Freight & Shipping

The market that moves every other market

Almost every physical commodity has to get on a ship. Roughly 12 billion tonnes of cargo move by sea each year, and the cost of that journey is itself a traded commodity, quoted, hedged, and speculated on like any other. Freight splits into two great families. Dry bulk carries unpackaged solids: iron ore, coal, grain, bauxite, fertilizer. Wet freight, the tanker market, carries liquids: crude oil on the dirty tankers, refined products and chemicals on the clean tankers. The two cycles are driven by different cargoes and rarely peak together, which is why traders watch them as separate markets.

The pricing authority for both is the Baltic Exchange, a London institution founded in 1744 and owned by the Singapore Exchange since 2016. Every business day it polls a panel of shipbrokers for hire rates on standard routes and vessel classes, and compounds them into headline indices: the Baltic Dry Index for bulk carriers, the Baltic Dirty Tanker Index and Baltic Clean Tanker Index for the wet trades. These index points are watched far beyond shipping as a barometer of world trade.

Why freight is the most cyclical market in commodities

Supply is a shipyard order book that takes about two years to deliver and then floats for 25. When rates spike, owners order ships that arrive long after the shortage has passed, and the resulting glut can depress rates for a decade. The Baltic Dry Index peaked at 11,793 in May 2008 and fell below 700 by December of the same year, a 94 percent collapse in seven months. Effective supply is also elastic in hidden ways: slow steaming, port congestion, and rerouting around chokepoints all absorb tonnage without scrapping a single ship. The 2023 to 2024 Panama Canal drought and Red Sea diversions showed how distance, not just demand, sets the true unit of demand, the tonne-mile.

The paper market: Forward Freight Agreements

Freight is hedged with the Forward Freight Agreement, a cash-settled swap on the average of a Baltic index over a calendar month, quoted in dollars per day for timecharter routes or dollars per tonne for voyage routes. FFAs clear mainly through EEX and SGX. Miners, charterers, refiners, and trading houses use them to lock in the cost of voyages they have not yet fixed, and the FFA curve is the market's collective forecast of trade volumes, congestion, and fleet growth. Physical fixtures, the actual hiring of ships, remain arranged through shipbrokers in an over-the-counter market.