Sinews of War and Trade. Laleh Khalili
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and economic crash that saw a 20 per cent decline in global trade.63 The boom years of 2002 to 2008 and the subsequent crash were pivotal in making new financial devices that better facilitated the financialisation of shipping routes.
Thus far, I have insisted on the interplay between the ephemerality of sea routes upon water and the historical, political, and socioeconomic mechanisms that congeal them into more durable forms. These routes traverse the seas between ports. But, in recent decades, these maritime routes have been joined by freight routes that constitute derivative markets, pulsing through wires and cables. Some of the more significant are the Baltic Dry Index and various containerised freight indices.
The setting of price of goods depends on spot and forward contracts, among other things. Spot transactions follow the price of a good at the moment of purchase. Forward commodity prices, by contrast, are a calculation of the expected price of the desired good at a future date. Forward contracts, when first invented, were intended to mitigate the effect of possible price fluctuations in the future by guaranteeing exchange prices at the time the contract of sale was being drawn up. Forward contracts have long been a feature of most market transactions, as they are often applied to commodities which are subject to speculative pricing but require lead time for production and export.64 Futures and options, ‘derivative’ financial products invented in the nineteenth and late twentieth centuries, respectively, became speculative market instruments that played on the differences between spot and forward prices.
Imagine an index of possible forward prices for a commodity. This index includes that commodity’s prices at different future dates. In a futures contract, a buyer and a seller agree to an exchange on an underlying product at a future price on a given date. In financial futures, that underlying product is not the commodity itself but the value of the market index. In other words, in a futures contract, a bet is made on whether the forward price will fall or rise at a given future time. An options contract gives an investor the right (but not the obligation) to buy (‘call’) or sell (‘put’) an underlying good (again, a set of price indices).65 In both futures and options, the buyer and sellers are speculating on the rise or fall of a price index rather than entering a contract for the sale of a good. What makes derivatives, or futures and options, particularly desirable as speculative products is that they allow investors to make money from a falling market by buying put options or selling forward contracts.66 This ability to hedge against a possible loss is a kind of insurance for future transactions. There are futures indices on oil, on grains, even on weather; they are essentially wagers on whether the price of oil or grain will fall or rise, or on whether the weather will improve or deteriorate.
It is also possible to speculate on the future price of sea routes. The underlying object of trade in freight futures is an index tracking the cost of freight on a given route. Such an index, the Baltic Dry Index, was first devised in the Baltic Exchange in the 1980s. The Baltic Dry Index tracks the freight rates for bulk goods (such as iron ore or grain), and is produced by the Baltic Exchange, a maritime exchange established in mid-eighteenth-century London and purchased by the Singapore Exchange (SGX) in 2016.67 The exchange chooses from among its members and subscribers a number of major shipbrokers (or shipping companies) who provide on a daily basis an assessment of the spot and forward prices on a given route for a range of different dry bulk cargoes on ships of specified sizes.68 The information is weighted and aggregated by the model-builders at the Baltic Exchange, who then publish a single price quote representing an average of cargoes, routes, and ship sizes.69 It is important to point out that these prices are not some objective, singular, ‘scientifically determined’ number but a convergence by a number of different vested actors on a set of estimated current and future prices. Freight futures contracts based on this index emerged in 1985, while freight options were invented in 2007, at the height of the boom in global trade. Freight futures were to be used to ‘hedge’ (or protect) against price volatility on a given route by speculating on the future of the index. For a buyer of a futures contract, if future freight rates rise, any loss on spot prices can be offset by future gains.70
While derivatives were ostensibly invented as a risk management scheme for buyers and sellers to protect themselves (or ‘hedge’) against price fluctuations, from the very first they had two major effects. First, they allowed for speculation, in ways that made the underlying goods or products immaterial to the process of exchange. It did not matter what commodity was exchanged. The wagers were placed on the price going up or down rather than on the commodity itself. In effect, financial derivatives encouraged ‘the greatest gambling game on earth’ by placing bets on stock markets.71 Second, the derivatives could – and did – directly affect prices through a feedback loop. In Donald MacKenzie’s words, the mathematical models that underlay options pricing were ‘an engine not a camera’ – producing the effect they claimed to represent. And, as MacKenzie’s meticulous account shows, the model ‘provided an economic justification for what might otherwise have seemed dangerously unrigorous mathematics’.72 Though MacKenzie’s language is circumspect, ‘dangerously unrigorous mathematics’ is essentially a euphemism for wild gambling on a completely imaginary future.
While the Baltic Dry Index is now the prevalent index for bulk goods and WorldScale (established in 1952) is used for tracking tanker cargo, no single index exists for tracking prices of containerised freight. Shipbrokers’ associations and freight consulting firms can provide such indices based on pricing data provided by their members or subscribers. For example, Drewry Shipping Consultants started producing the World Container Index (on eight major container routes) in 2006; Harper Petersen & Co. has offered HARPEX (also on eight time-charter routes for various container ship sizes) since 2004.73 The Chinese government has also created its own indices. The China Containerised Freight Index and the Shanghai Containerised Freight Index were first devised in 1998 and 2005, respectively. The former is an amalgam of both spot and futures prices on containerised export routes from ten Chinese ports on twelve international routes (calculated by twenty-two domestic and international shipping firms). The latter tracks only spot prices on containers exported from Shanghai (whose freight market is characterised by high fluctuations).74 The Shanghai Index was invented very specifically because the Chinese government hoped to create a freight derivatives market to benefit from the volatility – and rising prices – of freight rates.75
As is clear from this account, the price-setting processes are determined not only by empirically measurable factors but also by subjective measures determined by panellists – the very profitability of whose businesses depends on the prices their data constructs. This tautological magic has animated the financialisation of the shipping routes. The ‘science’ at the heart of financial route-making is as much about the affective attachments, political landscapes, and financial interests of the participants as it is about supposedly ‘objective’ market factors. Something of the traces of the political relations that created trade routes survives in these electronic models.
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