Red Sea-driven surge in container shipping rates loses momentum

Mass diversions of container ships around Africa’s Cape of Good Hope caused spot rates to surge, but the Red Sea effect has a limit, which may have already been reached.

Upward momentum has slackened. Rates in most lanes have leveled off. Several indexes for European lanes have pulled back.

The Shanghai Containerized Freight Index (SCFI) dropped 2.7% in the week ending Friday versus the prior week, the first weekly drop since late November.

map showing container ships diversions from Red Sea to Cape of Good Hope

Location of container ships with capacity of 10,000 twenty-foot equivalent units or more as of Friday. (Map: MarineTraffic)

“The squeeze in freight rates into Europe continues to abate from high levels, though freight rates in other regions remain firm,” said Jefferies shipping analyst Omar Nokta on Friday.

The rate dynamic now is very different than in the pandemic boom. The 2020-2022 supply chain crisis was driven by demand, as consumers bought more goods amid the pandemic. The current rate surge is driven by supply.

Liner diversions around the Cape of Good Hope extend voyage time, tying up ship and container equipment supply. But as liners adjust schedules to the longer routes, rates should theoretically stop rising, barring higher demand.

Container lines are taking delivery of a record number of new ships this year, which should give them the added vessel supply to handle longer routes. Furthermore, the Chinese New Year holiday in early February should temporarily limit vessel demand, easing the squeeze.