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Why the City's shipping supremo is battling an old rival for members

THE CHIEF executive of the Baltic Exchange Jeremy Penn looks remarkably unruffled for a man who has just seen a rival come back for a second time in a concerted attempt to muscle in on his business.

The head of the exchange that sets the prices for the majority of the world’s $200bn (£182bn) shipping industry, Penn received a letter two weeks ago from the London Metal Exchange (LME).

It contained a proposal to jointly develop an electronic screen exchange for forward freight agreements, key contracts that hedge risk on shipping routes.

Currently, the Baltic Exchange’s 585 member firms around the world agree
contracts on the 50 major routes the exchange covers over the phone.

However, the LME calls the current system “opaque and constrained from future expansion.”

And it openly admits it has been talking to, and has the support of, some of the Baltic Exchange’s members to build an electronic system, which the LME says will bring new players into the market because of greater transparency. This could bring brokers up to £1.3bn in additional fees a year.

The LME first approached the Baltic Exchange about this last summer. Penn was lukewarm about it then, and his view has not changed much since.

“The LME have made no secret of the fact it would like to run screen services for our members,” says the lean, thoughtful 50-year-old Penn, who took up his post in 2003 after a
20-year management career at Reuters. Penn is sitting at a meeting table that
easily seats ten in his spacious office on the second floor of the Baltic Exchange’s headquarters
next door to the Gherkin in the heart of the City.

The Gherkin is in fact the site of the old Baltic Exchange’s headquarters which was destroyed by an IRA bomb, killing three, in 1992.

Penn’s office is decorated in dark wood and leather, and the whole building has the feel of a gentleman’s club; on the ground floor the headquarters has its own bar and dining rooms run by another City institution, Balls Brothers.

The exchange estimates Britain maritime services industry employs 15,600 shipping brokers, bankers, insurers and lawyers, mainly in London, contributing £2.1bn to the UK’s overseas earnings last year.
London’s 400 shipbroking firms match ships and cargoes for 50 per cent of the tanker and 30-40 per cent of the dry bulk chartering business globally.

They are also involved in the sale and purchase of over half the world’s new and second hand tonnage. London also boasts 17 per cent of premiums in the international marine insurance market, 13 per cent of ship finance and other key roles in this crucial but little-noticed arena. Penn continues: “We’re here to support the development of the market place, and
that means not doing things that threaten existing liquidity. We are considering our
response and will get back to the LME in due course.”

This issue may have made headlines recently, but for Penn, whether to update its systems is a nut the body has been trying to crack for the best part of a decade. In
2001, at the end of the dot.com boom, the exchange tested an electronic system but “had very little support from the marketplace”, and stopped the trials.

The exchange looked at it again in 2008 “under a lot of pressure from our biggest traders”, but again tests were stopped after a short period. Penn explains: “It is hard to find a consensus among our members over this issue.

Some think this will lead to better price discovery and will bring in new members. Others think that the market already serves them well, and if it isn’t
broke don’t fix it. We really can’t move forward unless there is a consensus.”
The way the exchange, which can trace its roots back to the Virginia and Maryland coffee house in Threadneedle Street in 1744, is constituted has led to the current
impasse.

The group’s members own the business, and while some of the biggest – such as HSBC Shipping Services, Icap Shipping and Clarksons – want screen trading, its mass of smaller members are happy to work over the phone with people they trust. It is why one faction is able to agitate to start tests on electronic trading, while the other is able to drag its heels and eventually get the trials abandoned.

However, he has other problems to deal with, not least the state of world trade, which fell 12 per cent last year, the largest drop since the Second World War, according to the World Trade
Organisation (WTO). However, although shipping levels were down last year, compared to the five boom years from 2003-2008, they were still historically high compared 20-year averages, says Penn. Ship owners saw slowdowns in routes to America, but routes to China, which accounts for one quarter of the largest ships in the world, held up well.

Penn says: “Chinese consumption over the last five to six years has been a huge factor for the shipping business.”
WTO director general Pascal Lamy said earlier this month that there were early signs that trade was beginning to recover
in 2010, but he was unclear whether this would be maintained. Penn tends to agree and adds that a rise in US consumption and a higher oil price – which means producers will pump more
crude for export – will mean good news for the shipping industry. But judging by the Baltic Exchange’s coffers its members did not fare too badly in 2009.

The business saw its pre-tax profit rise 31 per cent to £1.7m, while sales rose
16.3 per cent to £5m. The body, which only employs 23 staff, has £24.8m of shareholders
funds at its disposal.

The exchange raises cash by three principle means: from membership fees – which
range from £25,000 for the largest firms to £5,000 for the smallest; from charges to
clearing houses like LCH.Clearnet; and from fees to publishers like Bloomberg and Reuters who carry its indices.

When Penn took over at the Baltic Exchange the body had been losing money.
He set about boosting its cash by charging more for the data it supplies to members,
and by raising its fees to the media firms that carry its indices. He says: “It is never a
good idea to run a business on the basis of losing money. However, our primary goal is not to make a profit, but to service our members.”

Penn is also keen that the Baltic Exchange (and London) keep their position as the largest ship broking centre in the world, so that members will not be tempted away by rivals. Hamburg has a specialised container shipping index, and the Shanghai Shipping Exchange provides
prices on routes to and from China. But Penn says the Baltic Exchange’s daily information
on routes, set at 1pm for dry bulk ships and again at 4pm for oil tankers, “is recognised for its independence and its integrity.”

However, the Baltic Exchange added its first overseas office in Singapore in 2006,
to be closer to the big players in the Asian market. And Penn says he is “actively looking” at another office in Athens – 30 per cent of the shipping market is run by
Greeks – or Shanghai in the next 18 months.

The exchange also wants to provide prices on new key routes around the world at a rate of two or so a year. So, with new offices planned around the world, a fight with a rival City exchange for its own members, and all the while setting prices for half the trade on the high seas – this sleepy gentleman’s club on St Mary’s Axe looks set for a busy year.