In the reefer industry chronicles (rise and fall) of tomorrow, how will the first half of 2017 be represented in the narrative? Although the market was undoubtedly tough and the TCE average on spot voyages was similar to 2016, the reefer fleet was near fully employed. And yet the sentiment at the start of July was bearish and the talk was of extensive demolition. How so?
It is too simplistic to lay the blame for the disappearance of the specialized reefer solely at the door of the carriers. Of all the variables that affect the performance of the reefer, aggressive pricing by the lines may be the most significant, but it is not the only one. While there has been a huge increase in the supply of competitive reefer capacity in the form of slots and equipment, there has also been a fall in demand specific to the once traditional reefer trade routes. For example, the trade in poultry from the US to Russia, once a core reefer industry staple, was once over 1m MT per year. Even before sanctions were imposed, this figure had dropped to zero.
There are other instances: in the banana business, geopolitical instability in the Black Sea, North African and Eastern Med markets since the Arab Spring uprisings has created an environment for the carriers to make inroads into what was the spot banana trade, and at the expense of the traditional reefer. No matter that the voyage from Ecuador is longer and involves transshipments, and that the quality of the fruit on arrival does not always match what is delivered on the reefer. It’s the size of the consignment that has become important - the more fragmented the market, the smaller the trading parcel, the more likely the shipment will be made in a reefer box.
Although the Algerian market re-opened to the reefer in March after a six-month hiatus, there are still no direct reefer banana calls into Novorossiysk, Ukraine or Syria, while demand from Libya is limited, sporadic and not without risk. As more fruit is channelled through the Turkish port of Mersin, banana pricing is more volatile and the Med traders have become more cautious, only supplementing their COA positions on rare occasions.
Will this change in the second half of the year? There will be excess fruit in Central America and Colombia this year, and theoretically therefore, opportunities for spot voyages. However after a disastrous 2015 and 2016, charterers are forewarned of the dangers. Only if there is a material change/reduction in the supply of competitive fruit from Ecuador and the Philippines, or equally that there is a significant improvement in market circumstances will they take the risk. On current evidence, neither is likely!
There have been exceptions to the decline: of the southern hemisphere deciduous fruit shippers, Chile continues to play a significant role. Between week 48 2016 and week 14 2017 Chile shipped 610K pallets of fruit into the US – up from last year’s 568K pallets, but on a similar level to the 617K shipped in 2014/15. Although the share of the total volume held by the specialized mode has been decreasing, largely as a result of aggressive pricing by the carriers, this season the absolute volume increased from 427K pallets to 442K – a 72% share of the total. While superficially impressive, the figure is almost 80K pallets (20 voyages) fewer than in 2014/15. Del Monte is responsible for a large part of the difference – the multinational last season moved its seasonal 30,000 pallets to the competitive MSC liner service.
Elsewhere in South America the picture is not so positive: the 185K MT of Argentinean apples and pears shipped to deepsea markets in the first six months of 2017 compares to 600K MT-plus shipped in 2005, a dramatic illustration of the decline in the country’s topfruit industry. The loss of these 400K MT is calculated to have cost the industry in the region of US$350m p.a. However it is also one of the major contributing factors to the absence of anything resembling a peak season for reefer vessels between February and March - the number of vessels employed to ship fruit to Russia and the US during the season has fallen into single figures as the pipfruit industry struggles with the reduction in volume and the reefer loses its battle with low-priced carrier competition.
Meanwhile, despite the year-on-year improvement in the South Atlantic squid catch, there was no seasonal dividend for the large reefer in 2017. However the uptick did have a positive impact on the small segment, with Lavinia tonnage being drawn away from the West African fish business, leaving fewer players and therefore fewer vessels to compete for business.
At 59c/cbft, the TCE average for the small vessel segment is not dissimilar to what was a very disappointing first six months of 2016. However, sentiment this year was a lot stronger and the yield to owners will have been higher due to improved capacity optimization – more vessels employed and less lay time incurred. Notwithstanding supply and demand, it was the increase in bunker costs year-on-year that took the gloss (and value) off the headline numbers.
In terms of capacity supply, in the first half of the year the industry demolished a total of 7 vessels, representing a loss of 2.7m cbft. The sinking of the Uruguay Reefer in the South Atlantic takes the total to 8 and 3.2m cbft respectively. With a number of vessels approaching their special surveys and market conditions unlikely to improve in the near term, it would not be a surprise to see a busy few months ahead for demolition activity.
On the container front, there were only around 41K new reefer boxes built in H1 2017, which indicates a second successive low-build year - last year the industry delivered a total 75K. Of the 41K to date this year, 28K were reportedly for Maersk Line, with the only other major line buying reefer boxes being Evergreen, which took about 2K. On the other hand, a couple of the major carriers are rumoured to have planned extensive renewals in H2 in order to catch up. After having taken a dominant share of the orders for the past three years, the lessor sector accounted for just under 6K of the total, with the rest being a variety of smaller lines or domestic users.
It is the case therefore that equipment supply is tightening. Then again, arguably there does need to be a correction, as the industry was possibly ‘over-boxed’ on reefers in 2015. This, together with the significant slot overcapacity resulted in freight rate erosion and a steep decline in margin for the carriers and lessors alike.
It’s not just the carriers that have suffered: the lessors have struggled with the fallout from the Hanjin bankruptcy, higher finance costs and additional operating expenses to reposition the ‘recovered’ container fleet. It is therefore perhaps understandable that new investment is at a low ebb.
This lack of investment by the carriers is partly explained by the pressure on profitability and a consequent shortage of funds. They are also presumably in the process of evaluating their fleet optimization after all the recent M&A activity. At an industry average of 5.4 paid moves, per container per year, the management of reefer by the carriers is extraordinarily inefficient. If that average could come somewhere close to the figure for the specialized reefer, the lines would clearly be a lot happier. They would be able to do the same volume with lower operating costs (less equipment) – this would offset the effects of the freight rate erosion - another reason investment might be at a low ebb!
On the positive side, there is still a reasonable supply of some good ‘mid-life’ equipment held in some container depots/locations around the world, available to lease at competitive prices. However it would require a paradigm shift in mindset for carriers to take advantage - both carriers and shippers would need to obsess less about the need for new equipment!
The first half of 2017 saw some of the other significant developments that have affected, and/or will affect the supply and demand for reefer capacity for the rest of the year and beyond. For example February marked the debut of Seatrade’s Colour Class on the operator’s New Zealand to N Cont Meridian service, which calls at Peru and the USEC en route. In order to accommodate the vessels into its service Seatrade needed to make some minor adjustments and additions to schedules, not least among which was the divestment of the specialized reefer vessels that used to perform the service.
The Meridian relies heavily on the kiwifruit trade between New Zealand and the EU for a third of the calendar year. After a few teething problems, the vessels appear to have been an unqualified success. In mid July kiwifruit marketer Zespri Chartering Manager Mike Knowles issued the following statement.
“Zespri started shipping on Seatrade’s new Meridian service to North Europe and the USEC this season and the results so far have been good, meeting our expectations for schedule reliability, transit time, temperature control and fruit conditioning. We’ve loaded six vessels so far with another ten to go before the end of the season and our customers are happy with the quality of the fruit outturns arriving in market. The service is just a few days slower than our traditional specialised reefer shipping option and is proving cost effective for the industry.”
“From the New Zealand end, the logistics of loading such a big increase in containers are being well managed by Tauranga Kiwifruit Logistics (TKL) and our suppliers loading 700-800 FEU each week the Meridian service calls, which is an increase of around one-third from last season. About 300 FEU per sailing are for the Meridian service alone”. He added that, “there have been a few ‘bumps’ initially, as expected, with the change over from the specialized to the container mode, but we have learnt from these and plan to share these learnings with our partners to further enhance the service for the future.” He concluded by saying that, “Zespri values its partnership with Seatrade, which is delivering great results for our industry.”
Given the obvious difficulty of tramping the cellular units, if Seatrade is planning to develop/expand the concept, it will need to focus on those trades that give it year-long utility. Currently, as well as the Meridian, Seatrade has two other 12-month liner services: the transatlantic Rayo and Caribanex banana strings, which are currently operated with specialized reefer vessels. With banana shipping trending heavily towards containerization, the culture change should be near seamless and the switch should not be difficult to execute. It should also be possible to re-gain business lost to the third party carriers, particularly if Seatrade can offer a service advantage.
However if Seatrade does pursue its box ambition, there will be consequences - not only for the owners of the large units in its various pools, but also for ports and terminal handlers that have relied on Seatrade vessel calls. With the average age of the 500’cbft-plus segment now in excess of 22 years and the lead time for a Colour Class unit approximately 18 months, the window of opportunity for Seatrade and those banana, pineapple, melon and mango chartering interests that bank on its fast, dedicated and direct alternative is narrowing all the time.
Otherwise, the 12-month delay in the completion/delivery of the US$1bn Terminal de Contenedores de Moín (TCM) may be bad news for AP Moeller Maersk subsidiary APM Terminals (APMT), its carrier customers and cargo interests, but it temporarily alleviates the pressure on specialised reefer services. The delay in the construction will cost concessionaire APMT an estimated US$900K.
Confirmed by APMT Director Kenneth Waugh, the start date has been put back from February 2018 to February 2019. The delay has been caused by difficulties with the piling, installed to underpin the foundations of the superstructure. TCM is being constructed on land reclaimed from the sea – the gantry cranes will need to be sturdy enough to service 8,000 TEU-plus vessels, hence the importance of the structural base.
Richard Bright, consultant
info@reefertrends.com
Click "Continue" to continue shopping or "See your basket" to complete the order.
