The Shanghai Containerized Freight Index (SCFI) has seen a dramatic 43% drop in Q3 2024, marking the largest non-pandemic decline since 2009. Explore the factors behind this fall and its impact on the shipping industry.
Introduction: A Significant Drop in the SCFI
The Shanghai Containerized Freight Index (SCFI) experienced a sharp decline in the third quarter of 2024, falling by 43%, according to Niels Rasmussen, Chief Shipping Analyst at BIMCO. This significant drop marks the largest third-quarter decline in a non-pandemic year since the SCFI was launched in October 2009. The SCFI, which measures spot container rates for container loading in Shanghai, serves as a key indicator of supply and demand within the shipping industry.
Rasmussen’s analysis highlights that while this decline is substantial, it is only exceeded by the sharp drop in 2022, when the end of a 24-month cargo volume boom, driven by pandemic-induced high consumer spending, caused a rapid decline in volumes and spot rates.
Understanding the SCFI: An Indicator of Supply and Demand
The SCFI is a crucial metric for understanding the supply and demand balance in the container shipping industry. Spot container rates, which carriers quickly adjust in response to market conditions, provide insights into the health of the shipping market. When capacity utilization is high, spot rates tend to increase, and when utilization is low, spot rates fall. Contract rates, on the other hand, tend to respond more slowly to these market shifts.
In the third quarter of 2024, the SCFI experienced its largest non-pandemic drop, reflecting the current state of the market. Freight rates on key routes—particularly those to Europe, the Mediterranean, the US West Coast, and the US East Coast—have seen significant declines.
Key Routes See Major Declines
Freight rates to several major trade destinations have seen considerable reductions during Q3:
- Europe and the Mediterranean: Spot rates have dropped nearly 55%, with average rates down approximately 20%.
- US West Coast and East Coast: Spot rates have fallen by about 40%, while average freight rates have declined by 20%.
These declines in rates signal a weakened demand for shipping services, particularly on routes to key markets. The drop in rates suggests that capacity utilization has decreased, leaving shipping companies to adjust their pricing strategies in response to reduced demand.
China Containerized Freight Index (CCFI) Also Falls
In addition to the SCFI, the China Containerized Freight Index (CCFI), which measures average freight rates for containers loading across China, also experienced a significant drop during the third quarter of 2024. The CCFI fell by 19%, marking the worst third-quarter performance in a non-COVID year since 2009. Similar to the SCFI, the CCFI’s decline reflects the broader challenges the shipping industry is facing as demand weakens on key global trade routes.
Stable Time Charter Rates Amid Declining Freight Rates
Interestingly, while spot and average freight rates saw substantial declines, time charter rates have remained relatively stable throughout the third quarter. Historically, time charter rates and freight rates tend to move together, but this divergence can be attributed to limited ship availability and the continued impact of Red Sea rerouting on demand.
Rerouting through the Red Sea has absorbed about 10% of the global fleet, supporting time charter rates even as freight rates decline. Additionally, upcoming changes to global shipping alliances may further increase demand for ships as carriers adjust their service plans.
Factors Behind the Decline: Early Peak and Lower Bunker Prices
Several factors contribute to the adverse development in third-quarter freight rates. One key driver is the earlier-than-normal peak in cargo volumes, which resulted in weaker demand as the quarter progressed. Lower bunker prices, which reduce operational costs for carriers, may have also played a role in lowering rates during this period.
Another contributing factor is the recent port strikes on the US East Coast and Gulf Coast. While these strikes may provide temporary relief by boosting rates to these markets, they are not expected to have a long-lasting impact on the overall indices.
Long-Term Concerns for the Shipping Industry
Despite the SCFI and CCFI still being 140% and 90% higher than last year, there are growing concerns about the long-term sustainability of current freight rates. Rasmussen emphasizes that the potential release of the 10% of the fleet currently rerouted through the Red Sea, combined with fleet growth expected to reach nearly 7% in 2025, could exacerbate the supply-demand imbalance.
“Medium- to long-term freight rate development must be a concern for carriers, especially if ships can return to the Red Sea. The 10% of the fleet that has been absorbed by the rerouting will at some point be released and add to supply growth,” Rasmussen notes. This additional supply, coupled with limited demand growth, could put further pressure on rates in the coming years.
Conclusion: A Challenging Outlook for the Shipping Industry
The sharp drop in the SCFI during Q3 2024 highlights the challenges the global shipping industry is currently facing. With declining demand on key trade routes, carriers have been forced to lower spot rates significantly. While time charter rates have remained stable due to limited ship availability and rerouting through the Red Sea, the long-term outlook remains uncertain as fleet growth and shifting global alliances are likely to impact future rates.
As the shipping industry continues to adjust to these evolving market conditions, carriers will need to monitor demand closely and make strategic decisions to manage capacity and pricing effectively. The coming months will be crucial in determining whether rates stabilize or continue to decline as new challenges emerge.