DRY BULK FORWARD FREIGHT AGREEMENTS

SSY Futures Ltd are authorised and regulated by the Financial Conduct Authority in the United Kingdom and are NFA members in The United States. The material contained herein is for information purposes only and should not be seen as a trading recommendation or solicitation of trade.

Dec 2019 SIMPSON SPENCE YOUNG

• Established 1880 • Largest privately owned shipbroker in the world • Worldwide network of 20 offices • A Leading Baltic Panelist • Expertise in:-  Dry Cargo SSY Futures Ltd  Tankers 30 Derivatives Brokers  Futures In London, Singapore & NY  Research and Consultancy  Sale and Purchase Team of 12 analysts  Ship Finance on dry bulk markets,  Agency and Towage tanker and Gas markets

Dec 2019 | 2 THE BALTIC INDICES

Dec 2019 THE BALTIC EXCHANGE

• The Baltic Exchange is the international membership organization for the global shipping markets. Since 1985 it has been publishing Freight Indices

• Baltic Exchange Dry Index (BDI) • Baltic Exchange Handysize Index (BHSI)* • Baltic Exchange Supramax Index (BSI) • Baltic Exchange Panamax Index (BPI) • Baltic Exchange Capesize Index (BCI)

* Not currently included in BDI

Dec 2019 | 4 THE BALTIC PANELISTS

• The Baltic carries out annual “audits” on independent ship brokers. • Companies who are doing sufficient business fixing individual routes and who demonstrate competence are invited to become Panelists. • The Panelists make daily professional assessments voyage and time charter rates. • The Baltic oversee the assessments, aggregate the inputs & publish the results.

Dec 2019 | 5 BALTIC INDICES ARE PRICED IN US$ PER DAY (TIMECHARTER) OR FREIGHT RATES IN US$ PER METRIC TONNE (VOYAGE)

• Time Charter: • Panamax Route 2a_82: Europe to the far east priced in USD/Day. • Voyage: • Capesize Route 3: Tubarao to Qingdao, iron ore route priced in USD/Mt.

The Baltic Index Council decide on which rates to report and vessel specifications. They are an independent group of industry experts working with the Baltic’s Senior Freight Reporter.

Dec 2019 | 6 BALTIC TYPE VESSEL DESCRIPTIONS

Capesize 2014: Basis a Capesize 180,000mt dwt, not over 10 years of age,198,000cbm grain max. Loa 290m,max.beam 45m, draft 17.75m, 14 knots laden, 15.0 knots ballast on 62mts fuel oil or 12 knots laden, 13 knots ballast on 43mt, no diesel at sea. Panamax 82: Basis a Panamax 82,500mt dwt, not over 12 years of age, 97,000cbm grain max. Loa 229m, max. draft 14.43m, 13.5knots laden on 33mt 14.0 knots ballast on 31mt fuel oil laden/ballast + 0.10 MGO at sea. Supramax: Standard "Tess 58" type vessel with grabs as follows: 58,328mt dwt on 12.80m SSW, 189.99m, beam 32.26m • 72,360cbm grain, 70,557cbm bale • 5 holds, 5 hatches • 4 x 30mt cranes with 12cbm grabs • 14 knots laden on 33mt fuel oil (380cst), no diesel at sea / 14 knots ballast on 32mt fuel oil (380cst), no diesel at sea. • 12 knots laden on 24mt fuel oil (380cst) no diesel at sea / 12.5 knots ballast on 23mt fuel oil (380cst), no diesel at sea Handysize 38: Basis a 38,200mt dwt, self trimming geared bulk carrier on 10.538 SSW 180m LOA 29.8m beam. 5 ho/ha. 47,125 cbm grain 45,300 cbm bale 14 knots laden on 26/24 mt ballast + 0.10 MDO at sea. 4 x 30mt cranes.

Dec 2019 | 7 BALTIC SUPRAMAX TIME CHARTER AVERAGE COMPONENT PARTS

S1B_58Canakkale trip via Med or Bl Sea to China-South Korea S1C_58 US Gulf trip to China-south Japan S2_58 North China one Australian or Pacific round voyage S3_58 North China trip to West S4A_58 US Gulf trip to Skaw-Passero S4A_58US Gulf trip to Skaw-Passero S4B_58Skaw-Passero trip to US Gulf S5_58 West Africa trip via east coast South America to north China S8_58 South China trip via Indonesia to east coast S9_58 West Africa trip via east coast South America to Skaw-Passero S10_58 South China trip via Indonesia to south China

Dec 2019 | 9 WHAT IS AN FFA?

Dec 2019 FFA DEFINITION

An FFA or Forward Freight Agreement is a Futures Contract on freight costs. In just the same way that people buy commodity futures to benefit from rising prices they can buy FFAs. They can also Sell FFAs if they believe freight prices will fall. FFAs always have a buyer and a seller - one will make money at the settlement and the other will lose it. It’s simple to trade an FFA instead of really participating in the freight market. No need to own a ship, employ operations staff, fill it with crew, fuel, food, water etc etc.

Dec 2019 | 11 OPPORTUNITIES FOR USING FFAs

• Time Charter and FFA. Fix ships on long term time charter but buy/sell FFAs to switch To a floating price if rates show signs of improvement. • Spot Market and FFA. Leave ships on the spot market but buy/sell FFAs to prevent earnings from erosion if the market starts to move. • Floating Rate Time Charter and FFA. Fix a floating rate time charter and then buy/sell FFAs to lock in the rate when rates are advantageous. • Investment Strategy. Use FFAs as an alternative to ship ownership. Employing capital to hold FFA positions that profit from a strengthening shipping market. • Portfolio Insurance. Use FFAs to hedge a portfolio of shipping investments.

Dec 2019 | 12 Cape Time Charter Average FORWARD CURVE – 18th Nov 2019

Dec 2019 | 13 CAPE TC AVG Spot & Forward 18th Nov 2019 ELEMENTS OF A TIMECHARTER AVERAGE FFA

• Buyer /Seller - freight exposure / market view

• Vessel Type - Cape, Panamax, Supramax, Handy

• Period - month / quarter / year

• Quantity - number of days per month

• Contract Price - level traded

• Clearing - EEX / SGX

Dec 2019 | 15 FFAs CASH SETTLE AGAINST THE AVERAGE DAILY PRICE PER MONTH

BUYER: Charterer Market Rises July settlement = $25,000 SELLER: Shipowner Sett Val = 25,000 – 20,000 X 10 Days = $50,000 TYPE: BCI TC AVG Q3 ‘19 BUYER PROFITS RATE: USD 20,000

QUANTITY: 10 days per month Market Falls May settlement = $15,000 PERIOD: July, Aug, Sept ‘19 Sett Val = 15,000 – 20,000 X 10 Days = ($50,000) SETTLEMENT: Avg of all index Days SELLER PROFITS SETTLEMENT DATE: Last Day of each Month

Dec 2019 | 16 CAN WE CLOSE OUR FFA? AN FFA CAN RUN UNTIL SETTLEMENT OR BE CLOSED EARLY…

Example: March 4th 2017 A ship owner sells Panamax Cal 18 at $14,250 opening an FFA. The market falls quickly - by the 18th March Cal 18 is trading at $12,000. The owner Buys Cal 18 at $12,250 closing the FFA and adding $2,000 a day to his earnings in just two weeks.

4th March Sell: $14,250 Opens FFA Position 18th March Buy: $12,250 Closes FFA Position Profit: $2,000 per day

Dec 2019 | 17 CLEARING

Dec 2019 TRADITIONALLY FFAs WERE TRANSACTED DIRECTLY BETWEEN THE BUYER AND THE SELLER

BUYER SELLERSeller

Dec 2019 | 19 OTC BI-LATERAL TRADES EVENTUALLY LEAD TO INCREASED COUNTERPARTY RISK AS TRADERS OPEN AND CLOSE FFAs WITH MULTIPLE COUNTERPARTIES

A B

C

D

E

F G

Dec 2019 | 20 COUNTERPARTY CREDIT RISK IS MITIGATED BY USING A CENTRAL CLEARING COUNTERPARTY

Central Clearing Counterparty

Dec 2019 | 21 CLEARING WITH BLOCK FUTURES

BUYER EXECUTION SELLER BROKER

CENTRAL CLEARING CLEARING CLEARING BROKER COUNTERPARTY BROKER

EXCHANGE

Dec 2019 | 22 THE COST OF CLEARING CURRENT INDICATIVE SGX ASIACLEAR PRICING.

Clearing Example: Initial margin requirement. Cape Q1 ‘20 position 10 days a month: Front Month Initial Margin $4730 Discounted Forward Maintenance Margin for Q1 = $4300 X 30 days = $129,000 +/- Variation margin, marked to market each day.

Indicative Initial Margins Q1 ‘20 Cape Avg 5 TC - $4730 Panamax Avg 4 TC - $1870 Supramax Avg 6 TC - $1150 Handysize Avg 6 TC - $660

Initial Margin Rates are subject to change without notice in volatile markets

Dec 2019 | 23 BENEFITS OF CLEARING

• Virtual elimination of counterparty risk

• Netting of positions

• Efficient use of available margin

• Standardised contracts

• Daily profit or loss adjustment

• Increased liquidity

• Level playing field

• Regulated market

Dec 2019 | 24 ADDING VALUE

Dec 2019 Trading Strategies

Beyond the core broking service there are a number of strategies brokers can assist with :

• Integrating FFAs in Physical Trading Strategies

• Inter-Market Spreads – i.e. Cape vs Panamax

• Time Spreads – i.e. Cape Cal20 vs Cape Cal 21

• Options Strategies

• Integrated FFA / Option Strategies

Dec 2019 | 26 FFA MARKET VOLUMES

Dec 2019 DRY FFAs – HOW DO THE VOLUMES STACK UP? Quarterly Volume

Dec 2019 | 28 CURRENT MARKET SHARE BY OPEN INTEREST

Dec 2019 | 29 FFA Use by Region and Company Type

2019 SSY Estimates.

2019 SSY Estimates

Dec 2019 | 30 CONCLUSION

Dec 2019 CONCLUSIONS

• The Baltic Exchange remains the preferred freight index provider

• The FFA Markets remain focused on Dry Bulk Markets

• Time Charter Average Contracts are the preferred Contracts

• The larger vessel sizes are more liquid

• The program of vessel reviews continues

• Volume is set to increase

• Growth expected from owner operators and investment sections.

Dec 2019 | 32 London T: +44 20 7977 7500 Singapore T: +65 6854 7126 E: [email protected]

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Dec 2019