长城汽车组织结构:China increases shipping pricing ability on f...

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China increases shipping pricing ability on first shipping financial derivatives

17:26, July 29, 2011      

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The Shanghai Shipping Freight Exchange Co., or SSFEC for short, China's first shipping freight third-party centralized trading platform, has operated for one month as of July 28. The transaction volume of the forward Shanghai export container freight rate contract, China's first shipping financial derivatives launched by the Shanghai Shipping Freight Exchange Company, reached 400,000 lots in a month, showing a good start.

Forward China coastal bulk cargo freight rate contract to launch by year's end

The initial transaction volume of the Shanghai Shipping Freight Exchange Co. was remarkably high compared to other new financial derivatives in the world. Leading shipping broker Clarksons made the first transaction of the Shanghai Containerized Freight Index operated by the Shanghai Shipping Exchange on Jan. 15, 2010 and completed 40,000 lots of transaction volume within the subsequent 20 months. However, it completed 400,000 lots of transaction volume through the platform of the Shanghai Shipping Freight Exchange Company within one month, including a net position of about 40,000 lots.

For the trade number and open interest, experts have attached more importance to the open interest because it has much more significance of hedging, but if there is no trade volume at the beginning, then there would be no open interest. Since the gradual increase of trade volume signifies the gradual rise of market liquidity, the open interest will also be heightened. In popular understanding, the hedging would actually be realized if the purchase is available when you want to buy and the sale is available when you want to sell.

"As a result, the gentle development of the derivative trading market must give priority to the liquidity and judging from this point, the beginning of SSEFC is quite favorable," said Zhang Ye, the president of SSEFC and CEO of Shanghai Shipping Exchange.

The shipping freight exchange product is a product used for hedging the risks from the spot shipping freight market. If a trader predicts that the shipping freight will rise, he could participate in the transaction, buy in the open order and sell it out when the shipping freight has risen. In this way, although the risen shipping freight has increased the trader's cost in the spot market, he still can gain profit in the forward market and the risk caused by shipping freight fluctuation can be hedged. In the same way, if a shipping company predicts that the freight will decline, it could sell the contract out first and buy it in when the freight has declined in the forward market to hedge the risk.

Currently, the company has launched the long-term shipping freight exchange product for the containers exported from Shanghai, including lines from Shanghai to Europe and Shanghai to the western United States.

By the end of 2011, it will launch the long-term shipping freight exchange product for dry bulk cargo imported from coastal line of China. And in the first half of 2012, it will launch the long-term shipping freight exchange product for dry bulk cargos of international ocean routes.

It will further promote China's speaking right in the international shipping market.

Regarding product development of shipping freight derivative exchange, there are two different gaps between the SSEFC and the Baltic Exchange. First, the SSEFC is not influential enough. Second, China's related laws and regulations have not been perfected. Therefore, it is not that the SSEFC does not want to expand the scale its derivative exchange, but that it cannot expand it. It must have a "steady start."

Regarding the exchange mode, the Baltic Exchange adopted an antiquated idea and uses the over-the-counter agent transaction mode. Though electronic platforms have been widely used now, the Baltic Exchange still does transactions through agents. But the SSEFC uses the modern electronic onboard transaction mode. Customers can read the information and place an order by themselves.

The cargo throughput of the Shanghai port reached 653 million tons in 2010, marking a 12th consecutive year of throughput growth. Shanghai overtook Singapore as the world's busiest container port last year when its container throughput reached nearly 29.1 million twenty-foot equivalent units. Surprisingly, China, a major maritime country, still has no say in sea freight pricing.

At the same time, the sea freight market, including the container transportation market, is facing growing volatility in freight rates. The lowest price for transporting a standard container from Shanghai to Europe by ship has been 300 U.S. dollars, while the highest price has exceeded 2,000 U.S. dollars. As shipping companies, goods owners, freight forwarders and traders all need a financial tool to hedge against freight rate risks, the SSEFC's shipping financial derivative will give China a greater say in the international shipping industry.

Regarding the development of shipping freight index derivatives, Zhang hopes that the Government of China could give more strict supervisions and allow state-owned enterprises to participate in the hedging transaction under the condition of a stable market.

He also suggests that the RMB internationalization should carry out pilot projects on the new products of the SSEFC because the shipping is an international business.

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