LNG

The Intercontinental Exchange, the US-based operator of global trading platforms and clearing houses, plans to launch LNG freight futures contracts for the Atlantic and Pacific Basins, adding to a portfolio of sector offerings already including Japan-Korea Marker spot LNG cargo and Dutch Title Transfer Facility European benchmark derivatives.

ICE is introducing the new LNG freight futures contracts based on price assessments from Spark Commodities, a provider of technology-based solutions for promoting market liquidity.

Singapore-based Spark is backed by French data firm Kpler and EEX, part of the Deutsche Börse Group.

“These new contracts - called the Spark30S Atlantic and the Spark25S Pacific LNG Freight Future contracts - are traded and settled in US dollars per day,” explained ICE.

The numbers in the contract names indicate the number of days it takes an LNG carrier to complete a return voyage on the respective routes.

The settlement price of the contracts are based on the Spark30S (Atlantic) and Spark25S (Pacific) LNG freight spot price assessments.

“Market participants can use the contracts to manage price risk in respect of round-trip voyages between the US Gulf Coast and North West Europe (Spark30 assessment) and Australia and Japan, Korea, Taiwan and China (Spark25 assessment),” ICE explained.

Atlanta, Georgia-based ICE said it planned to start offering these cash-settled futures contracts on March 22, 2021, subject to regulatory approval.

ICE said the freight contracts would form part of its global natural gas complex as the market manages freight price risk alongside existing Dutch TTF, UK National Balancing Point, US Henry Hub, JKM LNG (Platts) and the West India Marker LNG futures contracts (WIM LNG - Platts).

“We have been in close engagement with the LNG market for more than two years about the right assessment on which to base LNG freight futures,” said Gordon Bennett, Managing Director of Utility Markets at ICE.

“During that time, LNG freight markets have become increasingly volatile, significantly increasing demand for suitable LNG freight risk management tools,” added Bennett.

“We believe that our freight futures contracts, priced against Spark’s assessment, will provide the hedging tools the market has been waiting for,” he declared.

ICE said the freight futures would trade and clear alongside the highly liquid and global gas benchmarks on ICE.

Tim Mendelssohn, Managing Director of ICE’s partner Spark, explained the aims of the new product.

“After a summer of LNG freight rates at record lows, this winter followed with the highest LNG freight rates ever assessed, peaking at $322,500/day on January 8, 2021,” said Mendelssohn.

“This volatility necessitates new risk management tools as well as future orientated, tech-driven price discovery platforms,” he stated. 

The Baltic Exchange freight derivatives markets for both tankers and dry cargo vessels saw increased traded volumes last year when the exchange also launched the first Forward Freight Agreement (FFA) trades in the LNG market. 

Settled against the Baltic’s recently launched suite of assessments for gas shipping, the first LNG swap took place in July 2019, with cleared trades following at the end of 2019 and open-interest building.

The Exchange said in its annual review that freight derivatives markets for both tankers and dry cargo vessels saw increased traded volumes in 2019.

In LNG, the London-based Exchange collects data from shipping brokers to provide assessment of three routes on the CME Group trading platform.

These are from Australia’s Gladstone port in Queensland to Tokyo, from the US Sabine Pass LNG plant in Louisiana, owned by Cheniere Energy, to the UK. A third freight contract is from Sabine Pass to Tokyo.

In the overall freight derivatives markets Tanker Forward Freight Agreement (FFA) volumes were up 38 percent in 2019 compared the previous year, reaching 473,113 lots. 

Dry FFA volumes hit 1,632,773 lots, up 11 percent on 2018. 

One lot is defined as a day’s hire of a vessel or 1000 metric tonnes of ocean transportation of cargo.

“It was another solid year in 2019 for the freight derivatives market,” said, Baltic Exchange Chief Executive Mark Jackson.

“Underpinning these volumes are both volatility in the freight markets and trust in the Baltic Exchange’s settlement data,” he said.

“Last year both the dry bulk and tanker markets experienced big swings, with issues ranging from the Vale iron ore disaster, attacks on tanker shipping in the Middle East and IMO2020 impacting sentiment,” added Jackson.

The Exchange has also just launched in February 2020 daily spot ocean freight rate indices for 40-foot containers (FEUs).

The rate is now available via the Exchange and the Freightos Group, adding real-time, transparent price discovery and risk mitigation into the container freight market that powers global trade. 

The Freightos Baltic Index (FBX) has been produced weekly since April 2018 by digital freight platform Freightos, based off of live pricing data from hundreds of global logistics providers.

“With the robust, real-time data, as well as oversight from the Baltic Exchange, the FBX is positioned better than ever to provide a true pulse of the market in one of the world’s largest and most important industries,” said Freightos CEO Zvi Schreiber.

“Container shipping pricing has become volatile and FBX will be the foundation of index-linking and future derivatives which allow carriers, forwarders and imports-exporters to hedge their risk, as is already customary in other industries,” added Schreiber.

The Exchange, which already manages a diverse range of benchmarks for the global shipping markets, is also in the process of applying for Benchmark Administrator status with the UK’s Financial Conduct Authority (FCA).