News / Forwarders urged to smooth air freight rate turbulence with 'less-risk' contracts

© Konstantin Sutyagin

The volatility in air freight markets – which has heightened during the Covid crisis – could help trigger greater interest in managing freight rate risk.

The move towards new ways of buying air freight, including via the derivatives market, has been eased by the inclusion of the TAC Index air freight rates to the Baltic Exchange, where it will be rebranded as the Baltic Air Freight Index (BAF Index).

The proponents of a move towards the integration of air freight into global commodities markets argue that the industry was ripe for this anyway, owing to the highly volatile nature of rates.

But the latest developments in air freight pricing could accelerate the process, they claim.

“The 2019-2020 period has been a microcosm of the real-world impacts of volatility,” said Peter Stallion, airfreight derivatives broker at Freight Investor Services (FIS).

“Slack 2019 volumes and prices have been sharply counterpointed by an unforeseen globally disruptive event in 2020, resurrecting cargo airlines and aircraft, collapsing passenger capacity and causing severe turbulence for airlines, forwarders and end-users alike.

“Covid-19 has seen the large majority of fixed-price contracts capitulate under the strain of volatility, replicating tradelane-specific contract failure seen in 2017 and 2019 on a global scale. For 2020-2021, talk of recession and the unknown nature of supply and demand makes the forward market impossible to judge, and equally impossible to fix at a flat price.

“As such, the stimulus is there for derivatives and index-linked agreements to allow businesses the ability to create contracts that are far more resilient to volatility, while still achieving the industry-wide aims of stable costs and revenues over any timeframe and with any level of price volatility.”

A trading update issued yesterday by FIS evidenced some significant changes in pricing.

Hong Kong to Europe rose $0.65 last week, while Hong Kong to the US went up $1.37, following a week or two in which Hong Kong had “severe price disparity” with mainland China, in particular Shanghai.

Shanghai to the US, meanwhile, saw some individual airport pairs almost reach $12 per kg, overall rising $1.51 in a week. China mainland to the US went up 22.9%.

FIS noted: “Shanghai’s price rises remain meteoric, however it remains quite clear that most of this is still atop the PPE price balloon. North America now sits relatively apart from the rest of the world in terms of virus cases, deaths and, subsequently, its relief effort.

“The ‘relatively cheaper’ rates out of Hong Kong have appeared to attract transhipment volumes, much of our explanation for the rate bump we have seen would be purely anecdotal. It wouldn’t be too much of a stretch to suggest shippers moving non-medical goods might be using the spread between Hong Kong and Shanghai as a geographic arbitrage opportunity.”

FIS claimed derivatives would be an efficient tool to manage the situation.

“The post-Covid contract market offers an opportunity for airlines, forwarders and shippers to make a clean break into these advanced contracting methods,” said Mr Stallion. “Interest has increased dramatically, and feedback for these methods has been resoundingly positive particular over recent months, as businesses seek to make sense of the future market.”

The Baltic Exchange provides benchmark assessments for the maritime markets, used to settle billions of dollars-worth of derivatives and physical trades every year.

“Our status as a regulated benchmark administrator opens up all sorts of possibilities for the air freight market,” explained Baltic Exchange chief executive Mark Jackson.

“We are confident that the index will provide a completely independent and uncompromised view of the air freight market and the audited index will become listed by financial clearing houses. This would provide the industry with new ways of managing its freight rate risk and potentially bring in new market participants.”

The TAC Index provides weekly average assessments for general cargo on 32 major air tradelanes, based on transaction data submitted by global freight forwarders.

Managing director Peyton Burnett said: “TAC Index has seen its air freight indices become the primary price benchmarks for carriers, lessors, shippers, forwarders and end-buyers globally. The partnership with the Baltic Exchange will drive further integration of air freight into the global commodity markets and put the indices at the heart of a substantial new global forward freight market.”