China Daily reported that the Shanghai Shipping Exchange recently began offering derivatives meant to protect shippers from the risks posed by the fluctuating cost of shipping coal on two domestic routes.

The derivatives will apply to dry-bulk carriers that have deadweight capacities of 40,000 to 50,000 tons on routes going from Qinhuangdao to Shanghai and Guangzhou. A freight rate is the price charged for taking a certain piece of cargo from one place to another.

The new derivative will be settled in yuan in accordance with a freight-rate index the exchange also introduced on Wednesday. The derivatives will be sold in lots, one of which will be equal to 100 tons of cargo. The exchange will require 20% of margin from each trader.

According to the exchange coal freight rates on the two routes tend to fluctuate widely. Every year, more than 400 million tons of thermal coal is shipped on the two routes at rates varying from CNY 20 to CNY 160 a ton.

Mr Zhang Ye president of the Shanghai Shipping Exchange, expects the derivative to be one of the most often-traded products on the exchange.

He said that "During a trial run, the market response was good. Shipping companies have a strong demand for products that can be used as hedges on domestic coal routes."

If the new derivative proves popular, Mr Zhang said the exchange will consider introducing similar products for more routes and more goods.

The Shanghai Shipping Exchange began to develop quickly after the city adopted a plan to build itself into a global financial and shipping center by 2020.

The city government, meanwhile, has attached great importance to shipping derivatives, which it sees as being a crossroads between the shipping and financial industries.

(Sourced from China Daily)