LME’s freight derivatives bid set to falter

December 9, 2009

   By Jonathan Saul and Rebekah Curtis
   LONDON, Dec 9 (Reuters) – Opposition from ship brokers and a lack of experience in the seaborne sector is set to scupper any bid by the London Metal Exchange (LME) to move into the freight derivatives market.
   Forward freight agreements (FFAs), which allow a buyer to take a position over where freight rates will stand at a point in the future, are not traded on an exchange and the LME said  this year it was interested in expanding into FFAs.
   But it has faced a strong outcry from major players in this niche area who partly fear a possible loss of business and argue that the LME has no track record in cash-settled swaps markets.
   “The LME’s most recent contracts — plastics and steel billets — have been abject failures,” John Banaszkiewicz, managing director of freight derivatives broker FIS said.
   “They are also trying to claw their way back into gold bullion. Can we trust them to make a success of freight with this track record?” [ID:nLU693371]
   It is not the first time the LME has faced ire trying to move into new areas. Last month the Minor Metals Association voted against a joint proposal with the LME to set up a weekly price discovery system. [ID:nN22211649]
   “They (freight brokers) can’t quite see that this, as proposed by the LME, is going to work to their advantage,” Baltic Exchange chief executive Jeremy Penn told Reuters.
   Brokers have questioned the compatibility given the different type of commodities and products traded on the LME.
   “On the dry market, the majority of cargoes reflect trades in the iron ore and coal industries,” Nikos Nomikos, reader in shipping risk management at London’s Cass Business School, said.
   “So there is not what you would classify as a natural match between the business of the LME and the shipping industry.”
   However, LME commercial director Liz Milan told Reuters it estimated FFA volumes would grow as much as 500 percent through the creation of a central screen.
   “If the LME can offer visibility and clarity to an exchange that is looking at freight … then who is better placed than the LME?” a senior metals industry source said.
   Freight brokers say the Baltic Exchange should remain the natural home for any changes including a central screen.
   “If they (the LME) want to do it on their own, I think they will have massive difficulties because the shipping world stands together in times of peril as we witnessed with the last shipping crisis,” Stefan Albertijn, dry bulk chairman of the advisory Freight Market Information Users’ Group, whose members include investment banks and trade houses, said.
   Most FFA contracts are settled against the Baltic Exchange’s physical indices, compiled from independent ship brokers.
   Shippers say a further difficulty stems from the nature of LME contracts which are based on physical delivery.
   “Freight derivatives are not delivered, they are settled for a cash differential. So it would be a new departure for them (the LME) in terms of trading style,” the Baltic Exchange’s Penn said.
   The LME in its talks with freight players this year had discussed the idea of setting up a joint venture company with the FFA market which was rejected, two sources familiar with the matter told Reuters.
   A shipping source said with an expected upturn in FFA volume next year it was even more unlikely that there could be appetite for LME overtures.
   For a graphic on FFA volumes click on: http://graphics.thomsonreuters.com/129/CMD_FFABD1209.gif
   The FFA market has grown from its beginnings in 1985 and was estimated to be valued at an all time high of $130 billion to $150 billion in 2008 before the economic downturn.
   FIS estimated it could drop to $31.3 billion this year and recover in 2010 to $40 billion to $50 billion.
   Some in the metals industry believe it is a matter of when, not if, for FFAs to move onto an exchange.
   “It keeps coming up and it certainly has the feeling of something that won’t go away,” Malcolm Freeman, managing director of LME broker-dealer Ambrian Commodities and Ambrian Metals, said. “Someone somewhere will do it.” For a freight derivatives factbox click on: [ID:nLF324137]
 ((jonathan.saul@reuters.com; +44 207 542 4357; Reuters Messaging: jonathan.saul.reuters.com@reuters.net))
Wednesday, 09 December 2009 10:48:32RTRS [nGEE5B80P2] {C}ENDS

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