From Kirsten Bischoff, Opalesque New York: Research firm Celent has released a report on the freight industry. It focuses specifically on the still relatively new freight derivatives market, long anticipated as being “the next big thing” in finance.
For the past two months, since a record high (11,793 in May 2008) the Baltic Dry Index has fallen 93% to 668 due largely to the falling demand for dry goods, an oversupply of ships, and a freeze in credit. Celent’s report sets out to determine if the relatively young freight derivatives market (valued at $125bln) will be able to survive the impact of the larger financial crisis on the shipping industry.
The report concludes that even through the plummeting decline in the demand of dry goods, the freight derivatives market has sustained. In fact, participation of financial players within the industry has grown from 15% in 2007 to 40% in 2008.
“Furthermore,” the report’s authors state “the growth in the size of these markets means that sooner rather than later the derivatives market will overtake the underlying physical freight market”.
Analyzing the underlying physical freight market
Over the past months quite a few managers have begun looking to the Baltic Dry Index as one of the indicators of how bad, and how long the financial crisis might be.
In separate investor communications during October 2008, Harch Capital Management referenced the plummeting index as it discussed the bleak outlook for the future (well into 2009) and the Okeonos Shipping managers explained how frozen credit in shipping was strangling the industry (Source). The Celent report echoes both discussions.
When will it turn around?
Citing the rise in demand for some commodities, a rise in the FFA forward curve, a rise in providers catering to the market, and the deepening and maturing of the market, Celent looks to mid-2009 for the possibility of a turnaround in shipping.
In a recent Opalesque A Square publication discussing the future of the shipping industry, reference was made to the structural nature of emerging market demand for key commodities and a likely acceleration of globalization of production as firms cut costs, as one of the factors that would contribute to a future and rapid rebound in the industry.
Celent’s report additionally looks to the benefits of carbon emission reduction schemes to increase the cost of shipping contracts, passed on to end users and reflected in the FFA market. Corporate website: Source
Opalesque note: For further information on the shipping industry A Square has multiple articles covering the different aspects of this industry. See:
Article Source: Source