The mists enveloping Tianjin Port revealed a vibrant hub of activity as the colorful berth came to life, promising yet another day of substantial cargo handling and maritime operationsIn the heart of the Tianjin International Trade and Shipping Service Center, screens displayed the ever-fluctuating lines of the China Container Freight Index (European Route), a critical indicator of the health of the shipping industryThis synergy between freight indices and port activities is propelling China's maritime sector towards a new era of high-quality growth.

Shipping Industry's Boom

2023 marks a remarkable year for the shipping industryWith Shanghai Port surpassing 49 million TEUs (twenty-foot equivalent units) in container throughput for the fourteenth consecutive year, the port continues to reign as the world's busiestMeanwhile, Tianjin Port achieved a historical milestone, with container throughput hitting 11.88 million TEUs in the first half of 2024, representing a 4.6% year-on-year increase

The surge in performance is mirrored by listed companies in shipping, such as COSCO Shipping Holdings, which have reported significant profits and net income growth.

Alongside this growth, important risk management tools are emergingOn August 18, 2023, the first shipping futures product in China—the Container Freight Index (European Route)—was launchedThis novel instrument, rooted in Chinese index development, operates with a design incorporating a “service-type index, international platform, RMB pricing, and cash settlement." It opens its doors to global traders, enabling them to hedge against price fluctuations in the container transport marketSo far, the index has successfully completed four rounds of cash settlements, quickly rising to prominence in the futures market.

Since its inception, transactions in the container freight index futures have proliferated

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According to He Jun, the Vice General Manager of the Shanghai Futures Exchange, as of October 22 this year, the total trading volume reached approximately 42.44 million lots, accumulating a trading value of around 3.48 trillion yuanThis translates to an average daily turnover of about 12.3 billion yuan, illustrating robust participation that exceeds that of overseas markets.

At a recent ceremony marking the Shanghai Futures Exchange's designation of Tianjin International Trade and Shipping Service Center as a "Strong Source to Aid Enterprises" service base, Zhang Quanyi, the center's director, highlighted that the container freight index futures fill a significant gap in China's shipping derivatives marketIt has also attracted notable interest from domestic and foreign shipping firms, trade companies, and financial institutions alike.

According to Li Chandong, Vice General Manager of Huatai Futures, the liquidity of the container freight index futures is impressive

Maritime transport accounts for over 80% of global merchandise shippingAs a leading maritime nation, nearly 95% of China's import and export trade volume is transported via seaSince 2002, Chinese ports have consistently headed global rankings in container throughput, with seven of the ten busiest ports worldwide located in ChinaStill, Li emphasizes that while China's maritime infrastructure is robust, the sector lacks in technological sophisticationThe top ten global shipping companies dominate around 90% of global shipping capacity, resulting in significant price volatilityConsequently, while Chinese shipping capacities represent roughly 10% of global shares, pricing power remains predominantly overseas, relegating Chinese enterprises to accept external price determinants passivelyHowever, with the increasing emphasis on ensuring supply chain resilience and security, there is a pressing need for China's shipping sector to assert itself in international pricing.

Emerging Price Risk Management Functions

Currently, Chinese enterprises are increasingly expanding their footprint in overseas manufacturing, branding initiatives, and cross-border e-commerce

At the core of these endeavors is international logistics, which links production, distribution, and consumption harmoniouslyRobust logistics networks must lead the way as global supply chains become more intricate.

Lin Yikun, Executive Deputy Secretary-General of the Maritime Logistics Branch at the China Transportation Association, has spent over twenty years deeply immersed in international logisticsHe notes that since the outburst of the Red Sea conflict, shipping times along the European route have increased, and price volatility has significantly intensifiedThis volatile landscape, compounded by unexpected uptrends in export demands since the second quarter of this year, has exerted severe pressure on businesses reliant on stable shipping costsAs a result, foreign trade businesses and shipping agents are increasingly recognizing the necessity of price risk management toolsIndustries with thin profit margins, such as photovoltaics, pulp, furniture, and tires, are especially attuned to the risks of fluctuating freight costs

"When a freight forwarder secures a deal, they feel both excitement and anxiety, not knowing what tomorrow's rates might bringSmaller companies risk obliteration from a single significant operation," he explains.

The futures index has provided a critical lifeline for managing freight cost risksTianjin Qianhai International Supply Chain Co., which acts as a booking agent for numerous international shipping lines, encountered losses of 570,000 yuan due to soaring freight costs on one order this yearHowever, by engaging in container freight index futures, they managed to earn 290,000 yuan back, mitigating losses from freight volatility"Both upstream and downstream enterprises are enhancing their awareness and capacity regarding freight rate risk management," says Lin Yikun.

During a series of interviews, it became evident that freight forwarding companies are eager for risk management measures

For instance, Guorong Logistics purchased futures to hedge against surging freight costs, curtailing their losses from 190,000 to 40,000 yuanLu Yonghua, General Manager of Yide Futures Co., noted that leading freight forwarders have effectively hedged against price fluctuations using the container freight index futures, offsetting losses in the spot market and stabilizing financial impacts on their operations.

Moreover, some significant cargo owners are beginning to recognize the benefits of container freight index futures for risk hedgingZhongzhe Group, by participating in the index futures trading, has netted a profit of 230,000 yuanThis not only mitigated the potential for rising freight costs but also reduced their actual costs by an additional 80,000 yuan, successfully aiding the company in controlling risks and stabilizing profit margins.

Observation reveals that private enterprises from economically vibrant provinces like Zhejiang and Guangdong dominate participation in the container freight index futures market, while some large Chinese shipping companies remain cautious observers

Yide Futures’ Deputy General Manager Zhao Weixia explained that the transition of new products necessitates a period of acclimatizationTypically, before futures are introduced, leading enterprises in the supply chain possess greater bargaining power, but this dynamic can shift, ultimately benefiting smaller players once the futures are in circulation.

According to Zhao Yan, Assistant General Manager of the North China Region at China Merchants Logistics Group in Tianjin, the current pricing dynamics in the shipping logistics space reflect the “80/20 rule,” where 20% of large clients constitute 80% of the profit, while the remaining clients follow market trends looselyWith the launch and evolution of the container freight index futures, she believes industry pricing is poised for significant transformation"As more enterprises turn to futures pricing, it will gradually become central to market pricing." She anticipates that the industry’s relationship with futures will evolve from initial resistance to eventual acceptance and adept application

"Thus, patience and care for the container freight index futures will be paramount," Zhao remarks.

Growing Together: Futures and Ports

The freight forwarding sector in China comprises a vast number of companies amid fierce competition, with many exhibiting relatively weak risk resilience"Generally, smaller freight forwarding companies lack specialized futures talent and are consequently discouraged from directly engaging in futures tradingThus, we hope futures firms can innovatively design accessible and understandable freight risk management products utilizing the container freight index futures, providing excellent service to smaller enterprises," an expert suggested during discussions.

Moreover, survey insights reveal that a collaborative approach between futures and ports could harness immense internal momentumFor instance, Tianjin Port serves as a vital hub for basic industry in northern China, where steel, chemicals, and machinery constitute a significant portion of its exports

Establishing delivery warehouses for bulk commodities at Tianjin Port strengthens the port's support for regional industries and logisticsWith the introduction of the container freight index futures, which acts as a crucial bridge, financial capabilities can engender new developments within shippingThis collaboration enhances shipping resource allocation and boosts financial service robustness, ultimately propelling Tianjin toward its ambition of becoming a Northern International Shipping Center"The integration of shipping and finance, uniting forces across shipping, trade, and futures markets, aims to draw more enterprises from various sectors to Tianjin, consolidating resources essential for building world-class port facilities," officials from Tianjin’s commerce department stated.

Looking to the future, He Jun emphasized that the Shanghai Futures Exchange will prioritize risk mitigation, diligently fulfilling its regulatory responsibilities while ensuring stability in the container freight index futures market