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SGX bids for London's historic Baltic Exchange
IN AN attempt to strengthen its foothold in the shipping index and derivatives business, Singapore Exchange (SGX) has made a non-binding bid to acquire The Baltic Exchange, a historic London institution which provides key data on the maritime world.
The exchange's Baltic Dry Index of raw-material shipping costs is what physical and derivative shipping trades are based on; its Baltex platform is where cleared forward contracts can be registered.
While some interviewed by The Business Times said a successful bid could complement SGX's growing freight derivatives business or thrust Singapore into greater prominence as a shipping hub, others wondered whether the bid was more a symbolic statement of SGX's ambitions.
The last high-profile deal involving SGX was in 2011, when its bid for Australia's ASX was scuttled by Australian politics.
This time, SGX joins a number of suitors eager to buy the venerable Baltic. A Reuters report hours before the SGX announcement said firms such as US derivatives exchanges CME Group and ICE, and energy-and-metal data firm Platts, have held discussions with the firm. The talks were held months after Hong Kong Exchanges & Clearing-owned London Metal Exchange (LME) reportedly tried to buy it.
LME had also tried but failed to set up a freight derivatives exchange with The Baltic Exchange in 2010. Instead, in the following year, the exchange created Baltex as a platform for centralised electronic trading of forward freight agreements (FFAs). These agreements enable buyers to take positions on where freight rates will be in the future, based on agreed routes and times.
Baltex was loss-making, partly because FFA brokers, fearful of losing their commissions as intermediaries, did not bite. The platform had however attracted the attention of LME and CME Group. Things then improved for Baltex last year. What changed its fortunes was a deal struck in late 2014 to publish FFAs as block futures trades, a type of standardised contract, after they are cleared by LCH.Clearnet.
BT understands that SGX competes against London Stock Exchange-owned LCH and Nasdaq OMX-owned NOS in clearing these freight derivatives. "Clearing" refers to the process of reporting, margin maintaining and netting of trades until they are settled.
On Friday, SGX emphasised that discussions are still preliminary and there is no certainty that a definitive agreement will materialise. The Baltic Exchange said on Friday that it has "received a number of exploratory approaches and is now in confidential discussions with selected third parties regarding its future strategy and ownership".
The privately-owned Baltic Exchange began in 1744 as a coffee house on London's Threadneedle Street, and became a centre of global trade in the 19th and 20th centuries.
Merchants who trade bulk cargoes such as oil, coal, iron ore and grain would meet ship captains there to find ships for their cargoes. Likewise, shippers would be looking for cargoes. In the electronic era, however, vessel charter trading no longer takes place face-to-face at the exchange.
With the centre of power in the shipping industry shifting to Asia, given the rise of commodity-consuming China and India, some in the industry have yet to be convinced about SGX's bid.
A sceptical senior shipping executive told BT: "More and more owners are in Asia. I don't know why SGX is buying it. It's a very traditional UK organisation; it's more symbolic, historical, people go for lunch there and gossip."
He added that shipping derivative contracts have limited liquidity.
But Chris Jones, a veteran shipbroker who is now director of the Asia-Pacific at The Baltic Exchange, said the exchange is still relevant as a trade association that provides members with an independent source of information. "You can more or less guarantee who you're dealing with," he told BT over the phone.
The Baltic Exchange has made a push to expand in Asia in recent years; it has converted its Singapore representative office to a registered subsidiary and opened a Shanghai office. It had 645 members at end-March 2015, up from 627 the year before.
The Baltic Dry Index is the industry standard, a Singapore-based shipbroker told BT. "I look at it just to see how the market is trending," he said.
Based on its financials, The Baltic Exchange will not make much of an impact on SGX, which made almost S$300 million in revenues from its derivatives business alone in its last financial year ended June 2015.
By contrast, revenue for The Baltic Exchange's financial year ending March 31, 2015 was just £6 million (S$12 million). This comprised income from membership dues and activities and from renting out its premises at 38 St Mary Axe in London. Profit after tax was £1.3 million, based on its latest annual report.
Net assets stood at £26 million. The freehold St Mary Axe property was valued at £16 million in 2013 by surveyor CBRE.
Baltex was breaking even at the beginning of calendar year 2015, Baltic Exchange chairman Guy Campbell said in the annual report. This was due to the LCH deal from December 2014.
Baltex is dependent not only on volumes, but also the market share of LCH, which, "although volatile, has overall remained in line with our expectations", Mr Campbell said. Baltex generated US$258,946 of revenue between December 2014 and end-March 2015, he said.
Baltex's website noted that more than 500,000 lots of block futures trades were reported to it over 2015, representing "almost 40 per cent of all dry FFA volume".
Separately, SGX has been trying to grow its own shipping derivatives business.
Freight derivatives volumes hit a record in January at 46,588 contracts in total, up 375 per cent year on year.
Others interviewed said a deal between SGX and The Baltic Exchange would reflect well on Singapore's status as a maritime hub and an international financial centre.
OCBC Investment Research head Carmen Lee said she is not revising her earnings projections for SGX as the discussions are in the early stages. "Our fair-value estimate for the stock is S$7.01. We will turn buyers closer to the S$6.70 level," she said in a note.
SGX closed trading at S$7.14, up S$0.13 or 1.9 per cent.