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New phase of liquidity for dry bulk futures as Brazil-China grain route goes live

FFA market goes ‘back to its routes’ with the launch of cleared futures contract enabling users to hedge booming Brazil-China grains trade

Freight Investor Services, the global leader in freight and commodity derivatives, has helped usher in a new era in dry bulk futures trading with the launch of the Baltic Exchange Panamax P8 grains route.

The new route offers shipowners and grains market players on the key Brazil-China soyabeans route a complementary method of hedging to the existing Panamax P2A route. At current pricing of $32.042/tonne FIS estimates that each P8 trip carries approximately $2m of unhedged freight risk with around 38% of this associated to the cost of fuel oil.

The modern FFA market traces its roots to 1985 and the BIFFEX Index, of which US Gulf- Japan Route 2 grain routes formed an important part, hedging approximately 15mt of physical corn business annually.

“Grain routes are where it all began for many of us in the FFA market and it’s great to be at the forefront of a new phase of liquidity in dry FFAs and see a new trading opportunity come to fruition,” says FIS Founder John Banaskiewicz. “This is a cause we have fought for over many months, encouraging the Baltic to list the new route and working with customers to raise awareness of the opportunity.”

The market for seaborne transport of soyabeans is approximately 150m tonnes per annum, with 95m tonnes of this thought to have been exported to China in 2018, 80% of which originate from Brazil. FIS has been providing forward curves during the new route’s trial period and will continue to contribute curve and settlement price data.

“Uncertainty in the global economy and particularly the impact of the US-China trade war makes the ability to hedge freight and fuel risk on this booming route more important than ever,” adds John B. “With demand for soyabeans highly resilient in China and fuel prices set to rise from next year, the timing is perfect for P8. We believe this new route could act as a driver to encouraging greater Asian participation in FFA markets, particularly soyabean receivers.

While the first two months of 2019 saw a dramatic fall in dry bulk freight rates, the resulting volatility acted as a huge spur to FFA volumes, attracting new players to the market. Panamax FFA trading has followed the upward trend – having shown volume growth of 48% in year to date 2019.

Clearing will initially be offered by NFX to the attached specification. FIS clients wishing to trade the new P8 route from March 28 should contact their General Clearing Member to ensure they list the route. The Baltic’s P7 (US Gulf-China) route continues on a trial basis, with FIS continuing to provide forward curve and settlement price data.

FIS P8 FAQs

Why is FIS offering the Baltic P8 Route?

We have always believed that new routes provide a great opportunity for additional liquidity in the FFA market. The P8 route represents a hedging and trading opportunity on a new route that has shown strong growth and positive fundmentals.
FIS Shanghai office is receiving growing demand and enquiry from the Chinese crushing industry for a more effective hedging instrument.

What is the Baltic P8 route?

P8 is a Panamax vessel freight route from Santos, Brasil to Qingdao, China, primarily used to carry soybeans for processing in China.

What is the Baltic description for a vessel on this index?

Santos to Qingdao (min 13m arr draft). 66,000mt HSS, 10% more or less in owner’s option, free in and out, trimmed. 8,000mt Saturdays, Sundays + holidays excluded loading, 8,000mt Saturdays, Sundays + holidays excluded discharge. 24 hrs turn time at loading port, 24 hrs turn time at discharge port. Loading 15/25 days from index date. Age max 15 years. 5% total commission.

What contracts are available to trade on paper?

FIS will focus on providing forward pricing on the front six months and front three quarters. NFX will clear the front 24 months for the P8 contract. We envisage a full contract to be 60kt, half contract 30kt, quarter contract 15kt with 5kt also workable.

Which exchanges will list the P8 contract?

Initially P8 will only be listed for clearing by NFX (see specification attached).

Is there any historical pricing data?

FIS has been producing a forward curve for P8 on a trial basis for over six months and is happy to make this data available to customers.

What is the notional value of a P8 contract and the fuel oil exposure?

Taking the 66,000mt Panamax vessel at spot rates, the notional value is a little over $2 million with fuel oil being approximately 35-40% of the cost.
Source: FIS

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