2. Produced by - Amar Ehsan, CFA 2
Three Main Types of Freight
• Refers to any type of
cargo that can be stored
without any need for
sorting, packaging or
special climate control
• Can be further
subdivided into “major”
bulk (iron ore, coal and
grains) and “minor”
bulk (finished steel,
cement, forest products,
misc. metals,
intermediate minerals
etc.)
• Measured in deadweight
tons (dwt)
• Refers to crude oil,
petrochemicals, LNG,
LPG and industrial
chemicals
• Measured in deadweight
tons (dwt) or barrels
(bbl)
• Refers to containerized
cargoes of finished
products including
consumer goods like
Refrigerated Perishables,
Home Electronics, Clothes
and Automobiles. Also
includes industrial goods
like fabricated machine
parts, spare supplies etc.
• Measured in deadweight
tons (dwt) or Twenty Foot
Container Equivalent (TEU)
DRY BULK WET TANKERS CONTAINERS AND
GENERAL CARGO
3. Produced by - Amar Ehsan, CFA 3
Main Vessel Classifications
• MAJOR BULK
– VLOC (225k+ dwt)
– Capesize (80-225k dwt)
– Panamax (50-80k dwt)
• MINOR BULK
– Panamax (50-80k dwt)
– Handymax (30-50k dwt)
– Handysize (<30k dwt)
• Other specialized classes
exist as subsets of these
main classes
DRY BULK WET TANKERS
CONTAINERS AND
GENERAL CARGO
Vessels are classified on a combination of size, functional capabilities and
most frequented trade routes. However, overwhelmingly vessels are
contracted based on size.
• CRUDE OIL
– VLCC (200-330k dwt)
– Suezmax (120-200k dwt)
– Aframax (80-120k dwt)
• REFINED PRODUCTS
– LR Tanker (120-150k dwt)
– MR Tanker (80-120k dwt)
– SR Tanker (50-80k dwt)
• Other specialized classes
exist for LNG/LPG
• CONTAINERS
– Large (5000 TEU+)
– Medium (2-5000 TEU)
– Small (<2000 TEU)
• GENERAL CARGO
– Mo/Mo – (Multimodal)
– Ro/Ro – (Roll on/Roll off)
– Reefer – (Refrigerated)
– HLV – (Heavy Lift Vessel)
4. Produced by - Amar Ehsan, CFA 4
Shipping Contracts
• Negotiated rate for the vessel
is highly dependent on:
– Size of Cargo
– Available vessels of size
– Distance (Ton-miles)
– Age of vessel
– Port of destination
• Main users of spot market
vessels are:
– Steel Manufacturers
– Crude Oil Producers
– Ship Brokers
– Speculators
Spot Market Time Charter Market
Vessels are generally hired for a charter on a voyage basis (single round-trip
AKA “Spot” market) or on a longer term (AKA “Time Charter”) contract. Most
of the global fleet is owned and operated by the same party and thus
operates on a private contract basis.
• A vessel contract can range
from a short term contract of
0-6 months to a long term
contract of 5+ years
• Vessels can be contracted
with or without a crew and the
contracting party can “sublet”
the vessel while it is under
their control
• Most dry bulk and wet freight
operates on private long term
contracts. Nearly all container
traffic operates on private
long term contracts
5. Produced by - Amar Ehsan, CFA 5
Freight Indexes
• Baltic Dry Index
– Rates on major global routes are independently collated from a panel of brokers around the world
– Good leading indicator for economic growth
– Robust index widely quoted throughout the shipping industry
– Index is not currently tradable
• Baltic Forward Assessment (BFA)
– Published on a daily basis and provide market users with a forward curve out to 3 years (rolling calendar
Qtr) to act as a mark to market curve
– Quoted in US $/day to match vessel charters
(but certain routes can be quoted in $/ton or $/bbl)
– Trading on individual vessel routes is made possible, but a 4TC market (average of 4 individual routes) is
also provided that closely correlates individual routes and is far more liquid
The Baltic Exchange is an independent trade group comprised of Ship-owners, Shipbrokers and Ship Financiers
who share a common goal of disseminating the most accurate information available on global dry bulk fleet
demand and supply. They are responsible for publishing the Baltic Dry Index and providing the Baltic Forward
Assessments (BFA)
6. Produced by - Amar Ehsan, CFA 6
Trading Freight Derivatives (FFA)
Freight derivatives provide a means of hedging exposure to freight market risk through the trading of specified
time charter and voyage rates for forward positions.
Settlement is effected against a relevant route assessment, usually one published by the Baltic Exchange
The main terms and conditions set forth in a contract agreement cover:
(a) The agreed route.
(b) The day, month and year of settlement.
(c) Contract quantity.
(d) The contract rate at which differences will be settled
Freight Rate Trades can be set up to:
• Hedge a position in an equity that is synthetically “short” freight rates (i.e. steel, coal)
• Take a “long” position in a specific trade route (i.e. API#2 vs. API#4)
• Design a spread trade between two individual routes or a route versus the published T/C
average (i.e. Iron Ore from Brazil to China [C3] vs. Iron Ore from Australia to China [C5])
• Take advantage of convictions about port congestion or other infrastructure bottlenecks (i.e.
DRYS vs. Capesize 4TC Average, Short Xstrata [XTA LN])
The International Maritime Exchange (IMAREX) is the only authorized and regulated marketplace for trading and
clearing of maritime derivatives contracts (through Nordic Options Exchange), and provides an accurate market
for Dry Bulk and Wet Freight Futures
7. Produced by - Amar Ehsan, CFA 7
Main Dry Bulk FFA Routes
Capesize Vessel (Iron Ore, Coal)
IRON ORE
C2 - Tubarao (Brazil) to Rotterdam (Netherlands)
C3 - Tubarao (Brazil) to Beilun/Baoshan (China)
C5 - Newcastle (Australia) to Beilun/Baoshan (China)
COAL
C4 – Richards Bay (South Africa) to Rotterdam (Netherlands)
C7 – Bolivar (Venezuela) to Rotterdam (Netherlands)
C12 - Gladstone (Australia) to Rotterdam (Netherlands)
Panamax Vessel (Iron Ore, Coal)
IRON ORE, COAL, GRAIN
P1a – Transatlantic (Primarily Latin America to Europe)
P2a – Europe to Far East (Primarily China) via Suez Canal
P3a – Pacific Round Trip (Primarily Australia to China)
P4a – Far East to Europe via Panama Canal (Japan Eastward)
8. Produced by - Amar Ehsan, CFA 8
Main Wet FFA Routes
Crude or “Dirty” Tankers (VLCC, Suezmax, Aframax)
TD1 – Arabian Gulf to US Atlantic Coast
TD3 – Arabian Gulf to Far East
TD5 – West Africa to US Atlantic Coast
TD7 – North Sea to UK Coast
Refined Products or “Clean” Tankers (Aframax, LR, MR, SR)
TC1 – Arabian Gulf to Far East
TC2 – UK Coast to US Atlantic (North Sea Arbitrage)
TC6 – Cross Mediterranean
9. Produced by - Amar Ehsan, CFA 9
Future Drivers of Freight Rates
• Commodity demand. Headline story is always China – massive importer of raw materials but increasingly
becoming an exporter as well. Our trip realized mixed indications of whether a slowdown was imminent post 2008
Olympics. Globally, What are the levels of industrial production? Are power stations importing more coal? How is
the steel industry performing?
• Fleet supply. How many different types of ships are available? How many vessels are being delivered and how
many are being scrapped? Newbuilding is a 2-3 year process and forward order books for shipbuilding yards
indicate a large amount of tonnage becoming available in 2010; how accurately is this reflected in forward rates?
Scrapping is at an all time low despite attractive scrap prices; how long will vessel retirement be deferred? The
age profile of the global fleet is heavily weighted to older vessels. IMO standards require all single hull VLCC (33%
of global crude fleet) to be retired by 2010; with port standards being widely varied, will this deadline be met?
• Seasonal pressures. The weather has a big impact on the shipping markets from the size of grain harvests to
icing over in ports to demand for commodities and even river depth (draft) levels. Weather can also lengthen
loading, unloading and voyage times. Finally, weather can severely impact port efficiency
• Bunker prices. With bunker fuel accounting for between one quarter and one third of the cost of running a vessel
on the spot market, oil price movements directly affect ship-owners, the cost of marginal shipments and
contracting activity.
• Choke points. This factor can particularly affect tankers with almost half of the world’s oil passing through a
handful of relatively narrow shipping lanes. These points include the straits of Hormuz and Malacca, the Suez and
Panama canals, the Bosphorus (Istanbul) strait and other important channels whose closure – either from conflict,
terrorist attack or a collision in the overcrowded shipping lanes - would change the world’s supply patterns.
Recently, we have also seen significant congestion at iron ore and coal exporting ports as weather has hampered
operations. Looking ahead, port congestion and lack of infrastructure capable of supporting larger vessels may
create a demand/supply imbalance regardless of vessel availability.
10. Produced by - Amar Ehsan, CFA 10
Main Ports of congestion
Tubarao,
Brazil
Newcastle
, Australia
Richards
Bay, South
Africa
11. Produced by - Amar Ehsan, CFA 11
Port delays drove rates higher earlier this year –
+41.5%$9.91$23.88$33.79Cost of Ore
to Steel
Producer
1.6x1.6xOre Demand*
+41.5%$6.20$14.92$21.12Spot Px
Chg (%)Chg ($)6/13/077/13/07C5
(AUS -CHN)
+32%$20.90$64.80$85.70Cost of Ore to
Steel
Producer
1.6x1.6xOre Demand*
+32%$13.06$40.50$53.65Spot Px
Chg (%)Chg ($)6/13/077/13/07C3
(BRZ-CHN)
Illustrative Impact on Steel Costs
+27%$10.99$40.93$51.92Cost of Ore to
Steel
Producer
1.6x1.6xOre Demand*
+27%$6.87$25.58$32.45Spot Px
Chg (%)Chg ($)6/13/077/13/07C3-C5
12. Produced by - Amar Ehsan, CFA 12
Key Takeaways
DRY BULK
IRON
ORE/STEEL
COAL GRAINS/OTHER
Main Vessels:
VLOC (170k+ dwt)
Capesize (80-170k dwt)
Panamax (50-80k dwt)
Handymax (30-50k dwt)
Handysize (< 30k dwt)
“Tweendecker”
Main
Routes:
C3, C5
Trade Ideas:
Hedge Steel
Producers
Substitution of
Australian Ore in
China with Brazilian
Main Vessels:
Capesize (80-170k dwt)
Panamax (50-80k dwt)
Supramax (45-60k dwt)
Main
Routes:
C4, C7,
P2a, P3a
Trade Ideas:
LatAm/S. Africa Coal
Spread
China Coal
Imports/Exports
Main Vessels:
Panamax (50-80k dwt)
Handymax (30-50k dwt)
Handysize (< 30k dwt)
“Tweendecker”
Main
Routes:
P1a, P2a
Trade Ideas:
LatAm Import/Export
China Grains Trade
inter-Asia
WET
Main Vessels:
VLCC (200-330k dwt)
Suezmax (120-200k dwt)
Aframax (80-120k dwt)
LR Tanker (120-150k dwt)
MR Tanker (80-120k dwt)
SR Tanker (50-80k dwt)
CRUDE / REFINED
Main
Routes:
Crude – TD1, TD3, TD5, TD7
Product – TC1, TC2, TC6
Trade Ideas:
Increasing Crude to China
Diesel Shortage in China
North Sea Gasoline Arbitrage
Refinery capacity constraint in
N. America
13. Produced by - Amar Ehsan, CFA 13
Current Dry Bulk FFA Curve
(As of 10/24/07)
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
Q407 Q108 Q208 Q308 2008 2009 2010
TC USD/Day
Cape 6/07
Pnmx 6/07
Cape (NOW)
Pnmx (NOW)
