UPDATE 2-Suitors circle Baltic Exchange ship futures platform -sources

Tue Jul 9, 2013 1:12pm EDT

* Dry freight market in one of worst slumps on record

* LME made earlier overture to Baltic in 2010

By Jonathan Saul and Susan Thomas

LONDON, July 9 (Reuters) - London's centuries-old Baltic Exchange has received interest from exchanges and financial operators, including the London Metal Exchange and CME Group, for its dry freight derivatives platform, sources familiar with the matter said.

Volumes have remained low on the loss-making Baltex multilateral trading facility since it started in June 2011, but strategically it provides an attractive gateway into freight, bulk commodities industry sources say.

Baltex is the first central electronic marketplace for freight forward agreements (FFA), which enable investors to take positions on freight rates at a point in the future.

"The Baltic Exchange has received expressions of interest. There have been exploratory talks. It is at an early stage," one source said.

The LME and CME both declined to comment on Tuesday.

Sources also said LCH.Clearnet, one of the world's biggest clearing houses which also clears the biggest slice of overall FFA contracts, had expressed interest in the platform. LCH.Clearnet declined to comment separately on Tuesday.

Baltic Exchange Chief Executive Jeremy Penn said: "The Baltic has business relationships with a number of exchanges and clearing houses and therefore is often in dialogue with them. Such dialogue of course includes matters related to Baltex. This does not mean that there are active negotiations under way."

Baltex is run by a subsidiary owned by the Baltic, the hub of the global shipping market since its founding in 1744. Baltex recorded a loss of 682,093 pounds ($1.02 million) in the year to end March versus a loss of 704,166 pounds in the previous year.

In the Baltic's annual report published last month, chairman Quentin Soanes said the major concern for the board over the past year had been the "disappointing performance" of Baltex.

"Your board will be vigilant to ensure that swift action is taken if a point is reached where support for the project no longer makes sense," Soanes wrote in the report.

The LME, founded in 1877 and sold last year to Hong Kong Exchanges and Clearing for $2.2 billion, had made overtures to the Baltic in 2010 to launch a jointly-run freight derivatives platform but was rebuffed then by FFA brokers.

HKEx Chief Executive Charles Li said this year the company will use the LME's status as the world's biggest metals marketplace to extend HKEx's commodity trading platform into ferrous metals, such as iron ore, coking coal and energy.

"HKEx is looking at potential new products. They have said that they are looking across all sorts of asset classes," a metals industry source said. "Freight is of interest, and has been, given its relation to bulk commodities trading."

HKEx has signed a flurry of memorandums in recent months, including one in June with China Beijing International Mining Exchange. CBMX serves as a platform for trading mining rights and also as an operating organisation of China Iron Ore Spot Trading platform.

FFA BROKERS

The privately-owned Baltic Exchange has struggled to coax brokers to boost usage on Baltex. Brokers, who have been trading FFAs by phone or on screens of their own, fear that the use of Baltex will lead to a loss of commission business.

Despite its name the Baltic Exchange is no longer the forum for trade in the chartering of vessels and produces daily benchmark rates and indices that are used to trade and settle freight contracts as well as data used in the FFA market.

A source at a top freight broker expressed alarm at a potential sale to a third party.

"By any measure Baltex has not achieved any success at all," the source said.

"The Baltic produces information fed to them by physical and FFA brokers. That tap can be turned off if it is felt that the Baltic is acting outside of the interests of that brokerage community."

The entire FFA market has shrunk as the dry bulk shipping market has suffered one of its worst and longest ever downturns. Owners had ordered large numbers of new vessels between 2007 and 2009, just in time for the collapse of the global economy after the 2008 financial crisis.

With the growing importance of Asia as centre for the global shipping market, the Baltic is now contending with challenges from potential rivals. Last year the Shanghai Shipping Exchange launched China's first dry bulk and oil import indexes.

The dry FFA market, which had grown to an estimated value of $150 billion in trades in 2008, fell to around $8 billion to $12 billion last year, according to market estimates.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.