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Providing cargo flexibility and price hedging
Situation & Challenge: Manage risk of spot market pricing
Often, utility companies cannot anticipate the exact requirements of their power plants, making it difficult to forecast coal import volumes and timing of shipments. Under such circumstances our customers are at the mercy of the spot market, both in terms of freight rate fluctuations and performance of the carriers.
Solution: Unpriced contracts and Freight Forward Agreements (FFAs)
One of the risk management tools Cargill offers to customers in this situation is unpriced contracts. With these, freight rates are not fixed in advance but are based on a pricing formula that is linked to one of the major freight route indices. Cargill Ocean Transportation also gives customers complete flexibility in terms of how many cargoes must be lifted and when. In addition we use our extensive trading and risk management expertise to advise clients as to when they should lock in the price of an entire contract or portions of it in the Freight Forward Agreement (FFA) market.
Results
By concluding unpriced contracts, the risk for customers of having to lock in freight rates is removed, which can be a great advantage in a high market. At the same time, the performance by a first class carrier is fully guaranteed. For customers without access to the FFA market, we offer execution in the market on their behalf.