COSCO Shipping lost $577M on freight derivatives when the Baltic Dry Index crashed

China COSCO Holdings is one of the world's largest shipping operators, a state-owned enterprise that operates container ships, dry bulk carriers, and tankers across global trade routes.

In 2008, COSCO's dry-bulk unit purchased Forward Freight Agreements (FFAs) — derivatives traded on the Baltic Exchange that are linked to the Baltic Dry Index (BDI). The company said it purchased the FFAs to lock in costs of chartered-in vessels when the BDI averaged 7,123 points.

When the global financial crisis hit, shipping rates collapsed. The BDI plummeted from a record high of 11,793 in May 2008 to just 764 points by December 12, 2008 — a 93% crash. COSCO's FFA positions incurred a net loss of 3.95 billion yuan ($577 million).

The loss was one of the largest corporate derivatives mishaps of the 2008 crisis. COSCO's Hong Kong shares fell 2.8% and Shanghai shares fell 7.2% on the news. A rebound in the BDI in early 2009 helped ease some of the FFA losses, but the incident highlighted the dangers of speculative hedging in volatile freight markets.