Sea freight

The premise for the following suggestion is that even in the most competitive of commercial environments, the specialized reefer has demonstrated that it can not only add value, but also defend market share. The resilience of the mode has taken industry stakeholders by surprise. The reefer remains the mode of choice in some core trades and this will only change if it becomes materially uncompetitive.

In this regard, the switch to LSFO on 1 January 2020 is a significant test. If the LSFO premium remains anywhere near as high to the cost of high sulphur fuel oil (HSFO) as it is currently, there is every reason to believe that implementation of the sulphur cap will be an ‘event horizon’ for the specialized reefer. This is because given the relative fuel efficiencies of the two modes, once the cap is implemented, the drift to containerization will no longer be just incremental.

The most pressing question is whether reefer operators will be able to pass on the disproportionate increase in cost of the sulphur cap surcharge to cargo. Come November, what will Chilean grape exporters do, for example, if they suddenly find that the premium price they already pay for a dedicated reefer service to the US rises to an unsustainable level either in absolute terms, or relative to the containerized alternative? Under such circumstances, it would be logical for cargo to ‘defect’. Logistically however, it would not be feasible to migrate the 450-500K MT of Chilean fruit from reefers onto carrier services overnight – neither are there the slots nor the equipment available, never mind the major operational issues at either end of the chain that a switch would force.

Despite the proximity of the deadline, there are no clear indications yet as to what might happen next season. Competing head-to-head, the panamax and post panamax container vessels are larger and more fuel efficient than the reefer. As such, it is fair to assume that the fuel surcharge on the container rate will be lower than the BAFs imposed by the reefer.

In the medium term, the large reefer fleet will be phased out, with the sulphur cap acting as the catalyst. But what of the short term? Unless carriers and lessors massively increase investment in the manufacture of equipment, there won’t be enough reefer container capacity to compensate for the loss of the reefer mode should there be a mass beaching!

The focus of the comment and analysis to date has been on the negative impact that the sulphur cap will have on the specialized reefer mode and its customers. The effect on reefer cargo carried by the container lines has largely been disregarded, on the assumption that little will change other than the cost to shippers, which will/must rise. Although it is clear that the change will affect the carriers, it could also create a rather unique opportunity.

The following idea hinges on how the competitive advantages of the specialized mode can be leveraged to benefit reefer operators, cargo interests and the container lines. For it to work, all parties must recognize the following assumptions: in some trades the specialized reefer mode is preferred to the third party carrier. In some trades the reefer performs better than its rival in terms of service levels. In some trades the reefer is used as a strategic marketing tool. In some trades the reefer is a necessity, because the carriers cannot perform the same service.

Despite these advantages, reefer operators independently do not have the scale to optimise the mode’s superiority. This is principally because these advantages relate predominantly to seasonal cargoes. Unlike the small segment, which services a number of conveniently dovetailing seasonal (fish, squid, potato) trades, the time gaps between demand for capacity in the southern hemisphere deciduous, citrus and kiwifruit markets served by the large reefer are too wide to make the mode ‘seasonal trade viable’. Because of this, should the sulphur cap make the reefer mode unsustainably uncompetitive, operators will have little choice but to demolish.

The carriers meanwhile are in the process of commoditizing reefer to the status of dry vans. The directly competitive services they provide may be low cost, but they offer few other benefits. But this apparently does not matter. In what has become a hyper-sensitive pricing environment, a lower cost will almost always encourage cargo to switch modes. For the lines however, a lowest cost strategy is a double-edged sword: while price secures the cargo, commoditization makes it difficult to distinguish one carrier from another. There is no brand loyalty. Under these self-imposed circumstances, size and efficiency are the only key success drivers.

In a more complicated trade environment, reefer shipping need not necessarily be so polarized. There is surely now a space in between – a logistical formula that would benefit both modes and, more importantly, the customer. Such a third way solution already exists: reefer operator Seatrade has had great success with its containerized StreamLines service working alongside its dedicated reefer Caribanex and Zodiac services. The three services ply near identical transatlantic trade lanes, albeit with different headhaul/backhaul foci. The services have been oversubscribed since the start of the year to the point that Seatrade has been able to replace some of the handysize tonnage on the Caribanex service with larger units re-delivering from Chile. Having two differing modes operating under the management of one company has given Seatrade the flexibility to strategically optimize load factors on all three services without compromising service levels or sacrificing profitability.

The Seatrade twin modal service solution is a perfect microcosm of how the modes can work together: it might be difficult to replicate directly in other seasonal trades, but not impossible, given the combination of the number of container ships afloat and commercial alliances.

A similar hybrid modal solution on a larger scale would kill a number of birds with one stone: for example, the reefer could be used as a peak season loader in Chile, South Africa, Argentina or New Zealand. A reefer working in tandem with a liner string would allow a carrier to differentiate its service offer. For the shipper, it would guarantee a pathway to market. Most importantly however, it would prevent a capacity crunch by keeping the specialized mode alive long enough for the necessary modal adjustment to be made over a period of 3-5 years, by which time the reefer will be obsolete.

Given that the specialized reefer is a) so much more capacity efficient than the alternative, and b) worth little more than scrap value in today’s market, a carrier investment in a ready-made reefer operation would be significantly less capital intensive than the acquisition of the requisite number of reefer containers to plug the reefer gap. Why re-invent the wheel when the existing alternative is already more than adequate?

If the idea has merit, then Seatrade and Baltic Shipping/Cool Carriers would surely be prime acquisition targets; both control cargo and both have the hardware and the software, the assets and the experience. But would or could the carriers be tempted to buy? Maersk is already by far the largest global player in reefer and would likely balk at the suggestion. But CMA CGM and Hapag Lloyd already have a commercial relationship with Seatrade, while MSC has historically been the most price-aggressive in plundering reefer market share. If such an idea were ever to gain traction, it would likely be one of these three container lines that would pioneer the concept. COSCO too might be a contender, but there might be too much of a transatlantic or south/north focus for the Chinese carrier to be sufficiently motivated.