Freight Market Sees Considerable Growth

Banks and hedge funds have looked to the freight market in the past year, as it is one of the few not hit by the credit crisis and subsequent economic deceleration.

Forward contracts in freight, which are those that give shipowners and operators the power to lock in prices in advance, saw an increase of over 150% in the past year, mainly due to market instability and shipping costs increasing.

According to Michael Gaylard, a strategic director for Freight Investor Services who are a heavyweight in the brokerage markets, substantial portions of the freight market have been scooped up by banks and hedge funds, which has helped enormously in driving the market.

In the past year, many big names in investment banking, such as Citigroup, Merrill Lynch, Macquarie Bank, Goldman Sachs, Credit Suisse, Lehman Brothers, Morgan Stanley, along with hedge funds GMI and Akuila Okeanos, have built teams to deal in freight derivatives.

Since the onset of the credit crisis, banks have had to become creative to make profits as many markets, like asset-backed securities, have all but closed entirely; leading many of them to become far more active in the freight market.

The forerunner of this new interest was Citigroup, who formalized their entrance into the market at the height of the credit crisis in the summer. Citigroup have stated that they had a very high demand from both shipowners and investors who thought the freight market was ripe for speculation and hedging.

Figures released by Freight Investor Services suggest that the market has grown from $50bn this time last year to a whopping $125bn now, and where banks and hedge funds made up 15% of the market last year, then now make up 40%.

Even though costs for shipping have actually lowered since their peak last November, a ship used to transport raw materials, i.e. coal or iron ore, would have cost you $30,000 per day to rent this time in 2004; you would now be handing over $100,000 per day for the same service.

Expanding economies in China and India are forcing those countries to bring in large amounts of raw materials which is placing further demand on ships in this burgeoning market.

Even in juxtaposition with the current credit market, freight is more transient than it once was as ports in Australia and Asia have been closed due to poor weather conditions and power and infrastructure issues in South Africa and Russia respectively, have all led to less certainty in shipping prices in the future.

The underlying physical freight market is expected to be worth around $150bn by the end of the year, but both bankers and brokers are speculating that the derivatives market is going to keep growing quickly, perhaps even out-pacing the underlying physical.

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