Dry cargo FFA market

FFAs - A contract for differences

For FFAs to work as a long-term market, there must be more to them than just a self-interest in buying low/selling high on headline or sentiment-driven pricing.

Part of the answer lies in the many innate tensions in the shipping market between the natural buyer (charterer) and the natural seller (owner). These also afford opportunities for the trader/operator in the middle. It was largely these tensions which helped Clarksons when the idea was pioneered in 1991.

Here are some Rules of Thumb:

The larger the vessel, the smaller the number of types of commodities carried, the smaller the number of ports that can be visited, the larger the amount of time spent in ballast (unloaded), and the larger percentage of the fleet dedicated to scheduled runs. It all takes time. A February cargo from South Africa to Rotterdam may involve the ship being 'fixed' in January for it to arrive in Holland in April. The vessels are about two football pitches long, and travel at bicycle speed. The three standard vessels (Capesize, Panamax, Supramax) are linked loosely in that they all carry similar raw materials in the same bulk form round the world. For example, a scarcity of the larger Capesize in a coal-loading area at a particular time can lead to a rise in the Supramax grain freight rates at the same time. This linkage however can become tenuous as pressures mount or slacken unpredictably in a particular sector. The 'perfect' cargo sale may match the available vessel at an acceptable price, but the chances are it will not. Sales have to go from A to B; ships can always choose different parts of the alphabet. An owner will often regard a minimum FFA trade as being at least half of one full cargo for his vessel for it to achieve commercial relevance; a trader may be very happy to back the perceived market direction in reduced quantity; a charterer may find his primary concern to be a non-specific three-month forward window. Dates, size and price can pull in different directions - especially when it comes to the detail. An owner has to work his way round the world; often a charterer is only concerned with his favourite A to B. An owner's prime concern is the nett return per day (timecharter return), while the charterer or merchant is only concerned with the total outgoings per ton (voyage return). A charterer's strategy meeting might discuss: the cargo throughput for his mines/ factories/mills or silos; commodity price abnormalities; how interest rates may impact on the amount of raw material to be kept in store, and where. An owner's agenda would include none of the above. Given how little the parties have in common, it is amazing that nearly three billions tons are shipped every year. FFAs are only concerned with the dollar value of the freight - not the logistics of shipping cargoes. In the idealised world of FFAs, there are no weather delays or strikes - in fact there is no option of physical delivery, and still over one billion tons are covered every year on FFAs. Hopefully this creates some sort of a picture as to why the market needs to work - as a marriage of opposites. Despite their different interests, charterers, owners, operators and merchants cannot live without each other.