Mercuria and Baltic Exchange Head to Trial in London Over VLCC Freight Rates

Commodities trader Mercuria Energy Group this week launched a lawsuit against Baltic Exchange in London's High Court, arguing that the VLCC tanker freight rate assessments published by the London-based body must reflect actual market conditions. The case centers on the TD3C benchmark, which measures the cost of chartering a supertanker from Ras Tanura, Saudi Arabia, to China, and which serves as a reference for contracts between shipowners and charterers and for derivatives instruments worth billions of dollars.

Mercuria contends that Baltic Exchange should have suspended the TD3C index from early March, when the armed conflict between the United States, Israel and Iran severely affected exports through the Strait of Hormuz. The company argues that, following the outbreak of the war, the data used to calculate the benchmark ceased to accurately and reliably represent the physical and economic reality of the market, which it claims amounted to a breach of benchmark regulation. Through its claim, filed in April, Mercuria seeks to have the assessments published since then declared invalid — a request Baltic's lawyers called unprecedented, as it would affect an indeterminate number of third parties who traded on those prices for more than eight months.

According to documents submitted by Mercuria's lawyers, a Baltic Exchange freight assessor reportedly described in an April 14 call that the fear of a competitor replacing the index was “the predominant fear” within the organisation's operations. Mercuria also cited market participants and Baltic Exchange staff who questioned whether publication of the rate for that route should continue, and included comments from brokers who called it “nonsensical” to keep assessing TD3C given the level of disruption in Hormuz.

Baltic Exchange, founded in 1774, rejected the allegations and maintained that it stayed in constant contact with the market and its panellists, who remained willing and able to assess rates, and that transit through Hormuz remained possible. Chief executive Mark Jackson stated that the organisation met all of its statutory, contractual and regulatory obligations, and described Mercuria's claim as baseless. Baltic's lawyers countered that Mercuria's decision to litigate stems from the fact that the company built up large exposures linked to the index that it failed to manage, and that it is now seeking to displace TD3C by clinging to whatever argument is available.

Mercuria had initially estimated losses in the hundreds of millions of dollars as a result of the index's continuation, but withdrew that figure from its most recent claim. In its opening submissions, however, it cited an illustrative hedging loss figure of around $13.8 million per month for a single vessel. The company also dropped its alternative proposal that the benchmark be calculated using comparable routes, and is now only seeking suspension of the index.