Shipping: "Platts poised to take on Baltic Exchange in dry freight futures"

From FreightWaves, October 4:

By far the largest, most mature and most liquid freight futures market in the world is for Capesize dry bulkers, vessels with a capacity of around 180,000 deadweight tons. There is over $2.6 billion in open interest in Capesize forward freight agreements (FFAs) and options as of today.

When it comes to generating daily rate assessments to underpin these futures contracts, London’s storied Baltic Exchange has been the only game in town for as long as this derivatives market has existed. But that may be about to change.

S&P Global Platts, a giant in the index and price-assessment arenas, has just launched a Capesize index at a time when the Baltic Exchange still faces lingering reputational backlash after a controversial decision on its index definition in March. This confluence of events could eventually open the door to new Capesize futures products based on Platts assessments.

Platts said it launched its new index in response to “feedback from market participants who said they are exposed to basis risk and cannot hedge effectively without a new reference” – a polite way of claiming it was told that the Baltic Exchange’s paper assessments diverge too far from physical reality. “The shipping industry deserves better,” maintained Peter Norfolk, global head of shipping for S&P Global Platts.

The new index that debuted Oct. 1, the Platts CapeT4 Index, is a weighted average of assessments of four Capesize round-trip voyages: China-Australia (weighted 46%); China-Atlantic (i.e. Brazil, weighted 45%), China-South Africa (6%) and trans-Atlantic (3%).

During an in-depth interview with FreightWaves, Norfolk explained how the new product came about, how Platts’ process diverges from the Baltic Exchange’s, and how the product could evolve in the future.

“S&P Global Platts has had a presence assessing freight in the tanker markets, which made sense given our background in oil markets – and we now have four tanker assessments that are listed on CME and ICE as a basis for derivatives that are actively traded,” he explained.

“But we also assess [dry] commodities – metals, coal, agriculture – and as part of that we have been assessing dry freight routes,” he added, noting that Platts now assesses over 120 bulker routes....

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