CARRIER’S RISK Due to the volatile market there remains huge uncertainty regarding future income, whilst any declines in rates can result in reduced earnings. Furthermore it could be argued that even fixed rate contracts do not offer adequate protection from this volatility given their non-binding nature. However carriers can use Forward Freight Agreements (FFA’s) to secure a proportion of their future income, thereby protecting themselves from this uncertainty. THE STORY SO FAR With rate volatility showing no sign of relenting, carriers are increasingly looking at ways to protect their future income. Similarly demand is increasing from shippers, who are looking to use tools such as FFA’s to manage their own risk outside of traditional agreements. “Being able to hedge our shipments provides us with added certainty, which is otherwise not always achievable in the physical market” says Sebastian Smith, Chartering & Container Freight Broker at ED&F Man. Its not just commodity traders looking to use these tools. Freight forwarders such John Good Shipping are also participating in their use. Commercial Manager, Paul Ferguson says that “clearly there is a need for tools to manage rate volatility, particularly for carriers given recent declines, whilst for shippers it can provide us with added certainty.” Since the SCFI was launched in 2009 it has become an established industry benchmark. As a result market participants regularly refer to the index or use it as part of a physical index linked contract. Naturally by combining FFA’s with these indexed contracts carriers are able to secure future income in advance, regardless of rate volatility. In such arrangements shippers simply continue to pay their chosen carrier spot or an index linked rate, thereby ensuring the relationship between both parties is maintained. FFA’s can therefore almost be viewed as a sort of insurance protecting the holder from either rate increases or rate declines. This need for effective rate management is highlighted by TSC Container Freight. “We see FFA’s as being an effective tool that all market participants can use to manage risk” says Senior Manager, David Briggs. www.freightinvestorservices.com CONTAINER FREIGHT - MANAGING RATE VOLATILITY
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