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.

Inside the Baltic Exchange

The institution behind every freight index here is older than the markets it serves. The Baltic Exchange began in 1744 in the Virginia and Baltick coffee house in the City of London, where merchants chartering ships for the Baltic Sea trade in tallow, hemp, and grain met to do business, and it grew into the world's central marketplace for hiring ships. It has never owned a single vessel; its product is information and a code of conduct. Its members are shipbroking firms, owners, and charterers, and it is from panels of these member brokers that the exchange collects the daily rate assessments it compounds into the indices. Singapore Exchange bought it in 2016, moving ownership of the benchmark east to sit closer to the Asian trades that now dominate volume.

Two episodes are worth knowing. On 10 April 1992 an IRA truck bomb destroyed the exchange's listed headquarters at 30 St Mary Axe, killing three people; the site was eventually redeveloped into the tower Londoners call the Gherkin. The second is a matter of integrity rather than violence: because the indices rest on broker panels reporting where they judge the market to be, rather than on cleared trades, they face the same trust problem the LIBOR scandal exposed in interest rates, so the exchange now publishes its methodology and operates under formal benchmark regulation and the IOSCO principles to defend against manipulation. The other recurring stress is counterparty risk in the paper market: when the Baltic Dry Index collapsed 94 percent in 2008, a wave of forward-freight-agreement defaults followed, which is why FFAs were pushed onto clearing houses afterward.

Why the classes are named after canals

Ships are sorted into classes, and the names encode the physical constraint that limits each one, drawn from three different logics. Some are chokepoint limits: a Panamax is the biggest ship that fits the original Panama Canal locks, about 32.3 metres in beam and roughly 65,000 to 82,000 deadweight tonnes (vessels built for the 2016-expanded locks are Neopanamax), while a Suezmax is the largest tanker that can transit the Suez Canal fully laden, and a Malaccamax is sized to the Strait of Malacca. One class is named for the chokepoint it cannot use: a Capesize, around 180,000 dwt, is too big for the Panama Canal, so it sails the long way around the Cape of Good Hope, which is where the name comes from. Others are plain size or handiness descriptors: a Handysize is small and carries its own cranes, so it is handy enough to call anywhere, and Handymax, Supramax, and Ultramax are progressively larger versions of the same geared workhorse, while VLCC and ULCC simply stand for Very and Ultra Large Crude Carrier. The odd one out is the Aframax, roughly 80,000 to 120,000 dwt, named not after a canal but after the Average Freight Rate Assessment (AFRA), a tanker-pricing system Shell devised in 1954.

The classes matter because the fleet cannot respond quickly to price. The lead time from signing a newbuild contract to delivery is about two years, but most of that is queue time waiting for a berth slot, not construction, which takes only nine to eighteen months; when yards are full, as in the mid-2020s, delivery can stretch to three or four years out. The ship then trades for 25 years or more. That long, rigid lag is the engine of the freight cycle: owners order when rates are high, the ships arrive long after the shortage has passed, and the glut depresses rates for years, which is exactly how the fleet ordered at the 2008 peak haunted the entire 2010s.

Voyage or time: two ways to hire a ship

There are two main ways to put a cargo on a ship, and they split the costs and risks differently. A voyage charter is the spot market: you hire the ship to carry one cargo from A to B for a price per tonne (or in Worldscale points for tankers), and the owner pays all the voyage costs, bunkers, port charges, and canal dues. A time charter hires the ship with its crew for a period of time, months or years, at a daily hire rate, the "day rate" in dollars per day; now the charterer pays the voyage costs and decides where the ship goes, while the owner just supplies and crews a working vessel. The Baltic reflects both: its voyage routes are quoted in dollars per tonne, its timecharter averages in dollars per day. Two further structures sit at the edges, a bareboat charter that hands over the ship with no crew, effectively a finance lease, and a contract of affreightment that commits an owner to a string of voyages over time.

Choosing between them is a question of risk and market view. A charterer with steady, recurring cargoes, a miner, an oil major, a large trading house, time-charters to lock in cost, guarantee access to tonnage, and control scheduling, and an owner who wants predictable revenue likes handing the utilisation and voyage-cost risk to the charterer. A charterer with lumpy, one-off cargoes uses the spot market instead. The decision is also a bet on the cycle: an owner bullish on rates stays spot to keep the upside of a spike, while one who is bearish locks in a long time charter near the top, and traders charter ships in on time then sell voyages, or trade the forward-freight curve, to take a pure view on the spread.