Are FFAs set to go electronic?

By Titus Zheng, FIS Singapore

An e-revolution is stirring once again in the Forward Freight Agreements (FFA) market with traders debating whether to plug into electronic platforms or maintain the status quo.

The issue was the subject of discussion during the recent Singapore Iron Ore week, with market participants from shipping, commodities, trading and mining all considering how to advance the market into the future.

“You cannot ignore the benefits of FFAs,” said managing director and founder of Freight Investor Services, John Banaszkiewicz.

FFAs have proven themselves been a good hedging tool against the volatile market because of their strong linkage to the physical market. For Banaszkiewicz, both traders and brokers alike are looking for more ‘colour’ around the market – indicators that can help them to balance cargo and trading positions.

Nonetheless, both brokerage and trading wish-lists, include electronic platforms for fixing of vessels done online, just like in the commodities markets.

“Having a screen will definitely improve fixing and chartering of vessels,” said Mark Jackson, CEO of SGX-owned Baltic Exchange.

This he said is not because vessel is not efficient enough, but because a trading screen could bring all market participants together, improving volumes and increasing transparency in a way that would attract more new entries into the shipping market. But with or without the electronic platform, Jackson assured trade participants that Baltic Exchange will still operate on a business as usual basis, catering to the interests of all the stakeholders firsthand.

However, the challenges lie ahead in convincing the existing market participants to embark on this journey towards digitalization. For instance, mining companies have seen FFAs as a compliment to their trades but not a requirement yet. And many shipowners still prefer traditional methods of vessel fixing.

“Ship-owners and charterers need to work more closely with miners and mills alike to reduce market volatility,” said Ye Weilong, executive vice president of China COSCO Shipping Corporation Limited. Ye explained that the all participants – the ship-owners/charterers, miners and mills are joined in a supply chain and any cracks would imply wild price swings and creates threats to profitability.

For now, Chinese business conglomerates and state-owned enterprise have an open mind in exploring the use of FFAs in shipping. Ye claimed that the company has yet to conduct research and neither possesses much experience into the field but he does not rule out the trading FFAs as time goes on.

Banaszkiewicz also highlighted the new money coming in to the shipping sector. This new funding suggests not just the expansion of the world fleet, but also more trading in long-term FFA contracts.  As such, an e-platform might take centre stage to link these stakeholders to manage risk and steer away from the price fluctuations of the market in the future. But ’till then, the market will need to continue to mature with tested and proven methods with much dialogue on progress in the digitalized sphere.

“We will do our best to educate the market by conducting workshops and seminars on FFAs to involve more players in the market, especially here in Asia,” Banaszkiewicz concluded.