Wednesday, November 19, 2008

So much for Baltic Exchange motto "Our word our bond"

I won't say panic is setting in amongst owners of bulk carriers. It's more like they are really, really mad.

They had a cozy little club for a couple of hundred years, everything being done on a handshake. The motto of the Baltic Exchange is "our word our bond", but in today's Lloyds List article it incorrectly (or maybe more correctly) calls it "my word is your bond".

This is my take on this problem.

Companies involved in chartering ships normally acted on behalf of the owners of cargoes, or perhaps a carrier. Generally they would have some cargo in mind to transport. Sometimes they would speculate and take ship on long term charters, depending on if they thought they could make some money. Some companies were in the business of ship management, and maintained owned and chartered ships in their fleet.

Then the freight derivatives and freight forwarding contracts started. The first FFA was established in 1997. I remember at the time these were established I thought it was rather strange. But, it's a bit like someone buying or selling future contracts of commodities. If someone knows they will need a ship at a particular time, it's a good way to guarantee the price.

Then the speculators got involved. I recall one comment by a ship owner. There were something like 20 contracts after the initial one, driving up the price 10 times. The ship owner did not benefit from the price increases, and in the end some of the in between parties defaulted and the ship owner was left holding the bag. Not very fair. Or nice. Certainly not in the spirit of "our word our bond".

Now the ship owners want to put a stop to all this speculation. There is some talk of no longer publishing the index of charter rates for dry bulk ships, the BDI. That would take it back to the owners doing business with only those they trusted, and only those who really were in the business.

The owners blame all the outside speculation for wrecking their market, and I can't say I blame them. Owners needed the huge profits in order to weather the upcoming down years.

I am guessing some hedge funds got involved, looking at this as a quick way to make some money. I do not know this for certain.

And, if you haven't figured it out by now, this market is not regulated.

1 comment:

Anonymous said...

My advice to the publishers of the BDI is that hiding the BDI under a bushel would result in more harm not less.

The genie that is the value of the BDI is already out of the bottle. Investment bankers and commodities traders, as a group, outspend nation states on intelligence more than two-to-one. If the BDI exists, they WILL gain access to it.

The worst of the problems alluded to in your article result from manipulation rather than speculation.

Informed speculation can provide stimulus when there is stagnation, and can also bring badly needed calls of "the emperor has no clothes" when the market departs from reality.

Manipulation, on the other hand, is much more insidious. The most important ingredient for ginning up manipulation is secret information. If a truly useful market indicator is not publicly available, it can, and WILL be used as a tool to fine tune and optimize the manipulators' game. I would even suggest that some proposing that the BDI be placed outside the public eye are motivated by the potential to move from market speculation, to market manipulation.

More public information, not less is the answer, as well as regulations that promote transparency rather than restriction of trade. The biblical collapse of the CDS market is the result of so many traders (and speculators) being in the dark for so long. More non-biased actionable information in the marketplace (like the BDI) helps to balance the speculation. If more people have access to the ground truth, the speculators that venture too far will pay the price and help to stabilize the market at the macro level. Remember the adage "Light is the best disinfectant."