The international

shipping Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ...

industry can be divided into four closely related shipping markets, each trading in a different commodity: the freight market, the sale and purchase market, the newbuilding market and the demolition market. These four markets are linked by cash flow and push the market traders in the direction they want.

The freight market

The freight market consists of shipowners, charterers and

brokers A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...

. They use four types of contractual arrangements: the

voyage charter Chartering is an activity within the shipping industry whereby a shipowner hires out the use of their vessel to a charterer. The contract between the parties is called a charterparty (from the French ''"charte partie"'', or "parted document"). T ...

, the contract of affreightment, the

time charter Time Charter (6 April 1979 – 7 July 2005) was an Irish-bred, British-trained Thoroughbred racehorse and broodmare who won several major middle-distance races between 1982 and 1984. After winning twice as a two-year-old in 1981, she deve ...

and the bareboat charter. Shipowners contract to carry

cargo Cargo consists of bulk goods conveyed by water, air, or land. In economics, freight is cargo that is transported at a freight rate for commercial gain. ''Cargo'' was originally a shipload but now covers all types of freight, including trans ...

for an agreed price per tonne while the charter market hires out ships for a certain period. A charter is legally agreed upon in a

charter-party A charterparty (sometimes charter-party) is a maritime contract between a shipowner and a "charterer" for the hire of either a ship for the carriage of passengers or cargo, or a yacht for pleasure purposes. Charter party is a contract of carriage ...

in which the terms of the deal are clearly set out.

Freight derivatives

Freight derivatives, which includes forward freight agreements (FFA), container freight swap agreements, container freight derivatives, physical-deliverable freight derivatives, and options based on these, are financial instruments for trading in future levels of

freight Cargo consists of bulk goods conveyed by water, air, or land. In economics, freight is cargo that is transported at a freight rate for commercial gain. ''Cargo'' was originally a shipload but now covers all types of freight, including tran ...

rates, for dry bulk carriers, tankers and containerships. These instruments are settled against various freight rate indices published by the Baltic Exchange (for Dry and most Wet contracts), Shanghai Shipping Exchange (International and domestic Dry Bulk, and International Containers), and Platt's (Asian Wet contracts), or physical delivered through Shanghai Shipping Freight Exchange. FFAs are often traded

over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...

, through broker members of the Forward Freight Agreement Brokers Association (FFABA), such as Arrow Futures, Clarkson's Securities, Marex Spectron, SSY - Simpson Spence & Young, Braemar Seascope LTD, Freight Investor Services,

BGC Partners BGC Partners is an American global financial services company based in New York City and London. Originally formed as part of the larger Cantor Fitzgerald organization, BGC Partners became its own entity in 2004. History 1945–1990 In 1945, ...

, GFI Group, ACM Shipping Ltd, BRS, Tradition-Platou and ICAP. However, screen-based trading is becoming more popular , through various screens. Trades can be given up for clearing by the broker to one of the clearing houses that support such trades, or be executed in integrated electronic exchange. There are five clearing houses for freight: NOS Clearing/NASDAQ OMX, EEX, CME Clearport, ICE Futures Europe and SGX, and one electronic exchange: Shanghai Shipping Freight Exchange. 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. Baltic Dry Index measures the cost for shipping goods such as iron ore and grains. The trading volume of dry freight derivatives, a market estimated to be worth about $200 billion in 2007, grew as those needing ships attempted to contain their risks and investment banks and hedge funds looked to make profits from speculating on price movements. At the close of the 2007 financial year, the number of traded lots on dry FFAs doubled the derived physical product. Shanghai Shipping Freight Exchange is the first electronic shipping freight exchange in the world. It has three lines of businesses, including International Dry Bulk, Domestic Coastal Coal, and International Container. The container freight derivatives were launched in 2011 and shortly became the most liquid container freight contracts. Based on the success and experience from container freight contracts, SSEFC launched coastal coal contracts in 2012. In 2014, in order to better achieve the risk shifting effect of shipping freight derivatives, SSEFC innovated and launched the world's first physical-deliverable shipping capacity contract.

The sale and purchase market

In the sale and purchase market,

second-hand Used goods mean any item of personal property offered for sale not as new, including metals in any form except coins that are legal tender, but excluding books, magazines, and postage stamps. Risks Furniture, in particular bedding or upholstere ...

ships are traded between shipowners. The administrative procedures used are roughly the same as in the

real-estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

business, using a standard

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...

. Trading ships is an important source of revenue for shipowners, as the prices are very volatile. The second hand value of ships depends on

rates, age,

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

and expectations.

The shipbuilding market

The newbuilding market deals with transactions between shipowners and shipbuilders. Contract negotiation can be very complex and extend beyond price. They also cover ship specifications, delivery date, stage payments and finance. The prices on the newbuilding market are very volatile and sometimes follow the prices on the sale and purchase market.

The demolition market

On the demolition market, ships are sold for scrap. The transactions happen between shipowners and demolition merchants, often with speculators acting as intermediaries.

References