The futures market for handysize bulkers will be kick-started next quarter, when two major clearing houses begin clearing trades for the first time in years.

The Singapore Exchange (SGX) confirmed to TradeWinds that it will soon begin clearing forward freight agreement (FFA) trades for a basket of 38,000-dwt handysize time charter rates.

The company aims to launch the service in the second quarter, pending regulatory approvals. SGX has mooted a potential launch date of 16 April, TradeWinds understands.

The handysize futures market has been on ice for some years and was previously based on the Baltic Exchange's old 28,000-dwt benchmark, but even then the paper was thinly traded.

The Baltic launched its benchmarks for 38,000-dwt handysizes in March 2018, but there were no paper trades last year because the derivatives are not currently brokered or being cleared.

Bulker operator Ultrabulk has led a group of shipowners in calling for clearing houses to list handysize contracts, on the back of the ever-strengthening charter market.

Hans-Christian Olesen, Ultrabulk's executive vice-president and head of panamaxes and supramaxes, has led the project in his capacity as advisor to the Baltic's Index Committee.

"The incentive is to give the players another tool to manage their book," he said.

Quirks of the trade

But the handysize market is not necessarily a natural fit for derivatives. Handysizes typically trade on short-haul routes within one region and there are no clearly defined front-haul and back-haul trades, unlike those for larger bulkers.

Olesen, however, sees potential for the futures market because it will help operators take longer-term cover with less risk.

"Typically it's difficult to take two or three-year contracts of affreightment on the cargo side," he explained.

"That's where it will come in useful to have a derivative — because if you want to take a ship for time charter for three years, you might want to cover the last year on a piece of paper."

TradeWinds understands that owner-operators such as Oldendorff, Norden and J Lauritzen have also expressed a potential interest in handysize FFAs, as has major charterer Cargill.

Kenny Groth, SGX's director of commodities in London, said it wants to provide the handysize segment with more precise hedging tools.

"We are seeing strong demand from our clients looking for ways to manage Covid-related supply-chain disruptions, and believe the introduction of this new handysize product will play an effective role in enabling the shipping community with new risk-management instruments," Groth told TradeWinds.

But the big challenge for the handysize FFA market will be creating liquidity and finding market participants.

Why not just trade supramax contracts?

Some parties could come from the paper market for 58,000-dwt supramax bulkers, which is currently well traded, with volumes up by 34% in 2020 for the key 10TC contract.

But participants might be better off continuing to trade supramax contracts, rather than moving to a new handy paper market, according to Kerry Deal, head of business development at the world's largest FFA broker, Freight Investor Services.

"Given that the correlation between the handysize 7TC average and the supramax 10TC average for the whole of 2020 was nearly 96%, using and developing the highly liquid supramax FFA market as a proxy for trading any handysize exposure would be preferable to splitting liquidity on a new contract," he said.

Duncan Dunn, senior director at SSY Futures, thinks both markets should be able to succeed independently.

"Based on the level of enquiry we've been getting recently, I'd say we have a very good chance that we would see this new contract thrive, and it will attract new participants," he added.

"At the same time, the 58,000-dwt supramax contract will continue to grow, simply because there are a lot of vessels in those two sizes and more of the operators and other users are beginning to use a modern approach to trading."

This "modern" approach is fuelling interest in the emerging handysize futures market, he explained.

"In most cases, our enquiry is driven either by a belief that there is an opportunity to lock in a rate somewhat better than what we've seen recently, or they are interested to find a way to tender competitively for new business and then lock in their profit margin using FFAs," Dunn said.

The strength of supramax futures

The paper market for supramax contracts has gone from strength to strength over the past decade, according to Duncan Dunn, senior director of SSY Futures.

"In the last 10 years, we've obviously seen very good trend growth in the FFA market overall. We've seen a trend growth of about 50% in the last 10 years in terms of overall volume, but the thing that we really note is that the supramax sector, while if not the largest, has been one of the fastest-growing components of that," he said.

Trading volumes for supramax contracts have doubled and open interest has trebled over the past decade.

Dunn thinks this shows that users of supramax FFAs are taking a longer-term view and it demonstrates that freight hedging is becoming increasingly strong within the supramax paper market.

"I would very much characterise the supramax interest and inquiry as coming from modern shipowning companies, probably with a strong partnership from financial investors, who are particularly savvy and who are used to derivatives, who've been looking in that period a lot at the ultramax as the sort of sweet spot of the market in terms of risk-adjusted return."

Dunn thinks there is room for a new contract for the many 38,000-dwt vessels that are looking for a hedging opportunity closer to their existing size than the current supramax contract.