Dry Freight Derivatives Show Major Revival

Traded volumes in the dry cargo forward freight agreement (FFA) market have revived as the physical market strengthens, reports risk management advisor FIS, bolstering hopes that the sector has finally shaken off the worst of the downturn.

Higher volumes in the paper freight market reflect growing confidence that the physical market has recovered to something like normal levels after five years of depressed earnings.

They also illustrate the continued need for owners and operators to hedge their freight exposure, as the increases in Q114 surprised even the most seasoned market watchers. So far this year, cleared volumes in the dry freight market have increased 61% from the same period of 2013.

“Dry bulk freight has been an undervalued market for so long that it was overdue for a recovery in both sentiment and in terms of supply/demand balance,” said FIS managing director, John Banaszkiewicz. “Paper has come back into its own as a means to hedge freight risk and for traders who are looking to take advantage of the increased volatility.”

“The increase in rates in the first quarter has been much higher than most people expected and has meant that a lot of short players have had to change their strategies and re-engage with the paper market in a much more concerted way.

“The increase in index pricing and use of shorter term is reflected in a market that is subject to much faster changes. The mood and the market has changed for good – we are in for an interesting year.”

Alongside the increased volumes, a greater proportion of trading is being concluded between the large investment funds, operators and utilities, with the banks taking more of a back seat in contrast to their leading role pre-2008.

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