The freight team at Deutsche Bank sits within the dry bulk business, which consists of 10 professionals situated across Europe and is led in London by Simon Grenfell, head of metals and dry bulks sales and head of dry bulks trading.
Total freight trading volumes in 2011 were more than triple those in 2010 and the team now trades over 10,000 days of business per month. This year, Deutsche Bank has also increased the routes it offers by extending into Capesize C7 (Bolivar–Rotterdam), Capesize C3 (Tubarao–Qingdao), Panamax P2A (Skaw/Gibraltar–Far East) and Panamax P3A (Japan/South Korea–Australia/Pacific).
One of the key reasons behind the bank’s market-making ability in freight is an arrangement it has with one of the world’s largest shipping companies, which took full effect in the middle of 2011. As a result, Deutsche Bank can provide deeper liquidity and undertake larger trades.
“This close working relationship gives us a huge amount of access to liquidity that pure derivatives players don’t have,” says Grenfell.
This close working relationship gives us a huge amount of access to liquidity that pure derivatives players don’t have
An example of the bank’s ability to manage trades is the execution of a $60 million Capesize swap that was conducted on behalf of an institutional client in December 2011. Deutsche Bank describes the trade as “probably the largest freight trade ever done by an institutional investor”.
At the time of the transaction, Grenfell says the biggest challenge to overcome was the “patchy liquidity” in the freight markets. However, given Deutsche Bank’s relationship with the shipping company, the team was able to cope with managing the risk in executing such a huge trade. “We effectively took the risk onto our books,” he says.
Through the agreement, the bank can charter vessels, giving it access to the same underlying exposure that would be obtained from trading a forward freight agreement (FFA). As a result, Deutsche Bank benefits from being able to hedge FFA risk against physical shipping risk or vice versa.
“We have access to physical liquidity as part of the relationship so we can manage trades such as this $60 million Capesize swap better than any of our competitors,” says Grenfell.
In addition to actively making markets, Deutsche Bank has also been successful during the past year in introducing new clients to freight trading. “We have brought a few large hedge funds into the freight market and a couple of other institutional clients,” says Grenfell.
Through Deutsche Bank’s institutional sales group, the bank liaised with these clients and informed them of the opportunities of trading freight as a proxy for global economic activity. “It’s a great way of expressing a view on China, for example,” notes Grenfell.
Although the new clients had never traded before in the freight markets, because of the success they had with Deutsche Bank in other commodities (see Deutsche Bank’s Derivatives House of the Year award) they were keen to engage in freight, says Grenfell.
Looking ahead, Grenfell is optimistic about the growth prospects for the freight team. Clients such as commodity producers may be reluctant to hedge the price of their underlying product due to shareholder concerns but, because freight by nature can’t be stored and is volatile, it will be viewed increasingly as a service with a cost that can be actively managed, he says.
“The freight business is a really interesting sector for us. On the hedging side, we are expecting continued growth and as liquidity is deepening we will be seeing more fund activity. We are going to see more rapid growth in freight,” says Grenfell.