Bangalore: The Baltic Exchange last week began testing a voyage rate assessment on a key iron ore shipping route from India to China, in a bid to boost its relevance to the fledgling iron ore swaps market.
The daily rate is based on the S7 India-China supramax iron ore charter route. The dollar-per-tonne freight rate derived from the charter rate helps break down the freight component of the landed price for iron ore shipped from India to China and sold in the spot market.
The new rate assessment seeks to allow freight derivatives and iron ore swap traders to separate the freight element of iron ore costs, so they can hedge against volatility in ore prices and freight costs in the emerging spot market for ore.
The rate will be calculated based on fixtures reported by panellists on that route to the Baltic Exchange.
Supramax ships are mid-sized vessels that can carry as much as 60,000 tonnes of dry bulk commodities. Such ships are in demand from commodity shippers because their smaller size allows them to call at a wider range of world ports and terminals where bigger ships cannot enter due to depth restrictions.
The first forward freight agreement, or FFA, traded on the new Baltic Exchange supramax route from India to China was concluded earlier this week between Morgan Stanley and Cargill International. The trade was brokered by UK-based iron ore and freight derivates brokerage Freight Investor Services Ltd.
FFAs offer shipowners, charterers and traders a means of protecting themselves against the inherent volatility of freight rates. Trading FFAs entails taking a position in a futures (paper) market as a substitute for a forward cash (physical) transaction.
“We think that this service will be of particular interest to the many shipowners, charterers and freight traders active in the growing Indian iron ore export market,” Jeremy Penn, chief executive of the Baltic Exchange, said in a statement.
The Baltic Exchange, headquartered in London, is the world’s only independent source of maritime market information for the trading and settlement of physical and derivative contracts.
China imports around 100 million tonnes of iron ore a year from India, taking about 80% of what the world’s third largest supplier of the commodity produces.
Indian iron ore prices have reached nearly $140 (Rs6,400) per tonne in recent weeks.
A dollar-per-tonne rate has long been available for the other two principal iron ore trading routes. “India is exporting 110 mt a year of iron ore and we think there is a lot of potential in this route and a lot of value for users of physical freight, freight derivatives and iron ore swaps,” said John Banaszkiewicz, managing director of Freight Investor Services.