The fledgling market in swap contracts to hedge exposure to volatile rates in the container freight market will take longer than expected to gain trading volumes as participants warm to the idea of using derivatives, brokers ACM/GFI said.

The potential is huge, but volumes in container swaps are still very modest, said Cherry Wang, who runs the container derivatives desk for a joint venture between physical shipping house ACM and interdealer brokerage GFI.

"It is the last of the shipping markets to have a derivative instrument that allows people to hedge their freight rates, so it's still a very new area for many people," Wang said.

Freight derivatives or FFAs allow a buyer to take a position on freight rates at a point in the future. Container contracts offer the same hedging principle as those traded for dry bulk and tanker markets.

The strong growth in container shipping in recent years has spawned indexes, which are increasingly being used as benchmarks for rates and will smooth the way for the wider use of derivatives, she added.

Tonnage in the container sector has soared 135 percent over the past decade and accounts for half of the $7.7 trillion annual value of seaborne trade.

ACM/GFI launched container swaps about 18 months ago, and there has been some interest by potential clients and some trades to test the waters.

But it will take further outreach to bring on board enough manufacturers who ship goods and enough container lines such as Denmark's Maersk Line for the swaps to gain liquidity.

Containers transport myriad consumer goods ranging from food for supermarkets to Nike running shoes to Apple computers, but many manufacturers are not familiar with using derivatives.

"It will take time for these guys in the logistics departments to actually get the skills required to trade derivatives," said Will Leslie, head of the wet freight desk at ACM/GFI.

"We spent a lot of last year in the marketing and education phase, and I think it's fair to say that we've probably got at least another year of that," he said.

"But what has been extremely encouraging is the interaction we now have with our potential customer base. We have some of the world's largest shippers and manufacturers now saying they want to use derivatives."

A clutch of other financial institutions are involved in container swaps, including Clarkson Securities Ltd, the futures broking arm of the leading ship broker, which launched the first container swap agreement in January 2010. Banks Morgan Stanley, Saxo and Credit Suisse also offer container swaps.

Volatile Rates

Participants are ripe for hedging instruments due to the volatile and uncertain nature of container rates, Wang said.

So-called fixed rates are available in the sector, but there is a history of both sides walking away from obligations when prices move against them, Wang said.

The container swaps eliminate counterparty risk since they are cleared by established clearing houses - the Singapore Exchange and Europe's LCH.Clearnet. They are settled against the Shanghai Containerised Freight Index (SCFI), which was launched in 2009 and is becoming a benchmark in the industry for container rates.

The index, compiled by data provider the Shanghai Shipping Exchange, is regarded as neutral because it gets input from 15 carriers and 15 non-carriers.

It tracks rates that can be volatile. On the route from Shanghai to Northwest Europe, for example, rates surged sixfold in the 12 months to March 2010 to $2,164 per TEU (20-foot equivalent unit) as carriers withdrew capacity amid strong demand, but then slid back to $490 late last year as global growth deteriorated and capacity returned.

The index rebounded to $721 by Feb. 10 mainly due to a seasonal impact ahead of the Chinese New Year, Wang said.

Wang said the weak rates did not help convince manufacturers to start hedging their exposure to freight. "When you see rates going from $1,300 at the start of the year to $490 in December there's less of an incentive to hedge."

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