The History of the Shanghai Containerized Freight Index (SCFI)

The Shanghai Containerized Freight Index (SCFI) is a highly cited metric used to discuss the health of global trade. In the past 30 days alone, news outlets and industry journals have published over 100 articles referencing the SCFI. Carriers, such as global shipping giant Maersk, have referenced the SCFI in their annual reports since the index’s inception.

Aside from the fact that it’s cited frequently by major media outlets, what makes the SCFI so important? What real world impact does it have on exporters and importers? How does it differ from the similarly popular China Containerized Freight Index (CCFI)?

Creating A More Efficient Market

Created by the Chinese government in 2005, the SCFI was intended to address a few distinct needs within the market.

First, the government wanted a simple index of prices to help attract more buyers and sellers to local markets. By aggregating the movement of several market securities into one easy-to-read benchmark, an index can help efficiently match supply and demand by communicating the health of a market. The SCFI moves up and down based on the spot rates of the Shanghai export container transport market based on data compiled from 15 different shipping routes.

The second purpose of the SCFI was to provide a platform upon which merchants and shippers could shield their businesses against peaks and valleys in market prices. “One major purpose behind the SCFI was to help create a derivatives market to better offset industry risks,” says Gordon Downes, CEO of the New York Shipping Exchange.

Past Economic Events and Risk Management

A derivatives market for Shanghai freight prices would go a long way in enabling trade in the region. By buying derivatives that guarantee a certain price for freight, buyers and sellers could eliminate uncertainty, making it easier to invest in their businesses.

One such moment was in 2008 when the European Union repealed EC Regulation No. 4056/86, ending the anti-trust immunity that many groups of shipping lines had long enjoyed. Previously, shipping companies could legally fix prices and coordinate capacity on trade lanes. Since the repeal, fierce competition has created persistent volatility.

Currently, the ocean freight market is in a freefall, down 50% in just 12 months. Indeed, in the history of humankind the price of ocean freight has never been lower. “Carriers haven’t collectively made a profit since 2010,” says Mike Wackett.

The Underdeveloped Derivatives Market

With the creation of the SCFI, exporters and shipping companies finally had a reliable metric to trade derivatives against, which in theory would allow them to mitigate the extreme volatility mentioned earlier. While this was one of the primary goals behind the index’s creation, a derivatives market never got off the ground.

Backlash from the industry’s major players doomed the process from its infancy. Many carriers worry that a derivatives market would quickly be overrun by speculators. Today, the SCFI is mainly used as a backwards-looking barometer for the markets health.

An Important, Albeit Imperfect System

The SCFI failed at creating a proper derivatives market, but that hasn’t stopped industry analysts from tracking it closely. Important to remember that the SCFI is limited to a much narrower scope than nearly every other freight index: it only tracks exports (not imports) from a single market (Shanghai) and it relies upon weekly spot rates, which can deviate from long-term contract rates. By comparison, roughly 75% of the global market actually runs on contracted rates.