Independent market information from the Baltic Exchange provides the tools for settling almost all contracts in the bulk market.
The Baltic Exchange is an organisation in London with a total membership of around 550 ship owning, broking and chartering companies and 2,000 individuals. The Baltic Exchange indices are widely regarded as being the market’s most reliable and independent assessments. We went to London to discuss the role of the Baltic Exchange with its chief executive, Jeremy Penn.
The Baltic Exchange is located on historical ground in London. The mere street address, St Mary Axe, refers to the name of the old St Mary Church which was demolished around 1550 and had a tavern across the street with an axe in its sign. The name of the Baltic Exchange dates back to 1744 and comes from the Virginia and Baltick Coffee House in Threadneedle Street – a street that is also the address of the Bank of England.
“Our headquarters have been in this building – number 38 St Mary Axe, since 1994,” says Penn. “We had to move from our old headquarters, where we had been since the beginning, as they were terror bombed by the IRA in 1992. Our building was erected at the height of the British Empire and was actually built to celebrate world trade. What started off as trading cargo over coffee at the old coffee house developed into a trading house, or the Baltic Exchange.
To take a huge leap in time, we are today an organisation of some 22 dedicated employees in London, one in Singapore and one in Dubai, providing the independent information the industry needs to operate and agree on contracts.
There is no longer a physical exchange where deals are made. The Internet is the key at this time and age. We do still, however, have a rather strict code of conduct, pretty much like the Ten Commandments and ‘Thou shall……………!’ If members are in violation of this they may be expelled. Our motto is ‘Our word our bond’ and our members are expected to adhere to this,” underlines Penn.
Forward Freight Agreements (FAAs)
“We started trading in freight derivatives in 1984, which was a novelty at that time, settling agreements by cash,” says Penn. As we may not all be familiar with FAAs, the following definition is provided by the Baltic Exchange: Freight derivatives provide a means of hedging the exposure to freight market risk through the trading of specified time charter and voyage rates for forward positions. Settlement is effected against a relevant route assessment, usually one published by the Baltic Exchange. FAAs contain the agreed route, the month and year of settlement, contract quantity and the contract rate at which differences will be settled.
“We do not settle the actual contracts,” adds Penn. “This is done by a broker who acts only as an intermediary, and as such will not be responsible for the performance of the contract. The hedging of tonnage is good for owners and operators, facilitating easier management of the fleet with a longer horizon. The owner’s exposure to the market is fixed with the FAA, making the owner better able to make business plans.”
The Baltic Exchange Dry Index (BDI)
also traces its roots back to 1985. The BDI is what tracks the world wide international shipping prices of various dry bulk cargoes. It provides an assessment of the price of moving major raw materials by sea. Taking in 20 shipping routes, the BDI is also divided into Capesize, Panamax, Supramax and Handysize for the dry market, while the Baltic Tanker Dirty and Tanker Clean indexes deal with the wet market.
The Baltic Forward Assessment (BFA) is a mid price of bids and offers for the dry and wet markets submitted and published at 5:30pm GMT.
“The Baltic rates are indicators of the market. Based on daily input from our global network, we publish rates that truly reflect the actual situation in the market. The C4 route, Richards Bay to Rotterdam, is one that reflects much of the state of the market. What we provide are the benchmark prices based on a global network of independent brokers. The independence of our price assessments ensures that they are taken as a fact and not disputed. The trust the industry has in our price assessments is vital to us,” says Penn.
The Baltic Exchange also provides the demolition prices of tankers and bulk carriers as well as sale and purchase assessments for second-hand tonnage.