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Shipping sector sees fixing dry bulk freight on screen as the future

Singapore — Screen trading of physical freight for dry bulk vessels carrying iron ore and coal could soon become the norm, shipping market participants said in a panel discussion at the 2nd Platts Dry Bulk Forum in Singapore Wednesday.

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The increasing standardization of routes, consolidation of market players and pre-screening of counterparties were touted as the main factors driving freight execution through online trading screens.

"It's not a far off possibility," Michael Gardiner, miner Ferrexpo's global freight manager, said, adding that at least one Western Australian miner who was in discussion with a software provider to develop a kind of reverse auction system to fix freight.

"Effectively the [matching] of a shipowner and ship charterer is very simple. The ship charterer is going to provide the charter party [possibly with no options to alter or discuss the terms]. Then there is only change to the laycan, freight and demurrage," Gardiner said.

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The Steel Authority of India has been using a reverse auction system to fix freight since 2014. Recently, India's Rashtriya Ispat Nigam Limited, also known as Vizag Steel Plant, started using a similar mechanism.

"Tata Power does a [reverse auction] and Tata Chemicals is considering the same," said Dinesh Shastri, managing director at Tata NYK Shipping.

"It's working from the end-user's perspective. It is also taking away all the cost of transaction. It might become the disruptive factor going forward," Shastri said, adding that this provided a transparent mechanism that removed concerns over corruption and need for vigilance.

With a large number of charterers showing an intent to move towards a more transparent, screen-based mechanism to fix freight, the position of the traditional ship-broker is at risk.

"Much like owners, there are too many brokers chasing too few cargoes. From the brokers, we need a clear demonstration of where they add value," Gardiner said, adding that there were more information providers than before.

COUNTERPARTY DEFAULTS OVERTAKING RISK OF BANKRUPTCY

The panelists also touched on the issue of bankruptcies involving shipowners. They said that while dry bulk rates were currently slightly higher than the "lowest of lows" seen recently, they were surprised that more shipowners were not bankrupt.

"There has to be some correction for the markets to return to normal," said Sanjiv Bhargava, director of Hong Kong-based Bulk Marine. "The fault probably lies with the banks. They are uncomfortable with possessing the ship."

The market was seeing many new ship-operators, Sanjiv said, adding that given the credit extended by bunker suppliers, a small capital of $100,000 would be sufficient for a ship-operating company to be formed and start taking cargoes for trips of 30-40 days.

With lower entry barriers, the market faced a bigger risk of counterparty default, the panelists said.

Charterers hiring vessels on time charters were concerned about ships being arrested for non-performance of shipowners, who, in turn, worried about charterers not being able to meet commitments.

--Shriram Sivaramakrishnan, shriram.krishnan@platts.com
--Edited by E Shailaja Nair, shailaja.nair@spglobal.com