Tanker Forward Freight Agreements

New York March 13th 2008

Contents

•Worldscale
•The Baltic Exchange & Platts
•The Baltic Panellists
•Freight Market Volatility
•The Growth of the FFA market
•FFA Mechanics
•The FFABA Forward Curve
•Trade Examples
•Options
 Worldscale (WS)

• New Worldwide Tanker Nominal

Freight Scale (Worldscale) = annual
publication listing $/MT for voyage
between 2 ports.

• WS rate - % applied to flat rate to

calculate the $/MT rate for specific
voyage between 2 ports.

Flat Rate x WS Rate = $/tonne rate

eg 5.40 x W150/100 = $8.10/MT
Worldscale Components:

•Standard Vessel - 75,000 tonnes

•Average service speed - 14.5 knots
•Bunker consumption - 55 tonnes per day
•Port time - 4 days per voyage
•Fixed Hire Element - USD12,000 per day
•Port costs - In USD converted from local currency rates
•Canal Transit Time - Panama 24 hrs - Suez 30 hrs

Bunker Price - USD 328.75 per Tonne

This price represents the average worldwide bunker
price for fueloil 380 cst during the period 1st October
2006 to 30th September 2007.
 Tanker Assessment Providers

PLATTS Clean & Dirty Tankerwire

•Daily Freight Assessments
•Energy data
•Mkt commentary

BITR - Baltic International Tanker Routes (1998)

• Daily Freight Assessments on numerous routes
• Unbiased Broker Panel (monitored, audited)
Baltic Exchange: Tanker
Assessment Providers - Panellists
•SSY •ACM Shipping
• Fearnleys • Capital
• Clarksons • Braemar
Seascope
• Gibsons
•Bravo Tankers
•Mallory, Jones, Lynch
& Flynn • Barry Rogliano
Salles
•McQuilling
•Galbraiths
•Bassoe
•Island
•Weber
•Eastport Chartering •Odin Marine
Spot volatility - TD5 TA Route.
 Tanker freight volatility - High/Low 2004-’08
High ⇒ Average ⇒ Low

ME Gulf/Japan WS 342.97
$11.24m
(260,000mt) WS 130.00
$1.685m
WS 50.33

W Africa/USAC WS 399.97
$5.280m
(130,000mt) WS 175.00
$1.229m
WS 91.25

WS 330.91
North Sea/Cont $1.059m
(80,000mt) WS 178.00
$0.338m
WS 97.05
Growth in FFA trading:
Volume of tanker FFAs fixed
400
350
participants
300 20% owners
million tonnes

50% oil co/traders

250
30% financials
200
150
100

50
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Data Source: FFABA

 Simpson Spence & Young Ltd

• Established 1880
• Largest privately owned shipbroker in
the world
• Worldwide network of offices
• Represented on all major shipping
committees & indices.
24 futures brokers,
• Expertise in:- London & Singapore
– Dry Cargo
all FSA registered
– Tankers
– FFAs
– Research and Consultancy - Team of 10 analysts
– Sale and Purchase on tanker & dry bulk markets
– Agency and Towage
 What is a Forward Freight Agreement?

An FFA is a Swap

• Principal to Principal contract with a buyer and a seller

• An agreement today to buy or sell a freight rate at a
certain level for a defined period in the future.
• To settle at a future date at a price based on freight
assessments taken during the settlement period .
• Based on a defined voyage or time charter.
• Over-The-Counter or Cleared.
Why use FFAs?

HEDGE
• manage freight exposure & SPECULATE
cash flow
• High Volatility
• flexibility & ability to react • Cash settled
swiftly to spot market volatility • Clearing available
(rather than time charter) • FSA regulated

• trade-out of contracts
prior to settlement
Baltic International Tanker Routes
Dirty Routes:
ROUTE DESCRIPTION SIZE
• TD1 MEG-USG 280K
• TD2 MEG-Sing 260K
• TD3 MEG-Japan 250K
• TD4 W Africa - USG 260K
• TD5 W Africa - USAC 130K
• TD6 Cross Med 130K
• TD7 North Sea – Cont 80K
• TD8 Kuwait – Spore 80K
• TD9 Caribs - USG 70K
• TD10 Caribs- USAC 50 K
• TD11 Cross Med 80 K
Baltic International Tanker Routes
Clean Routes

ROUTE DESCRIPTION SIZE

• TC1 MEG - Japan 75K (12 yrs)

• TC2 UKC-USAC 37K (20 yrs)
• TC3 Caribs - USAC 30K (20 yrs)
• TC4 Sing - Japan 30K (15 yrs)
•TC5 MEG - Japan 55K (15yrs)
FFA Price Reporting
World Scale Flat Rates 2008
The FFABA Forward Curve

•FFAs need to be “marked to market” during

their life time.
•Cleared trades need to be margined.
•OTC positions need to be monitored for
internal reporting.
•The Forward Freight Agreement Brokers
Association (FFABA) members report their
daily assessments along the curve to the
Baltic.
•The Baltic publish the average prices daily.
TD3 - Example Trade
TD3 - Example Trade

• Buyer /Seller - We Buy

• Route - TD3
• Period - Q4 07
• Quantity - 20kt
• Contract price - WS88
• WS Flat Rate - 17.72
• Contract - FFABA / ISDA / Cleared
• Counterparty - OTC - Counterparty Risk
 TD3 Example Trade
• Q4 07 has three monthly settlements.

• October: WS57 November: WS91 December: WS240

• P/L Calculation for October =

• Settlement Price - Contract Price x Flat Rate x Size of Trade

57% - 88% x 17.72 x 20,000

(31%) x 354,400

October Loss = ($110,000)

November Profit = $10,000

December Profit = $540,000

The Seasonal Volatility Spike Returns!
 TD3 Trade Example

Conclusion
Our Trade has generated a profit of roughly $440,000.
If we were using the trade to cover physical exposure then this would be
available to offset our increased freight costs in Q4.
A full 260,000mt trade would have generated $5,720,000
By hedging we are able to fix our future costs according to known FFA pricing .
The decision not to hedge leaves unknown risk exposure.
FFAs can effectively manage freight risk.
Options:

An option gives the buyer the right but not the

obligation to take an underlying position.
Example.
You buy a Call Option (The right to buy)
TD3
Q4 ‘08 W120 Call - Cost W10
Result.
If the market goes above W120 in Q4 ‘08 you have
all the profit, once your cost of W10 is covered.
If the market falls you only lose 10 Worldscale
points.
 For Further Details Contact:
Business Development:
Duncan Dunn + 44 20 7977 7597

Head Of Tanker FFAs Ben Goggin + 44 20 7977 7491

London: Singapore:
Rob Dennis + 44 20 7977 7524 Andre Berry +65 6536 7988
Mark Reddihough + 44 20 7977 7594 Sharon Chua +65 6536 7988
William Mew + 44 20 7977 7580 Glenn Byrne + 65 6536 7988
Steven Pritchard + 44 20 7977 7593