Freight Forward Agreements

Risk Management and Trading

Agenda
What is an FFA
How does it work
Why use them
Who trades them and why
How to trade
Forward Freight Agreements
Paper swap deal between 2 companies or
cleared
Tailor made
No physical delivery
Bought and sold at an agreed Worldscale rate
Fixes a price today for settlement against an
agreed future period
Position closed out against Baltic Exchange
index or Platts avrage
Worldscale system
Unifies system for establishing payment
of freight
Introduced in 1952
Makes is easy to compare voyages with
different duration
Net income = WS*Tonnes*Flatrate
TCE = Net income/voyage duration
Like all paper trading it starts with
an Index
All except two routs are priced
against Baltic index
The Baltic panellists
International shipbroking firms
No Principals
Actively engaged in the markets they report
Members of the Baltic Exchange
Geographical spread
Not exclusive representatives or particularly influential
in relevant trades
Index
What does that mean?
Baltic Dirty Tanker Index
Route Route description Indicative Route
TD1 280,000mt AG to US Gulf Ras Tanura to LOOP
TD2 260,000mt AG to Singapore Ras Tanura to Singapore
TD3 260,000mt AG to Japan Ras Tanura to Chiba
TD4 260,000mt West Africa to US Gulf Bonny to LOOP
TD5 130,000mt West Africa to USAC Bonny to Philadelphia
TD6 130,000mt Black Sea / Mediterranean Novorossiysk to Augusta
TD7 80,000mt North Sea to Continent Sullom Voe to Wilhelmshaven
TD8 80,000mt Kuwait to Singapore Mena al Ahmadi to Singapore
TD9 70,000mt Caribbean to US Gulf Puerto la Cruz to Corpus Christi
TD10D 50,000mt Caribbean to USAC (DH) Aruba to New York
TD11 80,000mt Cross Mediterranean Banias to Lavera
TD12 55,000mt ARA to US Gulf Antwerp to Houston
TD14 80,000mt SE Asia to EC Australia Seria to Sydney
TD15 260,000mt West Africa to China Bonny to Ninqbo
TD16 30,000mt Black Sea to Med Odessa to Augusta

Baltic Clean Tanker Index
Route Route description Indicative Route
TC1 75,000mt MEG to Japan Ras Tanura to Yokohama
TC2 37,000mt Continent to USAC Rotterdam to New York
TC3 38,000mt Caribbean to USAC Aruba to New York
TC4 30,000mt Singapore to Japan Singaopre to Chiba
TC5 55,000mt MEG to Japan Ras Tanura to Yokohama
TC6 30,000mt Algeria to Euromed Skikda to Lavera
TC7 30,000mt Singapore to EC Australia Singapore to Sydney
TC8 65,000mt AG to UK/Cont Jubail to Rotteram
TC9 22,000mt Baltic to UK/Cont Ventspils to Le Havre

Tanker Dirty 3 (TD3): Saudi Japan
Ship: VLCC 260 000 mtons
Carries crude oil from Saudi to Japan.
Tanker Dirty 5 (TD5 ): Nigeria USA
Ship: Suezmax 130 000 mtons
Carries crude oil from Nigeria to USA.
Bonny
/Nigeri
a
Phil./USA Ras
Tanura/
Saudi
Chiba/Jap
an
Rotterda
m
New
York/US
A
Singapor
e
(TC4)
(TD3)
(TD5)
The most traded dirty routes
Correlation
Correlation
Tanker Clean 2 (TC2): Rotterdam - USA
Ship: Medium Range 37 000 mtons
Cargo: Clean products (gasoline/light destilates)
Freight element of the cross Atlantic gasoline arbitrage
trade.
Tanker Clean 5 (TC5): Ras Tanura - Japan
Ship: Long Range 55 000 mtons
Cargo: Clean products (naphta condesate)
Carries destillates from Ras Tanura to Yokohama.
The most traded clean routes
Bonny
/Nigeri
a
Phil./USA Ras
Tanura/
Saudi
Chiba/Jap
an
Rotterda
m
New
York/US
A
Singapor
e
(TC4)
(TC2)
(TC5/
TD3)
(TD5)
Correlation
Correlation
Who trades
Overview the physical side
Shipping Companies Oil Traders Oil Producers
Rather fragmented
industry with a few larger
players and many
smaller ones
Consolidated industry
with some very large
players
The speculators
Large privately owned
companies
Clearing house Norsk Oppgjrssentral members
ABG Sundal Collier ASA
ABN AMRO Bank N.V.
American Eagle Tankers
A.P. Mller - Maersk A/S
Addax BV
Dampskibsselskabet TORM
Arcadia Petroleum Ltd
Armada (Singapore) Pte Ltd
AS Klaveness Chartering
AWB (Geneva) SA
Awilco ASA
Barclays Bank Plc
Baumarine AS
Beltest Shipping Company Ltd
Bergen Bunkers AS
Bergesen Worldwide Gas ASA
Benor Tankers Limited
BHP Billiton Marketing AG
Bocimar International NV
KG Bominflot (...) Mbh & Co
Britannic Energy Trading Limited [ BP ]
Bulkhandling HandymaxAS
C Transport Panamax Ltd
Calyon Financial SNC
Cargill International SA
Cargoship Maritime Corporation
Carnegie ASA
Castalia Springs Limited
Castor Petroleum Limited
Cetragpa G.I.E
Charbons Et Fuels
Chemoil International Pte Ltd
Chevron
Clarksons Hedge Fund Limited
Colonial Oil Industries Inc.
Concord Energy Pte Ltd
ConocoPhillips Company
Constellation Power Source Inc.
Daeyang Shipping Co Ltd
Dampskibsselskapet NORDEN A/S
Dannebrog Rederi A/S
Deutsche Bank AG, London
Dresdner Bank AG
Duke Energy Merchants LLC
ED&F Man Shipping Ltd
EDF Trading Limited
Elsam Kraft A/S
Essar International Limited
Eurotrade Inc
Expedo Shipping Corpration
First Olsen Tankers ltd
First Rand Bank Ltd
Freight Trading Ltd
Frontline Tankers Ltd
FR8 Derivatives Ltd
General Maritime Corporation Inc.
Glencore Commodities Ltd
Golden Ocean Group Ltd.
Hanjin Shipping Co Ltd
Hanwha International (S) Pte Ltd
Heidenreich Marine Inc
Hess Energy Trading Company LLC
Highlander International Trading Asia Pte Ltd
IMC Shipping Inc
Industrial Carriers Inc.
J. Aron and Company
J.B. Ugland Dry Bulk AS
Koch Supply & Trading LLP
The Korea Development Bank
Lorentzen Skibs AS
Louis Dreyfus Corporation
Man Financial Limited
Maritime 24 Pte Ltd
Marubeni International Petroleum
Maquarie Bank Limited
Mercator Lines (Singapore) Pte Ltd
Mercuria Energy Trading SA
Merrill Lynch Commodities (Europe) Ltd
Mitsui & Co Energy Risk Management Ltd.
Montan Capital Gmbh
Morgan Stanley Capital Group Inc
Motia Compagnia Di Navigazione Spa
Navios Corporation
NACF Futures Corp
Neste Oil
Njord Marine Ltd
Noble Chartering Inc
Nordea Bank Finland Plc
Oak Bulk Carriers Inc.
Oceanic Hedge Fund
Okeanos Shipping Fund
Oldendorff Carriers GmbH & Co. KG
OMI Corporation
Pacific Carriers Limited
Pioneer Metals Logistics Co. Ltd
Prime Marine Corporation
Projector S.A.
Rothko Limited
RWE Trading GmbH
Sector Speculare AS
Sempra Energy Europe Ltd
Seoul Futures Co Ltd
Shell Trading International Limited [STIL]
SK Shipping Europe Ltd
Skaugen Petrotrans Limited
Sokana Trading Ltd
Standard Bank PLC
Statoil ASA
Stena Bulk AB
Swiss Marine Corporation Ltd
T.K.B. Shipping A/S
T. Klaveness Shipping AS
Taurus Petroleum Limited
Team Shipping ASA
Teekay Chartering Ltd
Titan Ocean Pte Ltd
Tongyang Futures Trading Co Ltd
Total Oil Trading S.A.
Trafigura Derivatives Ltd
Tschudi Shipping AS
Verney Services Ltd [Ocean Bulk]
Vitol Inc
Vitol SA
VOC Shipping NV
Western Baltic Inc
Western Bulk Carriers AS
Westport Petroleum Inc
Wilhelmsen Maritime Services AS
Woori Futures Co Ltd
Total Oil Trading S.A.
Trafigura Derivatives Ltd
Tschudi Shipping AS
Verney Services Ltd [Ocean Bulk]
Vitol Inc
Vitol SA
VOC Shipping NV
Westport Petroleum Inc
Woori Futures Co Ltd
Clearing house Norsk Oppgjrssentral members
Why Trade
Why trade FFAs (pros)?
Hedging
Secure forward income
Spread risk
Portfolio diversification
Alternative to time chartering
Speculative trading plays
Why trade FFAs (cons)?
Cons
Basis risks
Timing
Vessel size
Off hire
Hedger can have unhedged bunker
price exposure
Liquidity risk
Torm Derivative avtivites
Why we trade
Well informed through our presence
Organized to transform info into monetary
value
Culture for market projection
Still mostly oportunistic hedging
Cleared trading
OTC trading
What is clearing?
Counterpart
risk
Seller
When trading Cleared both buyer and seller will have NOS as
counterpart. Insurance and Securities Commission.
More than 193 market participants are members and have
approved NOS to be solid counterpart.
Buyer
Tanker FFA volumes
22.9 13.8 4.7 % change
5,474,277,303 329,434,250 12,758 2006
6,729,514,872 374,870,440 13,351 2007 TOTAL
3,345,291,182 173,990,000 6,312 Total cleared
3,384,223,690 200,880,440 7,139 Total OTC
$ value of trades Volumes in
MT
No of trades
Source: NOS
OTC FFA Trading
OTC FFAs are traded through a network of specialist FFA brokers. The
brokers are members of the Forward Freight Agreement Brokers
Association (FFABA)
Contract used is either FFABA or ISDA contract
Counterparties can be anonymous until just before trade terms are
concluded
Hedges can be offset prior to expiry
Settlement is between the counterparties in cash within five days
following the settlement date.
The broker, acting as an intermediary only, is not responsible for the
performance of the contract. Typically, brokers get commission of 6
cents from each party on the fixed freight volume but that may differ
between contracts
What are the risks?
- Credit Risk (Netting Clause)
- Volatility of market
- Limited forward period
- Usually up to 2-4 years
- Hedging and speculation are different approaches
- Basis risk
- Liquidity risk
- Overall, less risky than
physical market
FFAs for Risk Management
Shipping volatility
October 2007
VLCC $29,000
MR $13,000
Cape $167,000
Panamax $59,000
ConTex 1000pts
Dow Jones 14,088
October 2008
VLCC $107,000 +270%
MR $20,000 +50%
Cape $39,000 77%
Panamax $27,000 54%
ConTex 692pts 31%
Dow Jones 10,000 -23%
supply
demand new demand
ton-miles
FR
Freight Rate Formation
Risk management options in
shipping
Option A:
Do nothing & fix spot
Option B:
Timecharter, COA or long
term management
Option C:
Hedge with FFA and use
profit / loss to pay for
spot physical deal
High risk /
Unpredictable
Inflexible / inefficient
pricing
Opportunities to cover
requirements, quickly
fixed and flexible to
allow you to alter your
position should it change
Tanker freight volatility
0% 20% 40% 60% 80% 100%120%
Aluminium
Gas Oil
Crude oil
Copper
Heating Oil
Zinc
Gasoline RBOB
Nickel
Natural Gas
TC2, Front Month
TD3, Front Month
Volatility is extreme
Source: Danske Bank
Low correlation with other assets
Correlations (asset classes) Correlations (commodities)
-10% -5% 0% 5% 10% 15%
Stocks
GSCI
Stocks
Bonds
-10% -5% 0% 5% 10% 15% 20% 25%
Aluminium
Zink
Coal
Nickel
Fuel oil
Copper
Silver
Gas oil
Bunker oil
Crude oil
Palladium
Nat gas
Platinum
Gold
Source: Danske Bank
Who trade tankers
Financial
16%
Owners &
Charters
47%
Commodity
Traders
37%
Financial
32%
Owners &
Charters
32%
Commodity
Traders
36%
2005
2008
Source: NOS
FRO and the FFA Dec spike
Frontline P/E adj. based on 12 M FFA rates
2.5
7.5
12.5
17.5
22.5
27.5
32.5
7
/
1
2
/
0
5
9
/
1
2
/
0
5
1
1
/
1
2
/
0
5
1
/
1
2
/
0
6
3
/
1
2
/
0
6
5
/
1
2
/
0
6
7
/
1
2
/
0
6
9
/
1
2
/
0
6
1
1
/
1
2
/
0
6
1
/
1
2
/
0
7
3
/
1
2
/
0
7
5
/
1
2
/
0
7
7
/
1
2
/
0
7
9
/
1
2
/
0
7
1
1
/
1
2
/
0
7
Source: Carnegie Research
. .
Source: Carnegie
Trading Examples
Hedging example
It is late September 2008, and TC5 (55,000mt MEG to Japan) is
trading at WS 310 for Q4.
An energy trading company is worried that freight rates will increase
over the following 12 weeks, and decides to use FFAs to cover this
risk. The company thus buys 40 TC5 Q4 contracts @ WS 310 (each
contract being for 1,000 tons)
A shipowner finds the rate attractive and wants to lock in the
earnings of one ship at WS310 which gives TCE $45,500
At the end of Q4, the settlement price is WS 280 (calculated as the
average of TC5 freight rate assessments over Q4)
The owner will incur lower freight rates in the physical market, but,
at the same time, he has made a profit in the FFA market:
Net WS = 310 280 = WS30
Settlement = Contracts x Lot Size x Flat Rate x net WS * time
= 40contracts x 1,000mt x $17,8 * WS30 * 3 months = $640,800
Hedging example
At the same time spot earnings have been lower, probably close to
WS 280
WS 280 gives $38,500 per day
One ship transports 55,000mt per voyage
As one voyage takes about 42 days means 40,000mt is transported
per month
Settlement = Contracts x Lot Size x Flat Rate x net WS
= 40contracts x 1,000mt x $17,8 * WS30 = $640,800
$640,800/90 days=$7000 per day
Total earnings for shipowner $38,500+$7000=$45,500
Spread Example
TC4 Calendar 2009 trades at WS 191
TC2 Calendar 2009 trades at WS 194
Speculatur trading on historical rates
think TC4 is underpriced
Speculatr trading on segment
developments think TC4 is overpriced
Spread Example
We think it is overpriced so we sell TC4
and buy TC2
sell the (relative) overpriced, buy the
(relative) underpriced
What happens if TC2 averages 180 and
TC4 160, both down?
What happens if TC2 averages 220 and
TC4 217?
Spread Example
What happens if TC2 averages 180 and
TC4 160, both down?
Loss TC2 WS 14
Gain TC4 WS 31
Net gain 17 points
What happens if TC2 averages 220 and
TC4 217?
Spread Example
What is the minimum profit?
5000mt per month (1/8 ship) * 12 month *
flatrate 10 * WS 14 =$84,000
Questions?