Shipping: "In pursuit of an LNG freight derivatives market"

From Platts, Feb. 1:

The commoditization of the global LNG market has had implications across several associated industries, ranging from the gas-fired power sector to seaborne gas transportation.

Hence, it came as no surprise that the venerable Baltic Exchange, probably the world’s oldest source of shipping information, set out to build an LNG freight index in January that could be launched as early as spring 2018.

LNG carriers are after all the pipelines of the sea. The global LNG carrier fleet now numbers nearly 500 vessels, compared with less than 100 ships in 1997. That’s a fivefold increase in two decades.

Assuming an average cost of $200 million for one LNG carrier (it has ranged from $180-$220 million) that equates to nearly $100 billion spent on building the existing LNG carrier fleet.

Related blog post: JKM reveals three LNG surprises in three years – tightness, correlations and seasonality

The fleet is still growing and an increasing number of ships are being chartered on the spot market, in line with the fragmentation of long-term 20-year LNG supply contracts.

“As a liquid spot market for LNG ships develops, only now can we start talking about creating an index for LNG rates,” Ralph Leszczynski, Singapore-based head of research at Italian brokerage Banchero Costa, said.

SHIPPING VS DERIVATIVES
The Baltic Exchange has brought in four LNG shipbrokers to assess the routes for its index –Affinity, Braemar ACM, Clarksons and SSY.

Once the index is functional, the next logical step would be launching LNG freight derivatives called forward freight agreements or FFAs.

The Baltic Exchange was acquired by Singapore Exchange Ltd, or SGX, in 2016 with the objective of monetizing freight market information through derivatives products.
FFAs are cleared through the London Clearing House, Nasdaq, SGX, European Energy Exchange and the Chicago Mercantile Exchange.

However, building out a paper market for shipping derivatives is another ball game altogether, as the shipping sector lags other industries like aviation and oil in using derivatives products for hedging purposes....MORE:

Somewhat related:
Feb. 1 
Shipping (hedging; speculating; gambling): "Baltic Dry Index to Become Tradable After Benchmark Changes"