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Why Futures Contracts May Be the Key to Stabilizing Freight Rates

As all stakeholders throughout the supply chain seek answers to 2021’s skyrocketing freight rates, select parties are banking on futures contracts to bring some transparency to pricing going forward.

Six new futures contracts scheduled to start trading in February are designed to hedge the risk of ocean freight rates, and mitigate some of the volatility that importers and shippers have faced as they attempt to secure tighter container capacity.

Futures dealer and broker Freight Investor Services (FIS) said that it will offer the container freight rate futures on the Chicago Mercantile Exchange (CME), one of the world’s largest futures and commodities exchanges.

“The cost of freight shipping has become increasingly volatile, creating new price risks for the transportation of goods globally,” said Peter Keavey, global head of energy products at CME Group in a statement. “We believe our new container freight futures will be a valuable risk management tool for customers looking to hedge their freight costs over a longer time horizon and look forward to working with Freightos and the Baltic Exchange to offer these products to the marketplace.”

The daily price of the futures contracts will settle against the Freightos Baltic Index (FBX), a container rate tracking index developed by digital freight booking platform Freightos and the Baltic Exchange, the 277-year-old, London-based provider of shipping rates and indices.

The Baltic Exchange said in a separate statement that trading is expected to begin Feb. 28, with the first contract month for trade being March 2022, pending regulatory review.

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“The Baltic Exchange is an independent, trusted body with deep experience of managing complex benchmarks for the shipping industry,” Baltic Exchange CEO Mark Jackson said in a statement. “Our freight benchmarks already underpin a liquid market for dry bulk and tanker shipping, and we are excited by the prospect of the development of a market which plays such a significant role in moving global trade.”

The listed contracts will be for these major trade routes: China/East Asia to the U.S. West Coast (FBX 01); the U.S. West Coast to China/East Asia (FBX 02); China/East Asia to the U.S. East Coast (FBX 03); China/East Asia to North Europe (FBX 11); North Europe to China/East Asia (FBX 12); and China/East Asia to the Mediterranean (FBX 13).

Futures contracts enable shippers to lock in the forward cost of freight over a time period of their choosing. For ocean liners and ship owners, listed futures open opportunities to hedge against a downturn and ensure long-term stability and profitability after the strongest container market price run in history. The price structure, in the form of the “forward curve,” can provide visibility into what might happen in the future for CEOs, economists and freight consultants and advisers.

The new container futures come amid soaring freight rates in 2021, poor ocean freight reliability and congestion at all major ports. U.S. container imports in 2021 are anticipated to be the highest since 2002 and over 18 percent higher than 2020, according to the National Retail Foundation.

And according to FBX data, current contracts across all 12 trade routes collected indicate that the average 40-foot equivalent container unit (FEU) was $9,153 as of Dec. 17. This is a 14.4 percent decrease from the peaking rates on Sept. 10, indicating that rates have alleviated across the board into the holiday season. But it also speaks to the volatility that these prices endured, especially since FEU costs were as little as $3,452 per unit on Jan. 1, marking a 165.2 percent increase in 2021.

“The volatility that we have seen in the last 18 months has led many participants in search of hedging tools,” said Peter Stallion, container broker at FIS in a statement. “Futures are that tool to fill the gap between inflexible physical long-term contracts and outright exposure to spot prices. The launch of these cleared contracts opens up the market to all participants, helping drive forward an efficient and universally beneficial market…The listing of cleared contracts will bring in crucial liquidity providers, allowing us to drive forward more trading and help ocean liners, ship owners, freight forwarders and shippers manage their future price risk.”

Zvi Schreiber, CEO at Freightos, said that the industry has long suffered from lack of transparency and flexibility, making the introduction of these futures contracts more important to a potential further decline in 2022 freight rates and overall pricing volatility.

“We are excited that container shipping will now join other industries in adopting flexible index-linked pricing with financial instruments to hedge pricing risk,” Schreiber said in a statement. “FBX futures will help global supply chains to cope with unprecedented demand and new levels of volatility driven by the pandemic.”