FIS is the global leader in dry FFAs, enjoying leading market share with leading companies across the US, Europe, Middle East and Asia. Our position as market leader gives us a unique insight into the future development of the market and the direction of freight risk management.
A combination of factors is driving continued interest in freight trading. Dry bulk freight rates are recovering from 30-year lows, driven by a combination of better economic activity in the US, Europe and Asia, as well as a record levels of vessel scrapping.
As a result, Dry Bulk FFAs maintained an annual level of 1.4m cleared lots in 2017, equivalent to more than 3bn tonnes of physical cargo. This compares to a seaborne dry bulk freight market which has an annual volume of approximately 3.5bn tonnes, comprised mainly of iron ore, thermal coal, coking coal and grains.
Increasing volatility is leading operators to increasingly reject long term physical charters in favour of spot business for which they need better hedging and there is more growth potential to come.
Despite its critical role in dry bulk shipping – building half the world’s ships and accounting for half of its dry cargo demand – China accounts for less than 2% of FFA volumes traded, driving huge growth potential.
The purchase in 2017 of the Baltic Exchange by the Singapore Exchange further shifts the axis of world trade towards Asia and FIS is well positioned to capitalise, promoting new routes and leveraging the listing of new commodity contracts.
In response, FIS is developing new routes and products to add liquidity to trades including Gulf/China grain trade and Dry Freight ETFs all of which will enhance liquidity.
Dwarfed by the dry FFA market which stands at 3 billion tonnes a year, the cost of oil and products freight as a proportion compared to cargo value and the use of the Worldscale system has limited the ability of the Tanker FFA market to expand beyond its current size.
The seaborne tanker market equates to around 3.2 million tonnes of crude and refined cargoes transported annually. By contrast, total Tanker FFA market volume in 2017 was estimated to be a total of 250 million tonnes.
FIS is working to reinvent the tanker FFA market and build a platform for the next 20 years, moving to a dollar-denominated model that enables players to react to increased volatility.
FIS is already engaging in marketing, education, and support to help bring in new counter-parties to trade, utilising our current exposure in the Dry FFA, Iron Ore, and Fuel Oil markets.
By working with the major physical operators, which already trade derivatives in other markets we can increase cross-selling opportunities and help traders increase forward cover with cleared contracts.
FIS is bringing its expertise in financial risk management to the air freight market with the launch of Air Cargo FFAs.
This is a market that is ready for take-off: strong growth, high volatility and an annual value of $70bn with $20bn worth of goods shipped daily. The size of the air cargo market – 35% of global trade by value, but only 1% of trade by volume – puts huge amounts of value at risk every day that needs to be managed.
FIS has partnered with The Air Cargo Index (TAC Index) to provide airlines, forwarders and end users the means to flexibly price air cargo contracts and to hedge their exposure using cleared financial futures contracts.
The air cargo freight market is undergoing a transformation; growing rapidly, with volumes expected to more than double in the next 20 years, it also faces threats from new entrants challenging established business models and promising new levels of transparency using tools that threaten long-standing relationships.
Using the market-neutral TAC Index, FIS will publish a forward price curve, helping market participants with forward planning and budgeting, allowing them to better forecast expenditure and manage budgets effectively while also gaining more flexibility.
Buyers and sellers of cargo space will be able to improve price discovery on physical fixed rate contracts, strike index-linked floating block space agreements and use Air Cargo FFAs to lock in prices.
In order to generate the maximum liquidity in this emerging market, FIS has developed a series of geographically-focussed baskets to represent the most popular routes. Currently available baskets include the six biggest routes on Asia-Europe and Asia-US, generated on a volume-weighted basis set on an historical basis and priced against weekly index publication.
Freight forwarders will be able to manage their exposure and obtain better pricing. Asset owners leasing planes to carriers can use FFAs to manage their forward income stream, working with lessors to hedge their risk by locking in forward cover.