TRADING appetite for container freight futures faces its biggest test next month when six contracts are listed on the CME Group exchange amid claims that the world’s largest container lines are finally on board with the concept.

The container sector has been the last to embrace the use of freight derivatives to hedge against future shipping costs, even though such trading is well-established for dry bulk and tankers. The last attempt failed more than a decade ago.

But with record volatility in box freight rates, conceptual support from container lines and a leading freight forwarder prepared to become a market-maker, London shipbroker Freight Investor Services says this time will be successful.

“Members at the top five ocean liner community are also looking to do this market,” said FIS container broker Peter Stallion. “They are either actively following or will trade the market when it is cleared. They made that explicit to us.”

Ten years ago, container lines disapproved of establishing any derivatives market, and “now we not seeing that at all”, he added.

Counterparties that have expressed interest represent as much as 30m teu in the physical market he said.

The underlying physical market for container freight futures is estimated at about 200m teu, covering fronthaul and backhaul routes to US and Europe and the Mediterranean from China and east Asia, according to Mr Stallion.

Contracts will be settled against six Baltic Exchange’s FBX indices, which will be listed by the CME Group from February 28, with trading beginning on a March contract extending out to 2025.

Physical freight rates reached records during 2021 as port congestion, turbo-charged consumer spending in the US, and Covid-related schedule interruptions clogged maritime supply chains, stoking global inflation, and placing container shipping and logistics at the forefront of economic uncertainty.

Container lines are projected to report $130bn in profits in 2021 on the back of rising freight rates.

That has regenerated interest in a container freight futures market, which Mr Stallion said is rapidly changing amid a series of index-linked rates from forwarders, longer-term contract periods and spot deals.

Spot freight rates are said anecdotally to cover about 60% of the market, with this shifting to 40% as container lines seek to take advantage of sky-high demand and prices, while retailers seek to lock in longer-term contracts at lower rates.

“The physical market is really almost perfect for this contract at the moment, because of the desire for the liners to lock in as much as they can have the current market condition for as long as they possibly can,” he said. “There is a highly publicised battle in the physical market of lines versus forwarders as well.”

Traditionally, the ‘sell’ side was seen as container lines and the ‘buy’ side was freight forwarders and retailers, but current market conditions have turned this upside down.

“The price changes have been so significant, that they have started to impact the bottom line of businesses, you have got a market where ocean liners for once are profiting wholesale across the entire market,” said Mr Stallion. “On the ‘buy’ side, the prices are so high that your chief financial officers, your chief executive officers are recognising it.

``The whole supply chain side of the business is much more important now than it has ever been. One of the main things with the original market was there was a no shortage at all of buyers of the swap (contract). Now you have got a recognition from the freight forwarding market and from the liner market that they can sell effectively on the futures.

“Container lines are trying to offer three-year contract deals, and these will go out to freight forwarders. Freight forwarders are the ones that are best positioned to risk-on by taking a three-year deal.

``They can do that now because they know there's a mechanism to de-risk that three-year deal on the futures contract for 2023 and 2024. That puts them on the sell side of the market as well.”

Without an exchange listing, container freight futures against the Baltic Exchange indices have been limited to bilateral, over-the-counter swaps that have not been cleared, amplifying counterparty risk that locked out US-based retailers and forwarders.

“Some 95% of the counterparties we are onboarding need clearing in place before they can do any form of trading,” Mr Stallion said, adding “the interest we have is massive”. He said about 25% of business was expected from the US and the remainder from Europe.

The CME Group listing removes counterparty risk and allows US-based traders to participate because these contracts are cleared, he said. Clearing sees the clearing house, normally via the exchange, step in as a financial intermediary between the contract buyer and seller.

A top five freight forwarder who cannot be identified is prepared to become a market-maker, he said.