There is a growing emphasis on optimizing supply chains, the rising cost of transportation especially at sea, and transportation optimization, as well as a lot of attention being paid to the upcoming ESG and carbon rules and regulations in commodity markets. Indeed, as a result, anyone in trading or risk management who uses or interacts with vessels to handle trades, as well as those operating or chartering vessels, or fleets of vessels, will be keen to get a better handle of their exposures and risks in that area. Freight rates have been volatile and high, while with geopolitics to the fore, issues around cargoes, routes, and so on are also now increasing. The coming rules around emissions and ESG reporting only add further complexity to what is already quite a difficult area of the commodity complex to manage. So, I was very interested to hear from Martin Ireland recently!
Martin is CEO of Advanced Freight Trading Capital, a new venture that aims to utilize new technologies, sophisticated analytics, and AI to help with these issues. Martin has assembled a team of industry veterans, data scientists, mathematicians, and developers. Together with input from a high-profile advisory board and the University of Sussex, they have set out to solve the challenge of forecasting the dispersion of the global fleet beyond one or two voyages. This in turn requires unravelling several issues including,
- The relationship between dispersion and price (earnings) volatility is not properly understood and the ability to out-perform the market is therefore limited.
- The relationship between fleet dispersion and emissions regulations is not known. The tanker market may segment and become much less efficient and more volatile in future.
- The impact of freight price risk in commodity supply chains is poorly understood, making it difficult to identify mispricing of freight risk in commodity supply chains and locational arbitrage trades.
So far, the team has made rather remarkable progress and I was given a short demonstration of the software it is developing. The software as a service solution is built in very modern technology and is AWS hosted. It features several tools and dashboards that allow the user to drill into areas like pricing, emissions, and risk management. These are highly graphical and intuitive yet are backed up by state-of-the-art analytical models and mathematics. It remains early days yet the progress they have already made is remarkable and the tools hold significant promise and potential. The entire initiative is highly innovative as well – exactly the type of thing that we as analysts have been expecting to see in risk analytics, modelling, and supply chains.
Martin told me that they are targeting people like risk analysts, ship owners & charterers and commodity & freight traders with the solution. The solution already contains prototype solutions for risk analysts and ship owners/charterers, he told me. This includes pricing engines that can be used to identify the mispricing in physical value chains and arbitrage opportunities in locational spread trades. “Our Pricing Engines already contain a library of over 120 emissions- and risk-adjusted freight forward curves. These be applied directly to assist in the valuation of freight exposures that are embedded in supply chains and future discounted cashflows,” he said. The risk engine can be used to forecast future fleet earnings, adjusted for freight market risk, bunkers, emissions and new fuel substitutions (eg., KwH wind substitution for IFO). Their hedging tools can be used to accurately compute a matrix of hedges to capture future earnings and minimise slippage in p&l.
“We can offer free subscription on a trial basis and we are also seeking funding to support the next phase of research. This includes a grant application to Innovate UK in April 2022. We would welcome partners who would be interested to collaborate on funding, testing, or data provision to support this work. UK R&D tax and EIS credits are very favourable to investors wanting to mitigate risk in a high-risk start-up,” he told me. We will be keeping up with Martin and the team to track their progress to market over the coming months as they go to market with the product.