Understanding Baltic index changes

A series of important changes to the Baltic Exchange’s dry bulk indices is underway. Baltic Briefing looks at the process behind these amends.

This week the Baltic Exchange announced a number of changes to its Supramax, Panamax and Handysize Indices. These changes are at different stages in the development cycle: from proposal at working group level to the implementation of previously announced changes.  

With the Baltic’s independent daily assessments underpinning the business of countless charterers, freight traders, owners and brokers around the world, any changes to benchmark vessel descriptions or routes have the potential to impact companies’ day to day business. It is therefore vital that all changes are undertaken in close collaboration with the market, done so in an orderly manner and communicated well-ahead of implementation. 

“We needed to reflect the changing dry bulk shipping fleet profile,” says James Pendered, the Baltic Exchange’s Head of Freight Market Information Services. James Pendered manages the Baltic freight market teams in London and Singapore and is responsible for producing the Baltic daily indices, physical market assessments, fixture information and forward curves. James Pendered himself plays an integral part in making sure that the Baltic indices and routes accurately reflect the market, through a robust consultation process.

According to James Pendered, the need to comply with the International Organisation of Securities Commission’s (IOSCO) regulations is an important driver behind the latest round of changes to the Baltic’s indices. IOSCO requires financial and commodity index providers to demonstrate through data that their indices are a true reflection of the underlying market. Therefore, amendments and changes to the market are designed to reflect vessel fixtures and cargo flows as required, following extensive consultations with the market.

Supramaxes

The consultation period for the Supramax Index changes, which take place on the 3 April, first began in July 2015 when the Baltic Exchange began dual reporting the Supramax Tess 58,328 dwt.

James Pendered comments:

“The previous Supramax vessel description, which had been in use since 2006, was a 52,000 dwt, Tess 52 built at Tsuneishi in Japan. However, as the trend for larger vessels continues, the Baltic Exchange and its working group felt that the more modern design of the 58,328 dwt, Tess 58 would now be a more accurate benchmark for Supramax vessels in operation and on order.”  

Contracts based on the 52,000 dwt weighted average time charter will settle on a derived value, based on a formula that calculates the value from the five common routes between the 52,000 dwt and 58,328 dwt vessel.

The Supramax is a very versatile grab fitted vessel, able to carry a wide range of commodities including grains, ferts, coal, cement, clinker, steels, and alumina. A larger vessel of 62-63,000 dwt (Ultramax) was also considered to represent this sector. With a greater deadweight, it maximises capacity yet it is still small enough to fit through the Panama Canal: the Ultramax is versatile with gears and grabs and is able to travel to ports that do not have loading facilities.

However, any benchmark vessel should be recognisable, with significant numbers within the fleet and on order. Following consultation with the Supramax Working Group, made up of brokers, owners, operators and charterers, the Group agreed that due to the greater number of the Tess 58 design in the fleet it was a more appropriate benchmark vessel and recommended its amendment to the Baltic Index Advisory Council.  This body scrutinises all aspects of the Baltic’s benchmark determination process in accordance with the IOSCO Principles of Financial Benchmarks and the Guide to Market Benchmarks. 

See www.balticexchange.com/news/ for full details.

Panamax

The Panamax Index is currently undergoing the same process of amends as the Supramax Index, although it is at a much earlier stage, with a trial period of dual reporting about to commence. To date the Panamax market has been represented by a 74,000 dwt vessel since January 2003, which at 14 years old, is as James Pendered puts it: “A little long in the tooth,” adding that the fleet size is declining. 

From 24 April this year, dual reporting will commence, trialling a new larger size based on a Tess 82,500 gearless Panamax vessel. The four existing routes will continue, with a fifth route added (P6_82 – Delivery Hong Kong – S.Korea incl Taiwan for a 75-90 day trip via the Atlantic with redelivery Hong Kong – S.Korea incl Taiwan), to reflect where the ships are coming from in ballast, to undertake round voyages loading in the Atlantic to the Far East.

The weightings of the Panamax Index will change to reflect the volume of trade, with a 65%/35% Pacific/Atlantic split, which was agreed at the last Working Group meeting held in February 2017 and endorsed by the Index Council.

Should the trial period prove successful, the aim is for the new index to go live in July 2018.

James Pendered says that his greatest challenge is to only make changes when it is clearly needed and to best reflect the market demands, whilst at the same time keeping any changes as  simple as possible. With that in mind, the Baltic is now considering adding a new South America or US Gulf to China grain voyage route. This route would not be part of the index and the intention is to consult with the market to see if sufficient visibility exists for a voyage grain route and possibly ultimately a derivative.

See www.balticexchange.com/news/ for full details.

Handysize

Finally, the Baltic has set out a proposal to use an Imabari built 38,200 dwt geared bulk carrier as the new benchmark vessel to represent the handysize sector. With around 50 such ships currently trading and a further 50 on order, this vessel type represents the most common handy vessel over 30,000 dwt trading.

“It’s a big leap up from the current 28,000 dwt vessel,” admits James Pendered. “However, we simply couldn’t see any justification for any other ship type. No other vessel type in this segment is out there in the same sort of numbers of a young enough age.”

The first working group was held in February 2016 and at the last meeting held in February 2017 which was attended by 26 market participants, the inclusion of a further Pacific based route was recommended as this was not significantly represented in the index. There are over 40 cargoes types coming out of Asia on around 140 trading routes, and it is impossible to reflect this market in just one route, but the addition of a N.China/S.Japan redelivery Asia route should reflect the high level of activity in the region.

The next Index Council will be held in April and dual reporting on the new Handysize vessel and routes could begin as early as May 2017, with a trial period of 12 months to cover all the seasons of the year. James Pendered says that he aims to build indices that are good for at least five years, noting that the current Handysize Index was first introduced in the early 2000s, “so an update was long overdue.”

See www.balticexchange.com/news/ for full details.

The process of amending the indices is an ongoing process and even once an index is live, it may still need to be tweaked to ensure that the benchmarks continue to accurately reflect dry bulk markets. The dry bulk fleet profile is constantly changing as new ships enter the market and old vessels are sent for scrap, trade patterns alter to meet demand and cargo flows evolve over time, amendments to the Baltic Exchange indices are therefore part of an ongoing process that is necessary to be able a report and represent dry bulk markets.

To discuss any of the changes outlined, please contact James Pendered.
Tel: +44 (0)20 7369 1625
Email: broker@balticexchange.com