Mr Raghunanth - Managing Risk & Uncertainty

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Mr Raghunanth - Managing Risk & Uncertainty

  1. 1. Dry Bulk & Break-Bulk Shipping A Window to the Future in India 27 Nov 2013 R. Raghunath November 2013
  2. 2. 2 November 2013
  3. 3. 3 November 2013
  4. 4. tomorrow today What is Risk? November 2013 4
  5. 5. Major Risk Components  5 Credit Risk Defined as the risk associated with the default on a clients loan obligation before maturity of an agreement  Operational Risk Defined as the risk associated with the potential loss due to operational failures through inadequate systems, management failure and fraud  Market Risk Defined as the risk that reduces the valuation of a company’s position based on changes in financial prices or rates November 2013
  6. 6. Credit Risk • • • • • 6 Use Noble’s credit team to check counter-parties. Defaults by Korea Line, Deiulemar, Bottiglieri, Sanko, Daiichi and now Panocean. Vessels being arrested – delayed arrival of cargo in volatile markets. Non-performance of shipments. Reputational damage. November 2013
  7. 7. Operational Risk • • • • • • 7 Fast turnaround in ports. Weather routing. Port Captaincy services – stowage, draft surveys, etc. Web based vessel monitoring system. Efficient cash-flow management and finalization of accounts. Dedicated team of experienced Master Mariners at charterers service. November 2013
  8. 8. Market Risk • • • • • • 8 Risk is embedded in any forward contract Market fluctuations. Future markets are becoming tricky to forecast. Valuation of forward contacts fluctuate with market changes. Can be detrimental to company’s profit. Market risk can be managed by hedging. November 2013
  9. 9. tomorrow today Why Risk Management is Crucial – Increased Volatility November 2013 9
  10. 10. Factors Affecting Freight Market • • • • • • • • • 10 World economic growth (GDP) Steel production Energy demand/oil prices Interest rates: trade and investments Fleet supply: deliveries vs. scrapping Sources of cargo supply (ton-miles) Supply disruptions: war, natural calamities, weather Congestion/blockages Sentiment: paper market November 2013
  11. 11. Baltic Dry Index – cyclical and volatile… 11 12,000 10,000 8,000 6,000 4,000 2,000 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 November 2013
  12. 12. Breakdown of Voyage Rates: 2001 vs. 2013 Tubarao - Far East: 2001 OTHERS 10% OTHERS 11% BUNKERS 34% Tubarao - Far East: 2013 HIRE 30% HIRE 55% BUNKERS 60% November 2013 12
  13. 13. Singapore 380cst Bunker Prices – until 2002…13 $/tonne 190 170 150 130 110 90 70 50 1985 1987 1989 1991 1993 1995 1997 1999 2001 November 2013
  14. 14. Singapore 380cst Bunker Prices – Present $/tonne 800 700 600 500 400 300 200 100 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 November 2013 14
  15. 15. World Steel Production – up to 2002… 15 900 Million tones 850 800 750 700 650 1988 1990 1992 1994 1996 1998 2000 2002 November 2013
  16. 16. Millions World Steel Production - Present 16 Tonnes 1,600 1,400 1,200 1,000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 November 2013
  17. 17. World Coal & Ore Trade – up to 2002… Coal imports-Total 17 Ore imports-Total 400 350 250 200 150 100 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 1989 50 1988 Million tones 300 November 2013
  18. 18. World Coal & Ore Trade - Present Million Tonnes Iron Ore Coking Coal 18 Steam Coal 1,200 1,000 800 600 400 200 0 November 2013
  19. 19. Iron Ore Exports/Imports – up to 2002… Australian iron ore exports 19 Japanese iron ore imports 160 140 100 80 60 40 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 1989 20 1988 Million tonnes 120 November 2013
  20. 20. Total World Seaborne Iron Ore - Present Million Tonnes 1,200 1,000 800 600 400 200 0 November 2013 20
  21. 21. Cape Voyage Rates: Tub/Japan – up to 2002… 21 $17 Hi 15.85 04/95 $16 Recent Hi $13.79 11/00 $15 $14 24 Mth Trendline $13 $10.84 $12 $11 $10 $9 $8 $7 Historic 10yr ave $9.42 $6 21 months $5 24 months Recent Lo 6.15 12/01 2002-07 2002-01 2001-07 2001-01 2000-07 2000-01 1999-07 1999-01 1998-07 1998-01 1997-07 1997-01 1996-07 1996-01 1995-07 1995-01 1994-07 1994-01 1993-07 1993-01 1992-07 Date $4 November 2013
  22. 22. Cape Voyage Rates: Tub/China - Present 22 $/tonne 120 100 80 60 40 20 0 2000 2002 2004 2006 2008 2010 2012 2014 November 2013
  23. 23. Cape Voyage Rates: W.Aust/Japan – up to 2002… 23 $8.0 Hi $7.55 04/95 $7.5 Recent Hi $7.51 11/00 $7.0 24 Mth Trendline $6.5 $5.20 $6.0 $5.5 $5.0 $4.5 $4.0 Historic 10yr. ave $9.42 $3.5 $3.0 $2.5 2002-07 2002-01 2001-07 2001-01 2000-07 2000-01 1999-07 1999-01 1998-07 1998-01 1997-07 1997-01 1996-07 1996-01 1995-07 1995-01 1994-07 1994-01 1993-07 1993-01 1992-07 Date $2.0 November 2013
  24. 24. Cape Voyage Rates: W.Aust/China - Present 24 $/tonne 50 45 40 35 30 25 20 15 10 5 0 2000 2002 2004 2006 2008 2010 2012 2014 November 2013
  25. 25. Cape 1YR TC Rate – up to 2002… 25 $24,000 $23,000 Hi $22288 04/95 $22,000 Recent Hi $19000 09/00 $21,000 24 Mth Trendline $20,000 $19,000 $18,000 $17,000 $13500 $16,000 $15,000 $14,000 $13,000 $12,000 Historic 10yr ave $14362 $11,000 $10,000 $9,000 $8,000 Lo $7800 07/98 $7,000 Recent Lo 9500 01/02 2002-06 2001-12 2001-06 2000-12 2000-06 1999-12 1999-06 1998-12 1998-06 1997-12 1997-06 1996-12 1996-06 1995-12 1995-06 1994-12 1994-06 1993-12 1993-06 1992-12 1992-06 1991-12 $6,000 November 2013
  26. 26. Cape 1YR TC Rate - Present $/day 180000 1 Year TC Cape 170k 26 24 per. Mov. Avg. (1 Year TC Cape 170k) 161,600 160000 140000 120000 100000 80000 60000 40000 20000 0 November 2013
  27. 27. tomorrow today What are Freight Derivatives? November 2013 27
  28. 28. What are Freight Derivatives • • • • • 28 A Future is an agreement to buy or sell a standard quantity of a specified good for delivery at a fixed future date at a price agreed today. Forwards or swaps are principal to principal contracts, where one counterparty takes the view that the price of a product, at an agreed time, will be higher than the agreed level. While the other party contracts to differ. In time, the final settlement price provides the answer. Freight derivatives provide a means of hedging exposure to freight market risk through the trading of specified time charter and voyage rates for forward positions. Freight derivatives are primarily used by shipowners and operators, oil companies, trading companies, and grain houses as tools for managing freight rate risk. Recently, with commodities standing at the forefront of international economics, the large financial trading houses, including banks and hedge funds, have entered the market. Settlement is effected against a relevant route assessment, usually one published by the Baltic Exchange. November 2013
  29. 29. History of FFAs 29 November 2013
  30. 30. Why Trade FFAs? • • • • • • 30 Ease of trade Can build up a book Small lots Controlling risk Options Arbitrage with physical November 2013
  31. 31. FFAs?    31 Forward Freight Agreements (FFAs) are the most common form of freight derivatives traded. Forward Freight Agreements (FFAs) are primarily transacted on a cleared basis and will normally be based on the terms and conditions of the FFABA standard contracts as adapted by the various clearing houses. Commissions are agreed between principal and broker. The broker, acting as intermediary only, is not responsible for the performance of the contract. November 2013
  32. 32. The Trading Process  32 The main terms of an agreement cover: 1. The agreed route. 2. The day, month and year of settlement. 3. Contract size. 4. The contract rate at which differences will be settled. November 2013
  33. 33. FFA Prices     33 A nightly report is sent to clients detailing the indicative bid/offer spreads on the major routes in each of the sectors. Throughout the day, bids and offers are conveyed by phone, instant messenger and email in what has become a very fast moving market. Baltic Exchange publishes “Baltic Forward Assessments (BFA)” - an estimated mid price of bids and offers for the dry and wet market based on submissions from brokers at 1730 (London), which the official price used for daily margining and book management Prices reported include: 1. BFA Capesize: C3, C4, C5, C7, C8_03, C9_03, BCI T/C Average 2. BFA Panamax: P1A, P2A, P3A, BPI T/C Average 3. BFA Supramax: BSI T/C Average 4. BFA Handysize: BHSI T/C Average November 2013
  34. 34. Trade Recap 34  Once a trade has been concluded, a telephone call (lines are customarily recorded) or Instant message confirms the basic details of the trade and a recap is subsequently sent to both parties.  A full contract is subsequently sent to both parties for signature. November 2013
  35. 35. Cleared Contracts   35 Cleared contracts are margined on a daily basis through the designated clearinghouses and margins are based on a close-of-play forward assessment published by the Baltic Exchange. At the end of each day, traders pay or receive the difference between the price of the paper contract and the market index. Clearing services are provided by The London Clearing House (LCH), The Norwegian Futures and Options Clearinghouse (NOS) and the Singapore Exchange (SGX) November 2013
  36. 36. WITHOUT Clearing  36 Counterparty risk exists! November 2013
  37. 37. WITH Clearing  37 Eliminates counterparty risk! November 2013
  38. 38. Why is the Clearing House Taking the Risk? 38      Protected by margins Margins are related to amount of risk Mark to market Problem for pure hedgers Above all: if you can not pay the margins, you shouldn’t be trading! November 2013
  39. 39. tomorrow today Risk Management using Freight Derivatives November 2013 39
  40. 40. Baltic Cape Index 4TC Average 40 250000 225000 200000 175000 150000 125000 100000 75000 50000 25000 0 November 2013
  41. 41. FFA Volumes (Total Daily Average) 41 20000 18000 16000 14000 Lots/day 12000 10000 8000 6000 4000 2000 0 November 2013
  42. 42. FFA Open Interest 42 160000 350000 140000 300000 120000 250000 100000 200000 80000 150000 60000 100000 40000 50000 20000 0 0 TOTAL (RHS) CAPE PANAMAX SUPRAMAX HANDYMAX November 2013
  43. 43. Dealing with a Short Position WITHOUT Derivatives  COA with Owner (contract of afreightment)  Flexibility of source / destination / size  Counter-party risk  Long negotiation  Period ships  Ship is always at the wrong time in wrong place  Operational risk  Long negotiations  Basis risk  Take in spot tonnage  Market risk November 2013 43
  44. 44. Dealing with a Short Position WITH Derivatives     Agree the period Agree volume Agree price Agree to counterparty / clearing house  Deal is done!!  44 No subjects November 2013
  45. 45. Derivative Lingo        45 Backwardation - Where the price for the nearby period is higher than the further forward periods Contango - Where the price for the nearby period is lower than the further forward periods. Mark to Market - To re-value positions using current market prices to determine profit/loss. Support - The price buyers are likely to start buying in a falling market. Resistance - The price sellers are likely to start selling in a rising market. Basis risk - The differences between the paper hedge and the underlying physical. Fibonacci - Italian mathematician who discovered his golden sequence of numbers which can be applied to charts to determine market trends (38.2,50,61.8,100). November 2013
  46. 46. Risks Associated with FFAs     46 Liquidity – this is the biggest problem. Counter-party – all trades cleared. Basis risk – we need to be aware of it (route, size, laycan, special conditions…..) Accuracy of indices – manipulation. November 2013
  47. 47. thank you! November 2013

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