Record Arbitrage, No Clear Direction, and NYFI Options Go Live

You're now listening to the Supply Chain Secrets Podcast, the Ultimate Insider's Guide for All Things Ocean Shipping, presented by Nicex.

Hello and welcome to the Supply Chain Secrets Podcast. I'm Rich Heath, and I'm here this week, as always, with Lars Jensen. Good morning, Lars. How are you today?

Good morning, doing great. This time dialing in from Nuakshot, the capital of Mauritania. So still in the Sahara Desert, but visiting interesting companies here. As an example, I went to a quartz mining company yesterday. So definitely an interesting country as well.

So good morning, Peter.

Good morning. Not in a an amazing place like Lars, unfortunately, and just off the back of four days of sickness, but struggling to get myself on this podcast and help present options and futures.

Thank you very much for being here. And as you say, it's yeah, here in the UK where Peter and I are, it's an autumnal day. Lars, you're getting ever closer to the equator. Um, must be nice where you are, and lots of exciting stories that we're following from your journey as well. We have quite a lot to go through today.

Peter's joining us to talk about the launch of NIFI option contracts yesterday. We'll spend a bit of time discussing those. We'll cover what those contracts are, how they work, what they are not, um, and crucially how they can help shippers, carriers, and freight forwarders manage the risks that we see coming from the unpredictable and volatile ocean freight environment that we have.

Before we do that, we're going to talk around the trade numbers as usual. So, Lars, where should we start this week?

Yeah, I think we should start off having a look at Asia North Europe to start with and see where we are on those ones. Just as a reminder to everyone, we're now in the first week of October, which is Golden Week. So that's the traditional week of holiday out in China that usually also marks the end of the peak season.

But as we have already discussed multiple times here on the podcast, the peak in Asia Europe did not happen in the weeks leading up to Golden Week this year. It happened much earlier, way back in July. And basically, this goes like clockwork. With a slight hiccup, of course, as you can see, but apart from that, the pace of decline has been phenomenally steady here over the last two, two and a half months.

And simply continued into this week as well. The only question that's really relevant here is to start asking is okay, how long will this decline then continue and when will we see a rebound? And maybe to get an indication at least of where some of the market participants stores are, we could also look at how the futures indications are right now for Asia and North Europe.

And the indication is basically also in line with what one could seasonally expect. The expectation is to hit a bottom year during October, maybe into the beginning of November. And then we have the second seasonal peak that we always have leading up to Chinese New Year. Chinese New Year next year is in the beginning of February.

The only change compared to last week is apparently some of the participants are becoming slightly more bullish in terms of how high this pre-Chinese New Year peak is potentially going to be. But overall, Asia North Europe continues to present a very normal seasonal case in terms of auction out.

We discussed it last week around the congestion and the restrictional capacity that was having.

This continues to increase. And yes, as you point out, the there is this narrative out in Asia that this is down to poor congestion, this is why there's a lack of capacity. But I'm not quite sure that is all of the explanation. Because if you think it through, if this was really poor congestion and vessels couldn't get in, you couldn't handle the containers, why is this only impact in the Pacific?

Why do we see continued declines then on rates on Asia Europe? They should be equally impacted, they are not. If you look at the arbitrage right now between Asia, North Europe and Pacific, it is record high. We have never had such a high arbitrage as what we see right now. And this goes both if we look at the NIFI data, but also if we use other data sources and look all the way back over the last 15 years, we are at a record high in arbitrage between the two.

We have had an incident previously with a high arbitrage that was actually the reverse. That was during the initial pandemic where Asia North Europe skyrocketed the Pacific didn't. Normally you would say, fine, if you have such a huge divergence between two different trades, vessels would be reassigned and they would shift, and therefore such an arbitrage cannot live for long.

But last time when we had a record arbitrage back in 2021, it actually lasted almost six months before it was then corrected. So all better off in terms of how long this will last. And if we go back just to US West Coast and look at the future's indications as to where we might go, what we can see here is that is clearly not the same pattern as we saw in Nation North Europe.

There's no indication we're heading into a total week slack season and then another search before Chinese New Year. This is basically just expected to slowly taper off to a slide right into the pre-Chinese New Year peak before we then after Chinese New Year have a slowdown. So there are clearly participants in the market that expect Asia, North Europe, and the Pacific to develop materially different, still for a while to come.

So I see a market that is very much out of balance compared to what we normally see. And if we stay on the US West Coast trade and maybe look at the spread, that is also another indication of the very turbulent nature of the market. Because what we see here is if we focus on the 10%, 90% spread here, it used to be relatively narrow, but over the last couple of months, we have to give and take a few hundred dollars.

Basically seeing a spread hover around two thousand dollars according to it. This is an extremely high spread, but also indicate a market that is very much unsettled. So that was a pretty long fly-in to the rates, but at least from what I'm seeing here, I'm seeing a market that is out of balance. I'm seeing a market where even the physical participants in the market are not quite sure in terms of what comes next, what changes.

Logically, we have seen over decades in this industry that major arbitrages between trades cannot survive because you will see capacity being shifted. But we have also seen during the pandemic that it's completely unpredictable when this might change and how rapidly it would actually change.

That would be a a difficult decision for the shipping lines as well, right? If we look at where we are in the year, the potential for, as you say, pre-Chinese New Year peak on Asia Europe, potentially propping up rates there. That would narrow the arbitrage anyway, with the uncertainty on the Pacific.

It's a tough call, isn't it?

Uh to redistribute rest of the it is a tough call, but then there are other again, when you start to look at the information in the market, that seems incongruent. On one hand, we are hearing that you have all this congestion in Asia, which is absorbing capacity. Yet when I over the weekend was analyzing the level of blank sales, and you have the C intelligence data to do that work, we're actually at a very low level of blank sales rate.

When you look at the percentage of capacity, that's actually blank. So if capacity is being soaked up because they can't get to port, where the blank savings, they're not really there. Conversely, as late as yesterday, we now saw MSC come out with yet another indication of a golden week line saving. Normally I'll say sure golden week line savings.

That's exactly what you see seasonally. But if it is true that the port has so congested that cargo is piled up in Asia, why is there a need to suddenly do seasonal blank sales for Golden Week now? So the information we see doesn't quite stack up to the narrative. So I think all participants in this market is having a very hard time taking a read on where is this actually headed?

No one really knows. And maybe to use that as a slight segue in terms of also no one really knows where that is headed. Let's just do a very quick fly-in to the two trouble spots we have in the bottleneck, both almost at the Red Sea. On the Red Sea one, that continues to actually have positive news. We've talked about it before in recent weeks that we have a normalization process ongoing.

And since we spoke last week, Kremier Alliance have now joined the prey. They are shifting one of their Asia North Europe services, the FE one. We also have the OE on their own shifting their India to Europe service. So we see this continuing move towards denormalization. As I've said many times, this is good news, period.

But it has consequences. One of the consequences is a release of a lot more capacity out into the market. Another consequence that we should be aware of is the risk is still there. They've said it right now, they want, but we don't know. So another uncertainty factor. In Hormos, container ships are not going through.

The ones that are going through are tankers. But this is also where things appear to be heating up. Just yesterday, UKMTO, which is one of the only credible sources of data, basically reported five new incidents. And if I look over the last week alone, there has been 12 attacks now in the Strait of Orbit, which is really a ramp-up in terms of attacks.

So for homosex there is no indication this is gonna be assault or shipping anytime soon at so the overall theme here is the market is very strange as it is right now. It is unpredictable, it is highly volatile, and it does not follow neither the normal season of atoms, nor do the data actually support some of the narratives that we're hearing.

Thanks, Lars. That's that's an interesting update. And I think that's uh a kind of perfect segue into the risk management topic as well. This is exactly what this is here to help solve unpredictability, volatility. So, Peter, I'd like to bring you in. I know many of our listeners will know who you are, but maybe if you could just take a couple of seconds to introduce yourself or Clarkson's.

I run container features at Clarkson's. We do most of the volume on isolated contracts. So that's everything to do with NIFI indices on container freight. And as part of our role, we are fully regulated. So segue's on segue, that's a nice intro to do my um mandatory uh podcast disclaimer, which I have to speak out to everyone because we are regulated.

Um, so to rattle through this, so Clarkson's Futures Limited is authorised and regulated by the UK FTA, Financial Conduct Authority, registered with the US NFA as an introducing broker. So we are subject to regulations regarding financial promotions, including two rules, so NFA Rule 2-29 and Rule 2-9.

As a result, our views are general guidance only and cannot be construed as investment tax or legal advice. And we are not soliciting any action based upon our views. Now that bit's out of the way, I noticed a few, just to tag on a little bit with what Lars was saying earlier. So a few things we've noticed on futures, which might help this conversation.

Um so you mentioned the sort of as we might expect peak through to the end of January running into Chinese New Year. So that's been quite recent. So our Q4 markets, which is a good guide to Q426, have gone up about $900 per 40 or so in the past couple of weeks. So we were seeing live markets a couple of weeks ago $900 lower, they are now $900 higher, which is be much to the higher with some of the new freightfolders primarily that are looking to buy cover for Q4 and into Q1 next year.

Because they've seen that rate rise. If you're in that position already, that's great because you are essentially recouping the difference of the potential peak in Q4. But there's a sense that October after Golden Week, October will be fairly strong, and then November, December, realistically, no one really has much of a clue, uh, which is the point in what we do with futures.

You don't really know what's going to happen, and you are essentially looking to find a known price, so you're not caught on the wrong side of something. And ultimately, if you're a cargo owner, if you're a BCO, that's going to have a real impact because your budget, or you probably would have budgeted last year for this year on something like Asia Europe.

That has mostly gone out the window thus far. Now it's purely about managing price risk and what that looks like in terms of your your business bottom lines and your cost line items for container threat and logistics, generally speaking. And also similar views on anything into the US West Coast or anything Trans-Pacific.

Lots of people don't have a clue. They can see the rates really ramping up. I think the highest I heard through a very small cargo owner was 11,000 into the US East Coast, uh, which is pretty tremendous given that we're not in a COVID scenario. It's being driven by other factors. And again, beyond January, not a clue what's going to happen.

So we've actually heard of cargo owners holding back their their shipments and their inventory, and essentially, for lack of a better word, gambling their inventory because they don't know what the prices are going to be in Q1. So they are hoping and waiting and hoping, mostly hoping, that the rates will be sliding down by next year.

Ultimately, as the the sort of facilitator of these contracts, we don't know. Clients don't know. Probably ocean owners don't even know what the rates are going to do. So it lines up quite nicely with this conversation around futures contracts.

Thanks very much for setting the scene there. I think when we look into the NIFI, we see some of those rates that you talk around as well. We looked at the spread earlier on Asia, West Coast. If I look at it right now on East Coast, we do see rates there from about eight and a half to eleven and a half thousand on the kind of extreme end.

So definitely think those rates are in the market. So, as you say, sets it up perfectly for the risk management conversation. And what we wanted to cover today was the launch of the new NIFI auctions contracts at ICE yesterday. These contracts are now available on Asia to North Europe and Asia to US West Coast routes, which are both very topical, as we know right now.

So, Peter, as you say, you're in this market every day talking to the people who are executing these contracts. Maybe in a few words, you could kick us off just by telling us what option contracts are and how they're different to futures.

Uh so make it to provide a very simple analogy that I've probably gone through about 20 times already when talking through this, because honestly speaking, we've seen quite a large amount of demand for options before the launch, and even today when we were starting to market some of these some of these prices.

Um they're essentially um a freight price insurance policy. Um so the way options work is let's say you buy what's called a call option, uh, which has been the most popular inquiry for especially Trans-Pacific for next year. Um you'll buy um essentially this policy that means you pay up an upfront premium, much like an insurance policy, um, and you agree a price basis, whatever index you want to trade an options contract on.

Um, for example, that will be uh NIFI, Asia US West Coast, as an instance. Um that price, let's say it's 3,000, pick a number out of thin air, you'll pay an upfront premium for a contract and a certain amount of volume. And all that happens when the difference with futures and options comes into this, is you essentially get a one-way payoff against um whatever that index price does.

So if you paid your premium uh for a $3,000 pool option, you are earning the money back if the index goes above that price. Um so essentially, as a buyer, puts puts a ceiling on the rates that you're expected to pay basis that uh NIFI index. Um if you are buying what we call a PRUT, all that happens is that process is reversed.

Let's take that $3,000 example. Um you are earning the cash back if the uh market drops below $3,000. Um in both instances, if you are not what we say in the money on that contract, all that happens is the option expires worthless. So you paid your upfront premium. That's your exposure, that's all you pay.

Um, and ultimately you get a payout or pay-in, and depending on um whether that market moves in the direction that you might expect. Um, and ultimately, if you're looking at this from um from a cargo owner perspective specifically, you are you're looking to cap the the rate you actually have to pay, even if there's uncertainty in the market.

And then there's a whole dynamic in terms of how this is priced. Um again, the analogy I've been using is you'll take an insurance policy, for instance, on car insurance. Um, if you crash your car, your insurance premium is going to go up, presumably. Um, the container market is probably the same as if you crashed your car, you know, 10 times in a year, uh, which is again a good analogy for the container fair market.

It's been a bit of a car crash um the past, I don't know, five, six years, to be honest. Um so that will influence the the premium that someone writing these contracts, selling these contracts will want to will want to yield on the other side of that of that deal. Um in terms of mechanics, in terms of market creation, we were always very keen to make sure that we had people ready to sell these contracts, because that was the question that always came up.

We've already got those from day one. We started receiving these yesterday. So that part of the puzzle's already been answered. Um, it's more going to be about whether you, as a buyer of an option, are willing to pay whatever the premium might be for whatever the strike price might be moving forward.

And again, that's another topic because it has to make sense with your business, especially if you're a freightforwarder. You have a margin on a trade, your premium presumably has to fit into that, uh, or you have to charge a little bit more for that price protection. But that's all part of the same picture.

Thanks for that. That's a really clear explanation. I think that's great. As you said, we're expecting a lot of demand for the buyers of these options. So to hear that the sell side is already there as well is really great. Just for the the benefit of everyone listening, what sort of organizations sell these contracts?

Can anybody do it? How do we see that kind of market dynamic between buyers and sellers?

In theory, anyone can do it. That's never going to be a recommendation that everyone should do it. Because what happens is if you are on the sell side of an options contract, you are issuing the insurance policy to someone else. Obviously, if that insurance policy gets exercised, you have to pay up for it.

And that could be whatever markets are very volatile, so we don't know what that's going to be or what that might look like. What's more common, especially in initial stages, is financials will do it. The way they do it is they will lean on the futures market as a means to be able to hedge their exposure to an options contract.

Um, so that brings volume to futures. Uh, if anyone wants a sort of a rerun of how futures work, it's essentially uh a two-way swap. So if you buy it and you are a BCO, you earn money back if the market is rising, you'll pay money in if the market's falling, so you end up with it with essentially a fixed price, regardless of whether it goes up or down.

Um, a fund or a bank or whatever will be looking at that market to hedge their exposure on anything they write as an option. I did have this conversation last week. If you're actually yielding a spot price, so if you're an ocean liner, for instance, and you're already earning whatever the spot price is, especially if you have index linked contracts in place, there's nothing stopping an ocean liner writing options as an additional revenue stream moving forward.

Because essentially, if you imagine a customer, a cargo owner, a buyer of a call option exercises that option because the market has gone up, you're already recouping whatever that loss might be via the physical market rather than having to rely on futures. And ultimately, if you have an agreement on index linking where you have a ceiling and a floor, you're already dealing in options.

They're just, we would argue, not particularly good because you are agreeing with something that you don't necessarily want on the outset, because it's usually a two-way street with floors and ceilings. With the options market, you can just essentially focus on what you want out of that contract, that deal, that unnecessary contract.

If you're a seller, you can put in a floor completely by yourself using options. And likewise, if you're a buyer, you can put in a ceiling completely by yourself. And it helps address some of the issues around if you have a ceiling on a rate and you're index-linked, and let's say the ceiling is $1,000 below wherever the spot price is, you've negated the entire incentive for having the index-linked contract in the first place because the market's very high.

Oceanliner might be earning a little bit more, but they're still capped at whatever that ceiling is. So it helps address that as well. So ultimately, it's it there there are various ways to look at it. And I don't think we'll get too into some of the more complicated structures such as collars, straddles, and strangles, and all this sort of stuff.

But yeah, that that's a nice sort of overall summary.

Yeah, thanks. Thanks very much for that. I think from I said there's two really interesting points, lots of interesting points. Well, there's two that I wanted to draw out from there. One one was that last one that you said around you can do it all by yourself, right? And this for me is one of the great advantages of using derivatives over just trying to link physically limit things in a physical contract, is that it's not a kind of zero-sum game.

It's not I'm winning because I've capped my contract and rates are way above it, but therefore the other side is losing. You can kind of decouple what you physically pay for freight versus whatever your cost or revenue is. And I think once people really grasp that concept, the the possibilities are literally endless.

And that brings me on to that other point as well is that as you said, if anyone can buy or sell these, there's risks, or there are trading anything, but there are risks in the physical market as well. But as people get more into this, there's more and more that they can do, and it just brings more hedging and risk management possibilities to the market.

Let me jump in with the comment here as well. I would more look at it from the basic physical side of the market here because we are now at this time of year where we hear it as well from various PCOs. What is the freight rate going to be on, for example, Asia or Europe next year? Because we need to put something into the market, and you will typically have the same conversation if you want as it pertains to the Pacific market due to the American market.

And as I think everyone who has been in the market the last six eight years knows, this is a completely fictitious number because the market is so volatile that it makes absolutely no sense. If we can live without uncertainty, that's right. If we can just do it on the phone, or we can do it individually.

If we cannot live without uncertainty, we need to embrace some of these new tools which ones to use and how to use them. That depends on the business of your car that you're moving. That really is the only way of managing that. Couldn't you just do a contract for the carrier? Especially over the last six years, when the market changes drastically, those contracts are difficult.

When it goes up, you're gonna have to pay more if you want to go to the physically loaded. If rates they go down, the carriers are absolutely not gonna get the contract arranged everyone to default. And sure, there's been a lot of cases moving through the Federal Maritime Commission over the last few years revolving around some of these topics.

But they have also revealed that it is never cut and try, it is never as easy as you didn't allow me to book and load, because there's a lot of nuances that then goes into why was that the case. So the volatility we've seen the last six years is not gonna go away. The unenforceability of contracts have actually just become worse over the last six years, not better.

That's also not gonna change. So if you want any kind of predictability or stability, throw yourself a favor and look into what are the various tools, which ones might be relevant for my business.

Maybe we could help people with that, right? To give people possibly a very kind of basic use case. So let's say that we are a BCO, we're approaching our European tender season, as you say, Lars, we're trying to pick the number for the budget next year, and we're looking at the market situation, thinking that's completely impossible.

Peter, what's the kind of basic use case for how Solor could bring in options for futures into that scenario to help them in their kind of contracting process?

It's very simple with regards to options. Let's say you're a cargo owner, you're doing Asia Europe, you're budgeting now, or in through Q4 for next year. Um, you're, as Lars said, essentially picking a number out of a hat for your budget, and that could be wherever, depending on where the market moves.

Let's say, for one instance, you decide to do index thinking, which is very common or more and more common these days. All you'd need to do if you want to put certainty on your rates and also still yield a better outcome if the rates are lower next year, is come in and essentially buy a call option at a requisite strike price, whatever's going to be acceptable to you.

Ultimately, that number will be defined by how much pain can I take in the freight market before it starts impacting my business margin. And that usually is a defined number rather than the budget that you set for next year. Usually you say if I'm paying more than this on container freight, it's going to start eating into my business margin for whatever the product is that I'm shipping and delivering to customers.

So you would simply look to buy a call option basis the volume that you want to cover. Could be all of it, could be none of it, or could be none of it, not really none of it, could be all of it, could be 25% of it, 50% of it, 75% of it, whatever the situation might be. Um you pay whatever the upfront premium is, as long as that's that price is acceptable to you.

Um, and you quite simply have a ceiling on a rate if you're indexed linked. Even if you're paying in the spot market, you might have a little bit of what we call basis risk, because there's often a difference between the exact number that you pay on spot versus the exact number that turns up on any of the indices globally, not just NiFi.

What happens is if the market is going above that price, you are earning the difference back. And you don't do it the other way around. Futures is ultimately going to be cheaper than options and a bit more flexible in terms of how you actually manage positions. Um, but you'll do a similar sort of thing, except you'd say, okay, here's the price I want to try and lock in at.

It'll be a defined number for next year, let's say, can the year 2027. And all you say, okay, we'll agree a price. If the market goes above that price, I earn the difference back. If the market goes below that price, I pay the difference back. You end up with that fixed price because it's all offset against the physical market.

You just pay essentially the fees you pay to the exchange and the broker, such as Clarkson's, and you put in what I think is around 10 to 15% deposit in a margin account to maintain that position. And all that happens is you get a direct offset against whatever that contract, indexed contract or spot price does.

So you end up with a defined known number for next year. You don't have to guess, as Lars says, you don't have to make up a number for your budget. You can lock it in straight away. The third side of this is a cargo owner, or even if you're on both sides of an annual contract, we know there's always an issue, as Lars mentioned, with enforceability of annual contracts.

Usually we would say you fix a price, if it goes one way or the other, there's some kind of renegotiation that happens, or some kind of surcharge, or even bunker adjustment factor has been a big thing this year because of straightforward. That's increasing a customer's lifted price. The liner doesn't really see the benefit of that because they're essentially offloading the costs that they take when they are lifting marine fuel oil or even something like LNG these days, whatever the fuel of choice is.

You have an annual contract in place and you want to go down that route still, even if you've looked at the futures proposition and said, Okay, we can't do this yet, or we don't want to do this, you can still engage in options. Because you have a one-way payout, you could agree an annual contract, there's a degree of uncertainty as to what that annual contract will do if the rate goes one way or the other way.

So all you do is just cover the top of it with a call option. And if there's any sort of impact in the underlying spot market, you're already going to be paid off if it goes above that strike price and you bought a call. But also, there's an assumption that if the freight price goes up 50%, you will be impacted in one way or another, either via surcharge or bunkers or whatever.

So you can essentially recoup an unknown cost on an annual contract if that annual contract changes price at any point through the course of that contract. You can't do that with futures, you can do that with options because they're not directly linked. You just have a one-way payout if the market goes up as a call option, and a one-way payout if the market goes down as a put option.

So it doesn't really impact. You just have to pay that upfront premium. That's the only cost you have to factor in.

Thanks very much. So a great way to bring some certainty into that contract negotiation setup where we have complete uncertainty in the physical market at the moment.

One other element I want to throw in there also, if you look at the thought process seen from in this case a PCO perspective, what is the value of the goods you are shipping? Let's examine two different examples. Let's say I am moving a very valuable cargo. That means the trade cost is a time share of the overall same price of these goods.

In that case, it's extremely important for me that my physical supply chain continues to move, my cargo gets low. In that case, it would make sense to simply lock in the rates of futures contract, because that way I have certainty over a relatively small cost element, but I'm sure the cargo actually gets moved, which is extremely important when it's high-paying cargo.

Conversely, if my cargo is not that valuable, freight rate price is actually a substantial part of this. It might be more worthwhile leaning in towards the auction side, because the problem here is if I engage into a future, then of course it's great if freight rates go up. Excellent. But if freight rates suddenly come, I will have relatively high freight rate costs.

Whereas some of my competitors might be on the spot market, suddenly I have a problem. So in that case, going down the auctions route might make a lot more sense because I can avoid a spike in my cost, but I still get the benefit of the lower cost and can follow my competitors down. So the perspective from the individual DCOs has to also be linked to what is my core business here?

How important is freight rate as my overall business? And that leads me to different risk management strategies.

Yeah, and I think that's what's great about adding the auctions with the futures, is it just brings more possibilities to the market in terms of how people manage risk and more solutions for a kind of greater array of people to really tailor that to their business. There is one question that I really want to cover here because it's something that we still see, right?

I think futures and options, and certainly indices are not so new anymore in this industry. But yet, when we talk about these, we do still sometimes get the reaction around this is speculation, this is gambling, right? This is going to a casino for for ocean freight. I just wanted, Peter, to get your reaction to those kind of comments because we do still sometimes see these in the market when we talk about these tools, right?

The best phrase uh here I have heard for the past four years is if you are not hedging, you are speculating. Ultimately. No matter what your hedge tool is, whether it's futures or whether you engage in annual contracts. But then even on the annual contract side, as we've discussed before, there's an unknown that you're essentially locking into that you don't know about the performance of these contracts.

Could be good, could be bad. Usually, if it's good performance, that means that the spot price is lower than your annual contract price and a liner is incentivized. But then ultimately, we saw at the end of 22 these three-year fixed price contracts from ocean liners just keep completely collapsed across the board after the rates went down.

So you also see the ocean liners' perspective on that uncertainty of contracting in the physical market. It does make me quite annoyed that someone would say, okay, we don't value a tool that actually gives some semblance of certainty to both sides of a market, which is exactly what futures does. Um, you ultimately have to understand completely how the mechanisms work, and that's why we exist and why you guys exist at NYSHEX.

And also Lars touches on this quite quite effectively as well as part of this process. But ultimately, as I mentioned before, I mentioned a real example of I believe it's a furniture company, quite a small one in the US, holding back their inventory as a gamble that rates will fall in Q1 because they don't know what the rate is.

So they are they're doing something worse than just gambling what freight price they're going to get. They're actually gambling their inventory. And that could cause enormous issues if you push it to last minute and you're holding back um contracting, you're holding back shipments because you're waiting for some kind of mystical eventuality to happen that you don't know about in the future.

And then when it gets to the point, okay, we actually need to ship this stuff because we've got customers that are buying our product, then you end up paying whatever the rate's going to be. You don't know what that rate is at any point in the future. So if you're using futures, you gain a known price.

That's it. It might not be the best price, but it could be that the market, as Lars says, market completely collapses in Q1. Okay, you're right, you've locked in the futures contract. So you're you're paying whatever that futures price is essentially for your shipment. But then ultimately, with financial contracts, because they're all standardized, they are very tradable.

And if I was to throw in another example based on what Lars was saying about a customer that has a big focus on the cost of shipping on containers because their product margin might be tiny. If you lock in a futures price today and you're worried about downside on that contract, actually meaning you're paying a higher freight price if the market completely collapses, okay, buy a put option.

Just buy a put option slightly below your futures contract price, slightly out of the money. What happens is, okay, any pay-in you have on that futures contract because you're paying that higher freight rate is recovered by the gains on a put option. So all of a sudden you can lock into a futures contract and completely negate whatever the perceived downside is on futures because you might be paying a higher price.

So it's ultimately becoming extremely flexible in terms of how you look at this and completely derives any opinion that it's speculation or gambling or any of that sort of stuff. But then the caveat to it is ultimately if you wanted to speculate on this tool, as you might do if you are an owner looking to buy a vessel now, you're buying a vessel for container shipping basis the current market, you are essentially gambling that the market will stay in a certain fashion for the next 10 years to gain a return on that vessel.

If you're looking to essentially speculate on futures, you can do that if you want to, but it's not going to be what we would say any of the physical market will actually want to do. And we've not really heard that either that people want to do that.

The way I see it is if you have a physical stake here, either you have freight you need to move, or you are operating ships that need to get freight on, this could in no way, shape, or form ever be seen as gambling. Because you don't know what the future will bring anyway. It's a matter of managing your risk exposure for something physical you're gonna do.

If you are neither a shipper or a carrier or forward, it has not involved trade at all, and you want to use this speculatively, then we could have a discussion around whether that is called speculation or we should use other words. But for all the physical market participants here, no, it's not gambling at all.

It's a way of managing a risk exposure you have anyway, no matter what you do.

Thank you both for that. I think that's a great overview of the financial market in general, but particularly the options. Just one thing, Peter, if someone's listening to this and they think I want to know more about this, I want to get involved, I want to understand how to set up what's required. What's the next steps that they should take?

Contact us, essentially. I don't know if the contact details are going to be added at some point. But send me an email, give me a call. We've got a team here of three now. Wherever you are in the world, we've got some pretty insane working hours, so we'll probably respond to you. Probably why I'm ill at the moment, but there we go.

Uh yeah, just get in contact on email or or phone. And I'm sure if you've already got a contact with either Rich or Lars and they ask for a line in, there will be an intro that happens, I'm sure. And we can go into the nitty-gritty of everything to do with the mechanisms and how things work. And even if you are skeptical, please talk to me because I will speak to everyone about this.

And we speak in a very, I hope, simple way. Um, that is easy to understand, and we don't we don't hide anything in terms of how this works and how it's executed.

Okay, thanks very much. All right, I want to move on. I think we've got a couple of other kind of market news items to discuss. I think, Lars, you wanted to talk about some service changes and sort of things going on in the market.

Yeah, I kept it relatively limited because I knew we're gonna spend most of the time on the auctions here, but there's at least this week there are two things worth being aware of. One are there's a range of different service changes on the Asia to Latin America trades, especially Asia to East Coast South America.

And what appears here is there's a competitive battle that is heating up. Some of the vessel sharing agreements are now being terminated as we get into December. CMA is revamping some services, Couplo is revamping some services, and it would appear that Mosk has this might sound harsh, it might not be a completely correct depiction, but it seems they've been kicked out of one of the VSAs they had with their CMA CGM, so right now their service portfolio becomes more constricted.

And I'm sure we haven't seen the last of these changes, but there's clearly a competitive battle ongoing on the Latin America trade here that we are likely gonna see eat up further coming up. The other one that is important is Habak Lloyd attempt to acquire Zim, or rather to acquire part of Zim. That has gone through a process where this needs uh a major political approval in Israel, and right now that seems to hit a major snack.

Where after there was a revised proposal that was sent in by Habak Lloyd, that review has now been formally stopped by the Israeli government. And in order to move forward, as I understand it, there needs to now be a completely new proposal forthcoming from Habak Lloyd SIM in terms of how this should work, which might even need a new formal approach, approval also by the board of Habakkuk and SIM.

So the indications early in the year when the use of this deal first broke, that this might actually start to come into effect in early 2020. So that definitely seems to be out of the window in terms of the market.

Okay.

All right, so I think that's pretty much everything covered for today. Peter, thank you so much for joining us and everything that you've pleased to explain on the financial market. As Peter said, please reach out if you need more information. There's no cost to learning more about these markets. Whether you're keen or you're skeptical, I know he'd like to talk to you.

And if you don't have his contact details, as Peter said, please reach out to myself or Lars or Nicex as a whole, and we'll make sure that we put you in touch. Peter, thanks very much. Lars, thanks. As always, I look forward to following the next leg of your travels. We were talking off earlier about the next border crossing.

So we'll wait to hear news of that when in a couple of weeks' time, I guess. All right, thank you very much. That's it for today. We'll be back next week, as always, with everything that's moving in the container market.

Thanks for listening to the Supply Chain Secrets Podcast, presented by NightShakes. Be sure to subscribe on your favorite podcast app.

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