Freight Investor Services: Volatile freight rates may be higher than expected

Monday, 08 March 2021 15:28:11 (GMT+3)   |   Istanbul
       

We talked to Freight Investor Services about the current conditions and the future expectations regarding the freight market.

Can you inform our readers about your services?

We are the world’s largest broker on dry freight futures and have a strong presence across the bulk commodities, metals and energy markets. We were the first brokerage to trade in the cleared market on iron ore and later coking coal futures. We also maintain a leading position in broking steel futures on all exchanges, as well as fuel oil, base metals, fertilizers, and tanker freight. Not only do we provide excellent brokerage services, but also data - with our award winning app FIS Live - and education services to help those entering new markets.

How do forward freight agreements help your customers? For which products are FFAs mostly preferred?

Freight is a highly volatile market, as your readers may well know. Our customers benefit by controlling their risk, and in many cases locking in their profit margins. By using the FFAs, they are able to help stabilize and predict cash flows, guarantee rates to their customers, and protect themselves from sudden market swings in the cost of freight. FFAs are very popular tools to use - and very liquid markets - in both Dry Bulk and Tanker freight. The most liquid and mature market, though, is the Dry Bulk FFA market. This tends to trade on a global average of the daily hire cost of a vessel, as measured by the Baltic Exchange in London. Dry freight trades across three major vessel types, from the largest Capesize ships, to Panamax, and Supramax vessels. Traditionally, Cape and Panamax were the largest markets, but we have seen rapid growth in the past two years in Supramax FFA trading also.

Can you tell us about your physical freight operations?

FIS has a niche - but fast-growing - physical shipbroking business, operating from London, Mumbai, and Singapore. This has been entirely driven by demand from our dry FFA customers, many of whom like to receive a comprehensive suite of services.

How do you evaluate the increase in freight rates? Do you expect the uptrend to continue?

The market for Dry Bulk perhaps overcorrected in the fourth quarter of last year, especially on the larger Capesize vessels, where we saw an unusually steep fall, despite some brief recovery in January.

We are in the business of delivering real information to our customers, not guesses, so it’s not my place to predict where the market will go. I will say, however, that the fundamentals of the market, if we consider China’s initial recovery, and the hopeful signs that emerge with vaccination rolling out in many areas, may support healthier rates this year than many participants expected a few months ago, although this remains to be seen. This uncertainty highlights the need more than ever to hedge and protect against market swings using FFAs.

Have you observed any changes in trade routes during the pandemic?

Yes, initially we saw a negative market reaction on dry bulk as much of China went into lockdown early last year, and then another big drop as Italy announced its lockdown, and it became clear that Europe and America would indeed have to follow.

Having said that, freight is based as much on supply as on demand, and one of the reasons we had such a very strong Capesize freight market last October, for example, was the huge congestion caused by Covid quarantine restrictions of sailors aboard ships, slowing or halting crew change. So, it’s essential to remember the pandemic itself is not a universally negative factor on freight - it drives volatility both upwards and downwards.

What other impacts has the pandemic had on your operations?

Our firm faced a very large challenge with, in March 2020, all of our global offices working remotely due to lockdowns in each of the six countries we operate in. Our incredible technology team, and our decision to switch to cloud-based computing and communications the previous year, helped us achieve fully-remote working globally much faster than many of our competitors.

What do you expect for the freight market in 2021?

Very high volatility! As the world recovers, guessing the pace and the growth of industrial and consumer demand in each region will become exceptionally difficult, and sentiment will shift back and forth frequently. I expect dry bulk freight rates, which were already among the most volatile in history in 2020, to be even more so this year. I look forward to the global economy being back on its feet by 2022 though.

How does Steel & Scrap Derivatives help your customers?

There are several areas where derivatives can create value in the ferrous supply chain. First, firms who engage in trading can help protect against price risk, locking in margins against unpredictable market moves. Second, a company which is active in the physical market can offer fixed pricing for key suppliers and consumers by utilizing derivatives. Finally, a company utilizing a hedging strategy may be able to smooth earnings and compile information from both the physical and futures markets to better assess overall market conditions.

What impact has the pandemic had on the Steel & Scrap market?

We have seen unprecedented volatility in ferrous physical and futures markets due to trade wars and the global pandemic. All at once, global steel demand rocketed upward while prices had been stagnant. This has caused pricing to reach all-time highs and to continue to climb. From the trends in the market, it seems that volatility is here to stay.


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