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Freight hedging to gain speed: execs

Keywords: Tags  Capital Link, Annual Global Derivatives Forum, Freight Investor Services, steel futures, freight derivatives, John Banaszkiewicz, Samuel Frizell


NEW YORK — Steel, scrap and raw materials derivatives are gradually gaining acceptance in a metals industry struggling with unprecedented volatility, and a more widespread use of freight derivatives may be just around the corner, according to executives at a number of the world’s largest brokerage and shipping firms.

The steel and shipping markets have been swept by extreme volatility in recent years, industry leaders said at Capital Link’s fourth annual Global Derivatives Forum in New York this week, with average hot-rolled coil prices in the United States swinging between $580 and $750 per ton this year and shipping rates increasingly subject to their own sharp turnarounds.

That growing volatility has rattled the market in recent years, encouraging some participants—particularly on the raw materials side of the steel equation—to consider hedging their positions with futures or against indices.

"The two big swing factors are coal and iron," said John Banaszkiewicz, managing director of London-based freight and commodities broker Freight Investor Services Ltd. (FIS). "They are two-thirds of the dry bulk market in total, and we are very keen to see those two commodities develop into derivatives, into a liquid market."

Iron ore indices and swaps in particular have gained speed in recent quarters as mills look to stabilize their pricing exposure, but futures contracts can also benefit consumers of finished steel products, including automakers, said Tom Beney, Cargill Americas head of ocean transportation.

"We need to see (futures) not only work for the steel mill as a customer but also for the steel mill’s customer. And I think if we were able to do it, we’d have a huge potential," he said.

Peter Norfolk, research director at FIS, agreed that the benefits of hedging span the supply chain.

"Steel swaps provide price risk management, giving miners, traders and steel end-users certainty on margins," he told AMM in an e-mail. "We are confident that steel swaps have massive growth potential, and we are already seeing volumes build as more players get involved."

But while more steel mills and consumers are increasingly using risk-management tools in their businesses, the trend has not yet gained much speed on the freight derivatives front.

However, analysts predict customers will begin to hedge shipping contracts more in coming years in response to swings in shipping rates that can hurt supply lines as well as shippers.

The cost to transport a container from Hong Kong to the U.S. West Coast, for example, has more than doubled since 2009, according to Joe Alagna, vice president of U.S. sales at Shanghai-based China Shipping Container Lines.

"It’s difficult for our customers to plan their business and price their products," he said. "By going into multiyear contracts (based on an index), that’s really what we’re looking for so we don’t have to go through this process."

Only about 1 percent of the 4,500 shipping contracts filed with the Federal Maritime Commission are multiyear contracts based on an index, Alagna said.

"We do need indexing and we do need help with that so we can simplify it and lengthen our contracts," he said.


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