The problem of profit erosion is already apparent, market transparency is inevitable and happening whether we like it or not, so it’s time to act and use it to our advantage.

FIS is the top broker for Dry Freight, Coal, Iron Ore and Coking Coal. We specialize in the development of price risk management tools within the freight industry. We have a global presence and are recognised as a market leading commodity and freight broker by numerous global exchanges including; Singapore Exchange (SGX), Chicago Mercantile Exchange (CME) and Nasdaq Futures Exchange (NFX).

So here we have the ILA (Index Linked Agreement) and the AFFA (Air Freight Agreement). When used correctly they are price risk management tools that will work in conjunction with your current physical business. The ILA is a physical contract that is settled against the TAC Index +/- the premium your procurement team can achieve and the AFFA is a paper or derivative contract that will represent the complementary hedge for your physical ILA contract.

By utilizing an ILA, you are not only able to show your customer the price transparency they are craving, but you are also able to clearly explain those unwanted increases/decreases which have a way of sneaking up on us. Not to mention, you are always the best paying customer, does it get any better than that? Of course, this has its advantages and disadvantages, when one party is doing well the other is not and vise versa. A friend of mine described it as a series of one-night stands…one of you always gets ‘hurt’! However, by using an ILA, you are well on your way to an honest and open long-term relationship. Which is far less stressful and much more enjoyable.

But I know you’re thinking, “what’s in it for me?” Your customer is happy, but what about your bottom line?

By using the ILA in conjunction with a derivatives contract, you can hedge your price risk by using an AFFA as a future guarantee of cost thus managing your price volatility. We have seen it can vary up to 110% week on week, which is exponential! This is called an AFFA (Air Freight Forward Agreement).  Just as you already do with your FX and your fuel. It is often said, you cannot protect yourselves against ‘dead freight’, you cannot insure thin air. Now you can.