Hedge Fund Huddle podcast

Making sense of crises and commodities

Episode 3, Season 2

We have come to learn that there is always something happening in the world which most likely creates ramifications across commodities. Be it a geopolitical event or unfortunate natural disaster, commodities traders are navigating the volatile waters of commodity trading which also includes the complex world of shipping. In this episode of the Hedge Fund Huddle, we are joined by three experts who help break down and educate us on the world we are living in and its impact on the commodities we trade. John Kemp, Senior Market Analyst, Commodities and Energy, Thomson Reuters. Alessandro Sanos, Global Director of Customer Strategy and Commodities at LSEG, and Richard Stephenson, CEO at FreightFix.

Host: Jamie McDonald

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  • Jamie: [00:00:05] Hello everyone, and welcome to another episode of Hedge Fund Huddle. As usual, I'm your host, Jamie McDonald. Now today we are looking into the world of commodities, which is obviously a very broad topic to be looking into, but more specifically, we're looking at the impact of crises on the price of commodities, and we'll be looking in depth into the world of shipping. Now to help me discuss these broad topics, I have three specialists, John Kemp, who is Senior Market Strategist of Oil and Energy at Thomson Reuters. We have Alessandro Sanos, who's Global Director of Customer Strategy and Commodities at LSEG, and Richard Stephenson, who's CEO at FreightFix. Gentlemen, welcome to the pod.

    Richard: [00:00:46] Morning. Thank you. Thank you. Happy to be here.

    Jamie: [00:00:49] Perhaps let's start with you, John. If you could just say a few words about your role at Thomson Reuters.

    John: [00:00:53] So before joining Reuters, I worked for a trading firm focusing on energy and metals, joined Reuters in 2008, and I lead a small team responsible for analysing everything from oil and gas power through to agricultural commodities and industrial commodities.

    Jamie: [00:01:12] Excellent, Alessandro.

    Alessandro: [00:01:13] Thank you. I'm heading the Global Customer Strategy Function of LSEG's commodities, energy and shipping offering on market insights, analytics and data management.

    Jamie: [00:01:24] Thank you very much. And Richard, perhaps a little background about your life before FreightFix as well. And what FreightFix does.

    Richard: [00:01:31] So I started off on the fixed income and credit side on the investment management side of finance, and I initially focused on more liquid credit strategies, but gradually over time moving away from the macro side of things towards more exotic and illiquid assets that were more interesting to find solutions for liquidity around. So both as a trader and market maker and investment manager, moved through a number of banks and fund operations and ending up falling backwards into shipping through investing in distressed loan assets that converted into equity. Then I moved through a series of boards, saw opportunities to enhance the risk and investment management process through shipping data that culminated in the formation of several data driven shipping, entrepreneurial risk and investment ventures that ended up through a series of collaborations into my taking over as CEO of FreightFix, which is a freight liquidity provider to some of the largest dry bulk commodity players. And we stand in the middle of those players to enable freight transactions, dealing with lots of analysis around the freight rates, etc. that we'll go into a bit later on I suspect. I'm also Strategic Advisor of Freight Investor Services, which is an affiliate company and is the largest dry bulk derivative broker in the world. So yeah, many different backgrounds, wearing many hats and hopefully being valuable today.

    Jamie: [00:03:08] Good, good. Well thank you, Richard. And I know later on in this pod, we're going to be diving into how to gain exposure into the shipping and the mechanics around that. But John, if I could perhaps start with you, I'm going to ask you a Herculean task, but I would like you to give a quick synopsis of sort of previous major crises. And is it as simple for us to think that crises equals lack of supply, equals price goes up for commodities? And, you know, the last shipping one I can remember going back decades was Suez. So if you could maybe just bring up a few crises we had and then come forward to 2020. And what happened particularly with oil in 2020 as well.

    John: [00:03:46] As you as you point out, we've had a number of crises that have hit shipping flows, probably most famously the Suez Crisis of 1956 with the closure of the canal, which is very similar to today, forcing oil tankers the long way around the Cape of Good Hope. But we've seen more recent crises. As part of the Iran-Iraq war in the 1980s, both sides targeted tanker shipping in the Persian Gulf and the Strait of Hormuz, causing significant disruption. And with the United States and the United Kingdom and some of their allies deploying warships into the Gulf to provide convoying protection and ensure that the oil could continue flowing. As you pointed out more recently, we've come through an exceptionally volatile period in commodity prices and especially in the oil market, starting in 2020 with Covid, the arrival of Covid in the Western world, which provided probably the biggest negative demand shock that we've had in the oil market for 100 years since the depression of the 1930s. At one point, global oil consumption was down by more than 20% in March and April 2020. And the crisis was compounded because Saudi Arabia and Russia had launched a rather ill-timed price war to capture market share from each other in 2020. So we had both a negative demand shock and a huge increase in supply, resulting in a massive oversupply of oil and a huge increase in inventories. At one point, Brent prices were down to $20 a barrel. And in the United States at one point, we had negative prices for US crude. So we just about recovered from that crisis over the remainder of 2020 and 2021 and then, of course, Russia invaded Ukraine in February 2022, creating an enormous positive shock in the oil market, or at least a price spike, as traders feared that this would disrupt the flow of oil from Russia, especially as the United States and the European Union imposed sanctions in response. So again, we saw a huge price spike in 2022, gradually coming out of that when the latest crisis has hit in the Middle East. 

    Jamie: [00:06:00] Thak you John. Alessandro, coming on to you. As a fund manager, as I was, predicting these crises is nigh on impossible. We know that there are tensions out there. How should one be thinking about how to trade crises? And I was going to ask, you know, what could be the next one? Right now we're sitting here with you know, the Red sea crisis is essentially still going on, obviously, that's had a big impact on shipping rates. But if you could talk a little bit about positioning in and around a crisis and what you think could be the next crises in commodities.

    Alessandro: [00:06:30] There are a few topics which are blinking on my radar, but I will not try to attempt forecasting the future because we will all be caught off guard by the next big thing. Having said that, there are a few things which I believe are worth exploring. The first, unsurprisingly, is geopolitics. We're all living in an extremely fragile geopolitical environment, almost a tinderbox, I would say. Russia, Iran, China, all the players on the chessboard are really flexing their muscles right now. And on top of that, 2024 has been dubbed as the super election year, where almost half of the world's population will go to the polls. We're only in April and we are already seeing politicians who are up to re-election hardening their positions. So as commodities is a global market, I do hope that democracy and global trade will be able to stand a possible clash of narratives. Another point that I see as a concern is the energy transition, or lack thereof. People and their elected representatives have started realising that the physical aspect of the path to net zero is far more complex than what they had originally thought. Electrifying the economy and transitioning from fossil fuels to renewables is not as simple as turning on and off the light switch.

    Alessandro: [00:07:48] In energy, there is no magic. Commodities abide to the laws of physics. The transition is inflationary and there will be a cost to pay to fix what we have done so far. So when I look at behaviours, I do not see any particular willingness to sacrifice either standards of living or of doing things differently. Quite the contrary. Sceptics are gaining ground. So my concern is a potential public backlash of the transition to a net zero world. We cannot really afford wasting precious years. We should be focusing on investing in technology and build the necessary infrastructure that will enable the electrification of the economy. And the third point, which is all interrelated at the end, is climate risk. The impact of severe weather disruptions and climate change on commodities is massive from every aspect, from agricultural yields to shifting patterns of energy demand to commodity flows. Just think of the challenges of low water levels in the Panama Canal or the rainwater. 

    Jamie: [00:08:54] I think you just touched on a really important point, which is the kind of drivers that affect prices of commodities, work in very different timelines. You have these seismic shifts, which are things like demographics or climate change, which are sort of underlying changes in supply and demand. And then you have these very short term temporary things like war. So you've just got me thinking it's that if you are looking at trading commodities, you need to be aware that there are these drivers, but they're on very different timelines. Is that fair?

    Alessandro: [00:09:26] You're right. And actually looking at what are the skill sets that are required in trading commodities today, commodity trading is increasingly complex by several orders of magnitude, if I compare it to a few years back. The level of interconnection between markets has increased exponentially. So when I was jotting down a few words that I would say today, I asked myself what advice I would have wished to receive. So I selected three words from my notes. The first is curiosity. Curiosity is where it all begins. Intellectual curiosity makes your mind open to new ideas and enables you to recognise new possibilities. So in this new multidimensional world of commodities, you must nurture your curiosity to be able to connect the dots between the different commodities market: agriculture, energy, metals, shipping, carbon. Each of these markets is a universe of its own, but today each of them is increasingly interconnected. And if you want to master any of them, you must be curious about the others. And curiosity makes me to knowledge. And this is something that I always say knowledge is the most valuable commodity. It is knowledge that allows commodity traders to take with confidence decisions ahead of their competitors, and the rewards that our industry offers to those who master knowledge are of mythical proportions and maybe talking about how multifaceted our industry is. Embracing diversity is the third point that I wanted to talk about. As an industry, we should all contribute to accelerating the journey towards equity. We are nowhere near where we should be in terms of demographic diversity, gender, ethnicity and so on, but also in terms of diversity of thought. Thinking differently in commodities and having the courage to tackle a problem from a different angle - those blips that you mentioned earlier - it's a superpower in a world which is already permeated by artificial intelligence and where each of us carries in our mobile phones more computing power than the computers that sent us to the moon, the need for critical and creative thinking, I believe, is paramount.

    Jamie: [00:11:39] Richard, let's move on to you. I'll be very honest and admit I am far from being an expert in the world of shipping. So if you could give us a quick background as to how the world of shipping works, how somebody as an investor gains exposure and how freight specifically fits into that world?

    Richard: [00:11:55] Sure. Well, first of all, shipping underlies every commodity trade in that it transports 92% of globally traded goods. Typically these are raw materials coming from Australia, Brazil, Africa, etc., being transported primarily to China, where they're converted through labour and energy into finished goods. And those finished goods are exported from China to Europe and the US, and the original bulk commodities that go into the input process are transported by bulk carriers that carry coal, iron ore, bauxite, grain and oil. When the finished goods are finally produced in China, they are exported through container ships, which are those little boxes that everyone sees everywhere. So that's the cycle input of raw materials, conversion internally, primarily in China, and outputting finished goods are then exported. And then within that you can subdivide and have the demand drivers and the supply drivers. And the intersection between the demand and supply is the price. And the price comes out as the freight rate, which is a dollar per day or dollar per ton, which I'll elaborate on later. And from the demand side, it's very much a derived demand based on the demand for the underlying commodity itself. So if, you know, steel mills are making more profits in China, they'll demand more iron ore to and coking coal to combine to create steel. If there's more demand for heating based on electricity production, then they the demand for coal increase and therefore the subsequent knock on effect will be a demand for the vessels that transport those goods.

    But the supply side is somewhat constrained in the medium term because it takes three up to three, in fact, more than three years in current environment to build a ship. So the medium to long term supply picture is constrained by the number of vessels on the water, but the short term supply constraints that are the things that have an impact on the, let's say, spectacular freight rate gyrations that one sees in the press very often are driven by short term positioning. So every cargo auction is a function of the marginal cargo and the marginal vessel to carry that cargo. So if you have one cargo and 50 vessels then the vessel to win the cargo has to drop the price. But if there's 100 cargoes and one vessel, then vice versa. So the cargo auctions that take place instantaneously cause the prices to fluctuate in the very short term. But then over the medium to long term, they kind of dissipate. And that has an impact on the way that some people trade these strategies. And broadly speaking, in terms of access points, you have the asset play and the income play. And as we'll see, the asset play is a very high barrier investment space because you need lots of money to buy a ship, tens of millions, hundreds of millions in some cases. But in terms of the income side, you can buy into the income through chartering a vessel and receiving the income and playing the income curve, or doing it through the derivatives market, which again, we can expand on later on. 

    So let me start off with how the world of shipping works. Well, let's link it to the idea of the commodity trade. So shipping is unique among the commodity markets in that the way that one evaluates the efficiency of shipping, the cost of shipping is through the freight rate as described before. And the freight rate itself has a futures market and it is also an income. So unlike pretty much every other commodity, which is effectively tracking the price of something per ton, this is tracking the income one can gain from transporting something. So it's not storable, it's a transportation asset. So therefore it's priced differently to other commodities. But yet it underlies pretty much any internationally traded commodity. And to the point about connectivity, which is where I completely agree with everything Alessandra said, obviously, and particularly something that touches me personally, the excitement of working in markets that are so interconnected, to give you an idea that even if we're talking about the transportation of the second largest commodity after oil in terms of volume, iron ore, the transportation of iron ore along one of the most well shopped routes from Australia, which is the largest producer of iron ore, to China, which is the largest consumer of iron ore, 45 to 50%, depending on the absolute level of the price of transportation.

    Is the oil market through the fuel market and bunkers, etc. so the geopolitics associated with oil explains 50% of the cost of transporting iron ore, and that will in itself have an impact on how iron ore trades so much of the time that we spend, and this is moving me on to what we do, is analysing the factors that determine the cost of moving various commodities around. We focus primarily on dry bulk commodities, which are the most, let's say, traded commodities within the shipping space. So that's iron ore, coal controversially, though obviously increasingly less over time as people get aware of the environmental effects. And bauxite, which is a main input for aluminium, but then increasingly copper and other kind of rare, let's say, green metals and metals that lead to the transition are being traded on smaller vessels. So what we stand in the middle of the miners, the operators that have something not dissimilar to hedge fund internal trading strategies, and then shipowners who are in the business of effectively buying assets and creating a yield from chartering it out and using, let's say, yield curve-esque strategies where they can choose to charter short, medium or long term because the freight rate I alluded to before has a term structure, all of these elements are thought about in the same way that a hedge fund would think about things. The flip side of all this on the physical side, which is where we deal on the platform, is the mirror image of the derivatives that are used to hedge these instruments. And the hedge fund community is actively involved in speculating, taking the other side of those hedge positions from shipping. So we sit in the middle of the physical side, but we do lots of analysis, which is then consumed by the hedge fund community. So we have to know how everyone's trading in these key areas, as well as all the factors that affect those things, which can include the macro from oil, but could also include congestion from various disruptive events to the number of assets moving from A to B in terms of balances and positioning, and lots of other things that probably go beyond the scope of this discussion. So yeah, transport 92% of global trade and at the same time it sits behind everything quietly and efficiently, hopefully getting greener over time.

    Jamie: [00:18:36] There you go. I think Alessandro and you've both made the important point that as you say, 90% of global trade is on ships. So even if you are trading bonds or even if you're trading the equity market, you need to know what's going on in the world of shipping otherwise you could be caught behind. So just in terms of the mechanics, Richard, how liquid a market is shipping? Are freight rates decided on a daily basis? Is it dollars per day to transport one metric ton from one place to another? How specifically does that work?

    Richard: [00:19:05] Speaker5: Right. So focusing on the income side of shipping rather than the asset side which requires tens of millions to invest, you typically have the physical side and the derivative side. And for the physical side where you're agreeing between commercial counterparties, charterparty agreements that govern the amount of freight that will be paid per voyage or per ton, depending on the type of transaction. This, in terms of liquidity, is you have a vessel, you charter it out. It's relatively easy to charter depending on the time and effectively it's price corrected. Whereas on the derivatives side, which I think is a more accessible market, requires less of a capital outlay to access the market, one has a number of investment options and liquidity is derived through the FFA. Market, which has contracts that reference a monthly average of daily observation points. But then the prices fluctuate materially intraday based on people's changing view of the average monthly price at the end of that period. And it can go on through several periods. So what typically happens is liquidity is concentrated around the the front month. The most the contracts that are closest to settlement and liquidity points are constant as well with the largest market, the Cape five TC market, where this contract mirrors the weighted average of five routes that are the most traded routes within the most liquid largest vessel size the Cape size vessel that carries coal, iron ore and bauxite, and those vessels command a freight rate that is mirrored and estimated by this contract that then fluctuates.

    Speaker5: But then every month it's settled and cleared and cash is effectively exchanged. So in terms of liquidity, it starts off with the largest vessel type within the dry bulk sector and then gradually moves down to smaller vessel types. And as one moves to smaller vessel types, the liquidity tends to fade. But nonetheless, there's sufficient liquidity for very large hedge funds to feel comfortable participating in that market. So in terms of getting access to the freight market, the most practical way is through the derivative market and particularly through the FFA market. And the most logical access route is always through the largest pool of liquidity that would come through, typically a specialist FFA broker, such as freight investor services, that is currently the largest and has the largest pool of liquidity. Yeah. Again, one could look at listed equity and we can discuss that a bit later on. But there are some constraints there that are worth expanding on.

    Jamie: [00:22:00] So, Richard, I want to bring it more into a real life example. Today, we're still dealing with the back end of the Red sea crisis. For those people who may be listening, who are not sure about the specific situation, essentially, Houthi rebels in Yemen started attacking commercial shipping vessels in the lower part of the Red sea towards the end of last year in 2023. That significantly disrupted shipping routes and a lot of tankers, ships started having to go around the Cape, adding a couple of weeks of journey time. And Richard, I'd love to get your impression firstly, on how that situation unfolding, what did you see happening in the market? How did people react? Is it as simple as supply disruption by freight? And if you could talk again specifically about what are the different ways of gaining exposure? Obviously there'll be people listening who are in the equity market. What are the differences between buying the underlying equity in shipping companies, buying and selling freight, the different ways of getting exposure? Again, sorry for the long question, but give you a few things to answer.

    Richard: [00:23:03] Yeah, it's a long but great question. So it pays to then break down the different vessel classes, because each one obviously carrying different types of commodity will have a different reaction. So clearly the Suez Canal transports a great deal of finished goods as well as oil and oil product related goods. And the extent to which there's been a reaction is really a function of the volume of each one of those types of vessels and the alternative routes they have. Now, with the exception of some Russian vessels, I think there are very few alternatives because they were pretty much removed from the target set. And so as you mentioned, the majority had to sail rather than through the Suez around the Cape of Good Hope, adding 20 plus days and a great deal. So the immediate reaction once the attacks escalated was for freight rates to rise. So you mentioned before, how does one get exposed to that? I mean, for example, there are several listed equities that did quite well or were speculated to do quite well directly a result of their exposure to one of the most affected sectors, which is the LR Product Tanker market and the LR Product Tanker Market, without wanting to name names, but there are several listed entities, Scorpio tankers for example, that have a very direct pure play exposure to these vessel classes and those stocks did extremely well.

    Richard: [00:24;24] So I think once things recalibrated, and this is one of the characteristics of shipping where there is a disruption, then there's a recalibration. Then things just carry on until the disruption abates or something to that effect. Things just jumped up in terms of the LR2 earnings, many multiples of times from prior to this. And again, just to reiterate, as crude capacity moved to refining further and further east when European refinery capacity moved offline, as it continues to do, many more eastern refinery, refined products were transported through the Suez, etc. and those were affected and the stocks related to those moves went up and they will continue to trade up versus before because of that. The dry bulk market was much less affected. So in terms of shipping overall, this particular disruption has had much less of an impact. The LNG market had quite a lot of spare capacity. So after the invasion of Ukraine by Russia, there were lots of LNG demand coming from Qatar, etc., and that demand is now going around the Cape, almost 100% of LNG carriers are now doing that.

    Richard: [00:25:35] But it was priced in because of excess demand given seasonality. So if you put all these things into play, the biggest affected of this particular crisis of the LR2’s is the way to get access to that in the easiest way is through stocks. But, you know, stocks aren't necessarily, in general for shipping the best way to get exposure, because stocks have a capital structure and shipping companies in particular are highly leveraged businesses, they need to borrow a great deal. Very often they're small to medium size as a function of the overall market, and therefore their leverage structure means that if you look at the correlation of many of these shipping companies, they resemble the index they're in, which is typically Russell 2000 and associated small caps with the associated vol, and that can sometimes crowd out the pure play effect of the exposure that they're playing. So as I mentioned before direct FFA market exposure is best executed through a specialist broker with the highest level of liquidity. And there are a handful. I'm affiliated with Freight Investor Services that is by far the largest broker, but there are others, and that's the most low risk, easy access way to get a full suite of access to FFA and related options products, which would be a good entry point to the market for professional investors.

    Alessandro: [00:27:00] And if I probably could jump in quickly, Jamie, I think it's a classical question of how can I go long commodities. And equity is one of the ways. But it depends also from the risk appetite. When you buy an equity, you also buy the management of that equity. You buy the capital structure that Richard mentioned, not necessarily the underlying commodity itself.

    Jamie: [00:27:21] Yeah, I was actually going to ask both of you, for people listening who are in the world of commodities, I mean, I see what gets joked about a lot is that if you want to make someone look like a fool, ask them to predict the oil price in 12 months time, because that could just be far too difficult to do. But perhaps, John is there a sort of easier commodity to start looking at? It just sounds like when it comes to shipping, that's a very niche, specialised area to be looking at, but maybe you could talk about some of your clients, investors. Are there certain commodities that are becoming more popular to look at and what are people more keen on now?

    John: [00:27:54] By far the most popular commodity to trade is oil. It is probably the entry level commodity to trade. It is the most liquid of the commodity markets, and it tends to be, as we've noted, it tends to be driven by some fairly broad based factors, such as geopolitics, tensions in the Middle East. It's also a play on on global economic growth. So it has a strong cyclical component. So crude oil would probably be the sort of the entry level market. It is the broadest one. Most people in the energy space will be tracking what's happening with crude markets. Then you tend to get more specialism as you drill down towards some of the products, such as diesel and gasoline, and then very niche markets such as, for example, naphtha. The fastest growing market at the moment is probably LNG. Traditionally that wasn't a very liquid market. There were a very small number of both exporters and importers, and almost all the trade was done on a long term contract basis. But over the last decades, and especially over the last five years, we've seen a proliferation in the number of exporters and importers, a lot more cargoes available on spot that's becoming a much more actively traded market. And Russia's invasion of Ukraine and the cut off of Russian gas, the sanctions imposed on Russian pipeline supplies to Europe, have sort of turbocharged the growth of the LNG market.

    John: [00:29:29] And then probably the new frontier and the one that is attracting most interest is electricity. Traditionally the most difficult of all markets for outsiders to trade because it is so thoroughly dominated by the incumbent generation firms. But that too has started to become, we've started to see a big influx of some of the traditional trading houses with familiar names are all starting to open and grow electricity desks. And electricity, in many ways, is the market with the greatest future potential. As we go through this energy transition, one of the big components of that is that much more energy will be consumed in the form of electricity, rather than traditional oil and gas combustion. So there's a lot of growth potential there. It's always been a very volatile market. You know, electricity is very difficult to store. You can store small amounts of it with, with batteries and, and pumped storage. But there is exceptional amounts of volatility. And you're now getting an extra layer of complexity because where we used to have very predictable generation from coal combustion, gas combustion, we are increasingly moving towards much more variable generation from wind and solar. So that is adding an extra level of complexity. So, you know, the entry level market I think would be crude. And then with a bit more niche trading in products, the fastest growing market at the moment, probably LNG and the market of the future, probably electricity.

    Jamie: [00:31:03] I'm going to sidetrack and tell a quick anecdote now, but I promise you, there's a question at the end of it. When I was trading long short equity, it was in the world of insurance, so I really looked at insurance companies, and I remember it was March 2011, I think I was in a bar in Miami quite late at night, and my trader in Hong Kong called me to say that there'd been this earthquake just off the coast of Japan. And at that point, I think I thought the wise thing to do is to call my business partner at the time. But my point of the story was I had to react very quickly to that because at that time, insurance prices were moving fast, Japanese equities were open, the US market was closed. But you could trade Japanese insurance companies and reinsurers. And so my question really, to all three of you is in insurance, we had to deal with natural disasters. And that's obviously very difficult to predict. Geopolitical tensions are slightly more easier to predict because you know where the tensions are, you just don't know when it's going to happen. But how should people be thinking about positioning their portfolio in and around these crises, whether it's the Red sea crisis or whatever. Because there's a theory that you should have a position on going into these crises so that you can take advantage of whatever first move there is, or there's another train of thought, which is that you should wait until something has happened, watch to see it unfold, and then basically make your move and position your portfolio ready to take advantage of whatever happens as things settle. How should people go about trading these crises as and when they happen?

    John: [00:32:30] We’ve seen the most recent bout of volatility, which was triggered by Israel's drone attack on the Iranian building in Damascus, and we saw a very rapid escalation in crude oil prices, as traders anticipated that there could be a sort of an uncontrolled escalation across the region that would have an impact on crude production around the Gulf and tanker traffic. We saw prices sort of whiz quite quickly up above $90 a barrel. All of that geopolitical risk premium, that war risk premium has unwound already, as people have decided that actually the threat to, well, one that all sides seem to have backed away from an escalatory path, and two, that there wasn't actually any real impact on actual crude production or tanker traffic. So I think you're right that often the initial market impact can be quite extreme, and then prices tend to pull back as people sort of reassess what does this actually mean for the real production and consumption of the underlying commodity. So you tend as I say, you tend to get this very short, sharp response and then often a pullback. That initially exaggerated response is also often a function of lack of liquidity. You know, if one of these crises hits at the weekend when markets are closed, or if it hits overnight when there's only a relatively limited amount of liquidity, that tends to exaggerate the move. And then then the market pulls back as more liquidity comes in.

    Richard: [00:34:04] Yeah. So I would add to that, that I think thinking about it from the perspective of an event driven trading strategy and which instruments one would put on, which instruments one would look at to put on those strategies. So whenever there's an event there's a peak in uncertainty when people are moving from one state to the next, volatility is likely to be extremely high at that point. Selling options aren't always the most comfortable position to be in, but it can be hedged. And I think if we shift slightly back to the shipping side, one of the easiest ways to get exposure to the shipping market and how it may necessarily be affected by geopolitics and the associated throughput and commodities, would be through the option side of the market, which is something that requires less in terms of capital for variation margins and associated for such volatile commodities. So knowing that events happen and when they happen, there is a peak in vol as information isn't known. So people typically price in the very worst case scenario, which it seldom is. And then the gradual fall away, as people understand, as has been happening explicitly in crude this Friday was up 90 plus and then now it's super down again and people are now speculating on more. When the rumours are circulating, people effectively price in the worst possible interpretation of those rumours if there is anything to it, and that's kind of the prudent thing to do, then as information comes in, people then reprice the risk down. But at that point selling options is often in many scenarios is often, with the right advice, a good way to look at things. And that may not be just taking outright option positions, it may be creating options position through a series of offsetting positions. But once again, understanding the event, understanding the movement of the market, and then building a position around instruments you're comfortable with through costs of those positions running is a good way to trade these markets.

    Jamie: [00:35:58] So I guess, you know, shipping, as with other areas of the commodity market, there's always an element of psychology that goes into this. So never underestimate the power of human beings to be greedy or overly greedy and overly fearful I should say.

    Alessandro: [00:36:12] There will always be something happening in the market. There will always be a geopolitical event. There will always be a hurricane hitting the Gulf of Mexico. There will always be an earthquake shutting down some mines that will impact supply and demand. So there will always be something in the commodity market. It's a little bit the market of doom, if you like, but nevertheless, you will always get your coffee in the morning, you always get your gasoline to your car because the market is able to deliver no matter what. But to be able to do this, the underlying and foundational layer that these companies are investing in is basically data. Because in a data driven world, then you are able to understand the impact of things. Back in the days when Katrina hit the Gulf of Mexico, trading houses were hiring small planes to take the rounds and see what was the impact on the refineries. Nowadays, within hours, you have geospatial analytics. You don't need to hire a plane, and the data has been democratised. So now you do not have only companies that have the physical infrastructure, but you can have also companies like hedge funds, we have zero infrastructure. Without naming names one of those companies had record years in 2023 and 2024 so far. So the ability to ingest data from the never ending variety of sources which are which are there and aggregating everything together. So we're seeing a sort of a data race in the market out there. Value is still the key. Otherwise garbage in, garbage out. But the ability from hedge funds to aggregate data from different sources, they are very data hungry, is becoming really the next competitive advantage.

    Jamie: [00:38:08] Alessandro, that's a very interesting point, that the way investors consume information and research now is so different, not only to ten years ago, but even a few years ago, particularly with the onset of AI, perhaps we can just get a final word from everyone. Richard, let's start with you. I mean, when I was trading long short equity, it really was hard to have edge, so to speak, because so many trades were crowded, information was disseminated so fast that it was impossible to really have an edge. Is shipping one of those few areas now where there's still real edge, because it's not a crowded market? And if so, how is that changing? And then perhaps from everyone, if you could just touch on how the world of tech is really changing the world that you operate in.

    Richard: [00:38:54] I would say yes it is. And not only for the reason you mentioned, there's a lot of space. But it's also going through a period of transition through the very things Alessandro mentioned with regards to data democratisation. I would say the shipping market is one of the, historically one of the least democratic in this regard, and the silos have been typically kept in in particular companies, and those silos are gradually being opened up to an audience that's actually demanding it, and that's bringing in new players who are seeing the possibilities. I think with most hedge fund strategies, one benefits from volatility. It's hard to find a more volatile asset than the Capesize freight rate or the Capesize market in general. If one can manage volatility in the same way, then with the correct data, there are huge opportunities. So yes, edges are possible through people who are data savvy and who are able to find the pockets of data that really make a difference. And they can enjoy some of the benefits that can accrue from this market, for sure.

    Jamie: [00:39:55] And very quickly, just on the tech front, how AI is changing the world of shipping or how tech is changing the world that people trade shipping assets?

    Richard: [00:40:04] Well, AI is having a number of effects. On the first side, it is helping people organise the seas of information they get, which is largely analogue, so it's helping to digitise everything. Secondly, it's helping with predictive insights, Alessandro alluded to before. And thirdly, from the perspective of, let's say, the things we're doing in terms of liquidity provision, it's making us much more efficient. So we can with a smaller number of resources, reach a very large number of touch points in a more efficient way. So we're able to scale much faster. So three, three checks for technology.

    Jamie: [00:40:40] John, just a few final words. 

    John: [00:40:42] I agree with everything Richard said there. I mean, markets tend to become more efficient over time. We've seen that in the crude oil market, where I think that market has become vastly more efficient over the last 30 years, the ability to have an edge has eroded. It has become much more democratic. We are seeing some of the same things happening in the gas market, in the LNG market and the area where information advantage is still greatest, is very much electricity. So there is a process whereby over time, as these markets attract new entrants, they become more democratised and they become more efficient, but edge erodes.

    Jamie: [00:41:22] And Alessandro, a few final words. I think you've touched on a few points already.

    Alessandro: [00:41:26] AI is already here, so it's already permeated our everyday life. And machine learning is nothing new. It dates back to the 50s. What we are seeing is different aspects of and different parts of the workflows of some of our clients being dealt in a more efficient and automatic way. Just imagine giving back 5% of a trader's of an analyst’s time so they can do, you know, the interesting stuff, the things that actually bring value instead of spending the whole day fighting with data. So there is a lot of positive aspects which are arising from this. One of the questions that I often get is will we all lose our jobs? The answer is no. It's just someone who is sitting next to you and helping you out with the most boring and tedious tasks of the day. LLMs are not very good with maths yet, so it's getting a second opinion, it's summarising the data, it’s speeding up things. Probably we will see the race of centaurs back. Half humans, half machines. Someone sitting next to you, rather than someone replacing you. At the end of the day, is going to be intelligent humans helped by intelligence Ai.

    Jamie: [00:42:47] Very good. Well, we'll have a centaur on our next podcast to liven things up. Gentlemen, this has been a fantastic discussion on the world of commodities and shipping and how to navigate crises. So I want to thank you all very much for your time. Richard. John. Alessandro, thank you very much indeed.

    All: [00:43:03] Thank you, thank you. Pleasure. Thank you.

    Jamie: [00:43:06] The information contained in this podcast does not constitute a recommendation from any LSEG entity to the listener. The views expressed in this podcast are not necessarily those of LSEG, and LSEG is not providing any investment, financial, economic, legal, accounting or tax advice or recommendations in this podcast. Neither LSEG nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any and all liability therefore, whether direct or indirect, is expressly disclaimed. For further information, visit the show notes of this podcast or lseg.com.

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