percent. While that is more than 5 percentage points below its average in the previous decade, it does mean that intra-Asia trades may still be able to offer solace when other regions remain in the doldrum this year and perhaps into the next.