Is the bottom in sight?
Freight rates have been in decline for more than a year, and it is clearly reasonable to start asking whether the bottom is about to be reached.
But before delving into this main question, it is worth to take a slight detour. Saying that sea freight rates have declined for more than a year is not a picture all shippers would recognize. To some degree this is trade dependent. As an example, shippers on the head haul trade from North Europe to the US East Coast have seen spot rates as measured by the WCI spot index decline only since December 2022, and the WCI remain presently just below 5,000 USD/FFE versus a level of 2,000-2,300 USD/FFE in 2019 prior to the disruptions. It is also possible to find examples of contractual commitments which might not yet, or just very recently, have begun to see downwards adjustments.
Hence in stating that sea freight rates are declining this is an indication of the overall market totality. This does, as shown, not apply 1-to-1 in all trade lanes but does reflect most of the market.
CCFI-index shows that the bottom probably hasn’t been reached yet
A good index for monitoring this totality of the market is the CCFI rate index measuring a combination of contract and spot rates out of China. It should not be confused with the more popular, and volatile, SCFI spot rate index. The CCFI index is the only container rate index which has a very long history – it contains weekly data ranging back to 1998 and the overall index is a weighted average over all the major export trades routes out of China. Data analysis also shows that over time it is highly correlated with the global average freight rates realized by the carriers, and as such it does serve as a good indicator of the overall freight rate developments.
The CCFI is defined as an index that had a value of 1,000 points at its inception in1998. It is therefore not measured in USD/FFE. When the market peaked in December 2022, it had a value of 3565 points. By the first week of April 2023, it had fallen to 953 points. By comparison, the CCFI had reached a level just below 800 in the first week of April 2019 (before the pandemic). On that basis, one could argue that the bottom has not yet been reached if we return to pre-pandemic levels more generally and not just on selected trade routes.
But there is a different, perhaps more interesting, perspective on the decline. We have seen prolonged freight rate declines several times in the past as well – how long did it take for those to bottom out?
Four historical downturns
There is another and perhaps even more interesting perspective to look at these declines. In history, we have seen periods of prolonged price declines before, and how long did it take then for the market to bottom?
If we analyse the 25 years of CCFI index data (from 1998 to 2023), we end up with four recessions to look at.
The first period we come across covers the US recession, which at the time was mainly triggered by a decline in inventories (really no different from what determines a significant part of the decline in freight volumes today). From the peak in November 2000 to the trough in January 2002, 63 weeks passed.
The second period covers the impact of the global financial crisis. From the peak in February 2008 to the trough in June 2009, 71 weeks passed.
After this financial crisis, freight rates rose rapidly. The period following this crisis led to bottlenecks that created a lack of capacity for ships and containers. A dynamic very similar to the one we saw during the pandemic. Once the capacity problems were resolved, freight rates fell rapidly and a price war between shipping lines ensued. From the peak in August 2010 to the low in December 2011, 70 weeks passed.
The fourth period concerns the shipping lines' price war between 2015 and 2016. From the peak in March 2015 before the price war to the bottom in April 2016, 59 weeks passed.
We can draw on the experiences during the four downturns
Let us compare these four very relevant examples to the current situation. From the peak in January 2022 to the first week of April 2023 a total of 60 weeks has elapsed.
As can be seen, the 4 previous sustained downturns in the industry took between 59-71 weeks with an average duration of 66 weeks. In all 4 previous cases the bottom was largely determined by carriers pulling capacity out of the market to stop the decline – a sustained increase in supply/demand fundamentals only came afterwards.
Thus, if the market behavior over the past 25 years is anything to go by, it is likely that the bottom of the market will be reached within the next 6 weeks if the average is followed and in worst case in 11 weeks from now. Incidentally this timeline would coincide with the incoming peak season 2023, making this prediction of the timing of the bottom even more likely.
Our teams in DSV Air & Sea are ready for you.