Freight rate volatility is now a board-level issue, with the potential to impact company profits and supply chain resilience. This article explains why container freight risk matters, how boards can quantify exposure, and the practical steps to manage it using container freight futures (CFF) on Euronext. A structured governance framework can help your organisation protect its freight budget and reduce financial uncertainty.
Why freight rate risk matters for boards
Container shipping is the backbone of global trade, moving around 80% of goods by volume. For many companies, freight costs are a significant part of the cost of goods sold. In recent years, the industry has experienced unprecedented volatility. During the COVID-19 pandemic, container rates increased more than ninefold, and the 2024 Red Sea crisis triggered another sharp spike. The Organisation for Economic Co-operation and Development (OECD) has found that a 100% increase in shipping prices can add as much as 4.5 percentage points to import inflation within a year, directly affecting company margins and consumer prices.
The main drivers of this volatility are:
- Geopolitical events, such as disruptions in key shipping lanes or the imposition of tariffs
- Cyclical changes in shipping capacity
- Seasonal demand fluctuations
Unlike other commodities, such as energy or metals, container freight has only recently become accessible for hedging through regulated financial instruments. This means that many companies are still exposed to unmanaged risk, leaving their budgets and profitability vulnerable to market shocks.
Quantifying your company’s freight exposure
For boards, understanding the scale of freight rate risk is essential. Management should be able to provide clear answers to questions such as:
- What is our annual container volume, and on which trade lanes do we operate?
- How much do we spend on freight each year, and what percentage of our cost of goods sold does this represent?
- What would a 50% or 100% increase in rates mean for our profit and loss statement?
A scenario analysis is a valuable tool for quantifying risk. For example, if rates increase by 50%, what is the additional cost to the business, and how does this affect earnings before interest and taxes (EBIT)? If rates were to return to the peaks seen in 2021, what would be the impact on the company’s financial results? For many organisations, this exposure is significant and currently unmanaged.
Peer benchmarking: learning from other industries
Many leading companies in other sectors have long recognised the importance of hedging input costs. Airlines, for example, routinely hedge jet fuel to protect against price swings. Southwest Airlines’ fuel hedging programme is often cited as a benchmark, having saved the company billions and set an industry standard. Steel producers hedge iron ore, and the market for iron ore futures grew rapidly after their introduction, moving from annual benchmarks to spot-plus-futures pricing within just a few years. Food and fast-moving consumer goods companies hedge agricultural commodities as a standard treasury practice.
Container freight is now following this trend. In China, the INE SCFIS futures market, launched in 2023, has seen daily trading volumes ranging from $100 million to $2 billion, demonstrating strong demand for freight risk management. With the launch of Euronext container freight futures, international participants now have access to regulated, exchange-traded tools for managing this risk. Early adopters of freight hedging can gain a structural advantage, just as airlines did with fuel.
Understanding container freight futures (CFF)
Container freight futures are standardised contracts traded on regulated exchanges such as Euronext. These contracts allow companies to lock in future freight rates, providing budget certainty and reducing exposure to market volatility. CFF contracts are available for major shipping routes, including Asia-Europe and Transatlantic lanes, and are cash-settled in US dollars based on the Xeneta Shipping Index by Compass (XSI®-C), which is compliant with EU Benchmark Regulation.
Key features of CFF include:
- Central clearing through Euronext Clearing, which eliminates bilateral counterparty risk
- Eighteen consecutive monthly maturities, suitable for forward budgeting and planning
- MiFID II compliance and eligibility for hedge accounting under IFRS 9
How container freight futures work in practice
The mechanics of container freight futures are straightforward. A company buys a futures contract at a fixed price for a future month, for example, $3,500 per forty-foot equivalent unit (FEU) for August. At expiry, the contract settles against the actual market index. If market rates are higher than the contract price, the company receives the difference, offsetting the higher physical freight cost. If rates are lower, the company pays the difference, but benefits from lower physical freight costs. The net result is that the company’s effective freight rate is stabilised near the hedged level.
Key points to remember:
- Using CFF does not affect physical shipping operations or carrier relationships
- Hedging is designed to reduce existing risk, not to speculate on market movements
- The lot size of 5 FEU allows companies to calibrate their hedges precisely to their actual shipping volumes
A practical hedging scenario
Consider a company with a shipping volume of 3,000 FEU in the second half of the year. If the company decides to hedge 50% of this exposure at a forward rate of $3,500 per FEU, it would buy 300 CFF contracts (since each contract covers 5 FEU). If market rates rise to $5,500, the company faces a physical cost increase of $6 million, but gains $3 million from the futures contracts, reducing its net exposure by half. If rates fall to $2,500, the company saves $3 million on physical costs but pays $1.5 million on the futures, still achieving a net saving of $1.5 million. This approach allows companies to limit downside risk while retaining some benefit from falling rates.
Example:
Hedging 50% of H2 exposure
- H2 shipping volume: 3,000 FEU
- Hedged portion: 1,500 FEU (50%)
- Current forward rate: $3,500/FEU
- Buy 300 CFF contracts (1,500 ÷ 5)
If rates rise to $5,500 (+57%):
- Physical cost increase: +$6 million
- Futures gain: +$3 million
- Net exposure reduced by 50%
If rates fall to $2,500 (-29%):
- Physical cost savings: -$3 million
- Futures cost: -$1.5 million
- Net savings of $1.5 million
Risk controls and clearing
Central clearing is a cornerstone of the CFF market. Euronext Clearing stands between every buyer and seller, guaranteeing contract performance and eliminating bilateral counterparty risk. The market operates under a robust risk management framework, including:
- Daily mark-to-market valuation
- Margining
- Position limits to ensure orderly trading
For most physical hedgers, the process is operationally simple, with no need for complex bilateral agreements such as ISDA documentation. Standard exchange rules apply, and most companies qualify for the MiFID II ancillary activity exemption.
Hedge accounting and compliance
CFF contracts are designed to qualify for cash flow hedge accounting under IFRS 9. This means that the effective portion of hedging gains or losses is recorded in Other Comprehensive Income (OCI), reducing volatility in reported profit and loss. The underlying XSI®-C index is EU Benchmark Regulation compliant, meeting regulatory requirements for designated benchmarks. Euronext provides template hedge documentation and guidance on effectiveness testing, making it easier for companies to implement and report on their hedging programmes.
Implementation roadmap for boards
A successful freight hedging programme starts with board approval and a clear policy framework. In the first two weeks, the board should authorise management to develop a freight hedging policy, define the target hedge ratio (for example, 25–50% of forecast volume), and set risk limits. The next step is to select a clearing member and complete onboarding, which typically takes one to two weeks. Once the account is set up, the company deposits initial margin and establishes reporting and monitoring processes. The first hedge can usually be executed within four to six weeks from board approval. Ongoing monitoring, monthly reporting to the risk committee, quarterly strategy reviews, and annual hedge effectiveness assessments ensure the programme remains effective and aligned with company objectives.
A typical implementation timeline:
- Weeks 1–2: Board approval and policy framework
- Weeks 2–3: Clearing member selection and onboarding
- Weeks 3–4: Margin funding and system setup
- Weeks 4–6: First hedge execution
- Ongoing: Monitor, report, and refine
Recommended next steps for boards
Boards should begin by approving in principle the development of a freight hedging policy. A pilot programme, such as hedging 25% of one route for one quarter, allows the company to build experience and refine its approach. It is important to engage auditors early, sharing IFRS 9 guidance and clearing documentation to ensure compliance. Euronext can provide introductions to pre-vetted clearing members to facilitate account setup.
Freight rate risk is a strategic issue that demands board-level attention. By adopting a structured governance framework and using container freight futures on Euronext, companies can protect their budgets, reduce financial uncertainty, and gain a competitive edge in global trade. Early action and board engagement are key to effective risk management in today’s volatile shipping market.
For more information, visit live.euronext.com or contact freight@euronext.com.