Drewry Shipping Consultants have published a Spotlight Report on Forward Freight Agreements (FFAs) and Shipping Derivatives.
The report highlights how trading in shipping derivatives, primarily Forward Freight Agreements (FFAs), has seen significant growth since 2000. “Today, the FFA market has reached an important stage in its development as its volume, liquidity and depth appear to have achieved a ‘viable mass,’” say Drewry Shipping Consultants.. “It is time to take them seriously.”
It should continue to grow and exert some influence over near term sentiment both in its own marketplace and in the underlying physical market, say the analysts.
The expansion of the FFA market – and its ability to attract participants from outside shipping – has accompanied an unprecedented bull market in most of shipping and the dry bulk sector in particular.
“At the start of the year, 2008 looked set to be an interesting year for both the shipping industry and the FFA market – not least because, globally, the risk environment seen in the early part of 2008 was not one that has been contemplated seriously for some considerable time. Of course, whether 2008 turns out to be a good year or a bad year will depend on events now well in train over which neither shipping nor the FFA industry has any control. With the ‘credit crunch’ biting deep into financial sector stability, no one is yet clear as to whether the contagion has further to spread and to what extent all of this impinges and affects the ‘real economy’. However, it does bring financial risk management strategies – and the protection of market positions – to the fore.”
What is also clear, say the Drewry analysts, is that while FFAs may be fashionable at present, this does not mean that players should enter this market based on little more than a whim. Under the current financial black clouds, it is even more vital that physical market operators understand forward markets and that forward market ‘outsiders’ (traders, funds, banks, etc.) understand the fundamentals of shipping. Sound long-term judgments are always going to be difficult to make when the immediate marketplace is at a fever pitch. Ill-thought-out strategies, however, could be catastrophic.
