Newsletter No.30 2019

Baltic Exchange member Affinity (Shipping) has facilitated the first LNG freight swap settled against the Baltic Exchange LNG spot assessments. The trades involving Total Gas & Power and Glencore were arranged over-the-counter by Affinity Financial Products LLP and executed bilaterally by the counterparties.

“With liquidity increasing in the LNG market in recent years, freight has come under the spotlight as participants look to manage their exposure to vessel spot rates,“ said Benjamin Gibson, Head of LNG Derivatives at Affinity. “Using the Baltic Exchange’s rate assessments we are able to help clients benchmark their freight exposure and develop a forward market for hedging price risk.”

Last winter tight vessel availability pushed charter rates from an average $50,000/day during the first half of the year to above $200,000/day during November 2018. By March 2019 the Baltic BLNG1 assessment had fallen to almost $20,000/day. As LNG traders seek to build trade volumes their exposure to this volatility in freight rates increases.

The Baltic Exchange’s LNG rate assessment methodology uses submissions from independent shipbrokers to mark time charter equivalent rates for LNG carriers on certain, key trade lanes. This benchmark includes not only the headline rates for hiring the vessels, but also the highly important ballast bonus and/or position fees paid by charterers depending on market conditions.

Baltic Exchange Chief Executive Mark Jackson said:

“The Baltic has over 30 years of experience of benchmarking freight markets and our LNG assessments are the latest in our suite of shipping market data. We’re delighted that this product has been adopted by the market which has recognised the value and quality of our index production process. We look forward to continue working with brokers and users in this developing market and anticipate that the next two Baltic LNG routes (USG/East Coast UK and USG/Far East) will go live later in the year.”

This first trade represents an important milestone in the development of an LNG forward freight market. With the Baltic Exchange set to release further LNG spot route assessments Affinity see more appetite for bilateral trades.

“Initial trades are all about testing the settlement mechanism. Now is the time to try things and see how they work. We have lots of interest in the Baltic’s forthcoming Atlantic routes and a weighted average of routes to give a global LNG freight benchmark,” added Gibson. “The strong growth in financial trading of JKM and the spreads to other natural gas hubs will underpin the physical demand for hedging freight rates as understanding of the products and market develops.”

The following individual has applied for membership of an existing member company.

Any comments should be passed to Karen Karanicholas by 31 July 2019.

The Baltic Exchange wishes to inform members that room RLG10A (546 sq ft) on the lower ground floor of the Baltic Exchange is now available for rent.

For more details, please contact Mark Read. Pictures of the space can be found below:

Tensions continue to rise in an area described as the most important chokepoint in the oil transportation system globally. In July, the British-flagged chemical/oil products tanker Stena Impero was seized in the zone in question, the Strait of Hormuz, by the Islamic Revolutionary Guard Corps (part of the Iranian Armed Forces) after Iran accused it of “violating international maritime rules”. The move, described the UK Government as “unacceptable and highly escalatory”, occurred a fortnight after the UK’s Royal Marines aided with the seizure of the Panamanian-flagged crude oil tanker Grace 1 off Gibraltar due to evidence it was moving Iranian oil to Syria in violation of EU sanctions.

In recent times, there have been increasingly-strained relations between Iran, the US and the UK in the region in which the strait is located. In June, Baltic Briefing reported that little over a month after four tankers (Saudi, Norwegian and Emirati-flagged) had been attacked near the passage, two other tankers (Panamanian-listed and Marshallese-flagged) saw June blasts after travelling through it. Earlier this month, UK Royal Navy frigate HMS Montrose reportedly saw away three Iranian ships attempting to halt the tanker British Heritage in the waterway (the ship was apparently travelling out of the Gulf through the strait when it was approached by the vessels).

A week on, US officials believed Iran had seized a Panamanian-flagged UAE oil tanker as it crossed the passage, with Iran later claiming that the Islamic Revolutionary Guard Corps had taken control of a foreign oil tanker and its crew for smuggling fuel out of the country. The next day, US President Donald Trump claimed that the United States Navy’s USS Boxer (LHD-4) amphibious assault ship had shot down an Iranian drone that had come within 1,000 yards of the warship and ignored calls to stand down, but Iranian military officials denied an Iranian drone had been lost in the strait.

Insurance implications

Jonathan Moss, head of transport and marine at law firm DWF, calls the seizure of the Stena Impero “unacceptable and clearly an act of retaliation as a consequence for the British authorities seizing the Iranian Grace 1 supertanker offshore [of] Gibraltar on 4 July”. According to him, the increasing tensions caused by these incidents will keep having a knock-on impact on worldwide fuel prices and insurance premiums.

This geopolitical fallout has not been seen since 2003

“The global insurance markets are accustomed to factoring geopolitical uncertainty into pricing models,” he says. “Nevertheless, this geopolitical fallout has not been seen since 2003. In 2003, rates for Hull & Machinery [and] War Risks cover for tankers in the Persian Gulf increased significantly owing to the political instability in the region. In particular, global marine insurers are already closely monitoring the current situation and employing complex risk models.”

He continues: “Given the hostility escalating, underwriters will also be closely scrutinising voyages on a case-by-case basis, with premium-increases covering vessels in the region a near-certainty. Ultimately, this uncertainty in the Gulf region is likely to lead insurers to raise premiums, re-negotiate terms of cover and introduce riders to marine and energy contracts of insurance and reinsurance, in the face of a cocktail of instability in the region.”

Speaking on American business news channel CNBC, Esben Poulsson, International Chamber of Shipping chairman, said that the main direct cost, being felt immediately, from the tensions is the insurance premium, which has increased anywhere between threefold and fourfold since the situation commenced. What’s more, he claimed the shipowner is set to absorb this cost.

“The shipowner will, of course, attempt to pass the cost on to charterers in cases where this could apply, but largely speaking, it is a cost for the owner.”

Broader issues at stake

The elevated tensions in the Strait of Hormuz region are unsettling for the seafarers who have to enter it too. Speaking to Bloomberg, tanker captain John Smith, whose name had been changed to protect his identity, is “acutely aware of his powerlessness to protect his crew and ship”. At the time of speaking, Mr Smith is about to move the tanker through the strait, and he says that everyone on board and families back home are scared of the situation. According to the Bloomberg article, shipowners are asking crews on vessels passing Hormuz to implement “best management practices” designed to combat a piracy increase off the coast of Somalia — however, the military threat of the Islamic Revolutionary Guard Corps is a totally-different thing.

“We do have drills where we play through scenarios,” Mr Smith explains. “How effective this training would be with multinational crews, I cannot tell you. As far as I am concerned, we always think about the ‘what ifs’.”

He adds: “It is always going through my mind thinking about collision avoidance, if the other ship does something stupid and how you get out of a situation. I suppose it’s the same with what we are approaching.”

Mr Smith says that when his ship travels through the Strait of Hormuz, six people will be on the bridge keeping watch for the approach of “‘fast boats’”. However, he notes he is “not sure six people on the bridge will have any deterrent effect on troops abseiling down onto the ship from a helicopter”.

According to the International Energy Agency (IEA), the oil market is well supplied at the moment so the impact on the commodity market could be minimal. In H1 2019, oil production exceeded demand, increasing world stocks by 900,000 barrels daily. Currently, Organisation for Economic Co-operation and Development commercial stocks stand at over 2.9bn barrels — greater than the five-year average.

“IEA countries hold 1.55bn barrels of public emergency oil stocks,” the agency says. “In addition, 650m barrels are held by industry under government obligations, and can be released as needed. These IEA emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.”

Reassuringly, the IEA also notes that if a disruption occurs, the organisation is prepared “to act quickly and decisively” to ensure world markets stay sufficiently supplied.

The Baltic Exchange will hold its next Freight Derivatives & Shipping Risk Management course on 7 and 8 October in UK capital London. More information can be found here.

Co-hosted with HFW at their London office, BESA is delighted to invite its members and the wider Baltic Exchange community to a special presentation on Wednesday 9 October given by British Paralympic World Champion, Hannah Stodel. Hannah will share the inspiring story of her success and discuss the next challenge she has set herself: to become the first disabled sailor ever to take on the Vendée Globe. Racing 24,000 miles around the world – nonstop and without any assistance – Hannah plans to set three major records along the way.

 Registration for the event begins at 5.15pm, presentation at 5.45pm and networking over drinks and canapés at 6.30pm.

About our speaker

Three times World Champion and four times Paralympian, Hannah Stodel was born missing her lower right arm but she is a force unto herself and it has not stopped her from competing in able-bodied competition. Besides her three World Championship titles and scores of other results and awards, she’s been the global leader for reinstating disabled sailing into the Paralympic games and is an ambassador for Ditch the Label (anti-bullying) charity in London. With a fierce determination, Hannah is now undertaking the greatest challenge yet, her personal “Everest of the Seas” by competing in the Vendée Globe. We very much hope you can join us for what should be an interesting and inspiring event.

Please RSVP if you wish to attend (including your intended number of guests) to Philip Bacon (philip.bacon@icthusmarine.com). Alternatively please contact Amanda Hastings, BESA Social Secretary, (amanda.hastings@thomasmiller.com) or Camilla Robertson at HFW (camilla.robertson@hfw.com).

This annual event traditionally brings together two or three flotillas of ocean-going boats that compete as teams in name of The Baltic Exchange, Lloyd’s of London, and sometimes The London Stock Exchange. This year, we have agreed with several other City-based sailing clubs to mutually open our summer / post-summer events, so we might have other teams competing, e.g. John Lewis or The Portcullis Club.

On Friday 20^th September evening, crews gather in Cowes for dinner and light refreshment, in concentration for the athletic feats of the following day. Early on the 21^st, a starting gun will see the flotillas race off neck to neck round a dedicated course within the Solent, which will be shorter than last years’ Nab Tower race. After the racing and the traditional ‘apres’ social on Marina and nearby watering holes, Saturday evening the motley crews regenerate themselves into a glamorous gathering for Dinner at the Royal Yacht Squadron and perhaps prize giving, if the winners can be decided.

Companies or groups may enter boats and crews in the Racer or Cruiser categories for Team Baltic; if you are not part of one, please get in touch as we will be seeking to accommodate individuals on Team Baltic boats in need of crew. There will be Special Provisions for Young Baltic Association members.

If you have never sailed, don’t be daunted – this is a perfect chance to try it out!

Please contact Philip Bacon  for further information and entry forms.