Sea freight: H1 2019 review

The increase in business for the large segment was indeed good news for reefer operators, not least because the mode was successful in both taking back market share from the carriers and developing new business. However the issue remains on how to translate this success into sustainability. This issue comes into sharper focus at the start of 2020, the implementation date for the IMO 2020 LSFO sulphur cap regulation. All reefer vessels bar the scrubber-equipped Cool newbuilds will be forced to bunker at a premium rate, which will compromise the mode’s cost competitiveness against the containership alternative.

Will the mode be able to justify the cost difference by the value it adds? The reefer will remain viable if it can retain its customer base while charging higher rates. However if the gap is too wide, cargo will defect en masse to the carriers. Or at least it will attempt to! However, not enough containers are being manufactured currently to absorb such a shift. And if China takes action to mitigate the African Swine Fever related losses to pork production by importing a whole lot of supplementary protein, there may be a real reefer capacity crisis, which will lead to not only a spike in rates but also the possibility that cargo will be left behind for lack of equipment.

On the topic, the Chinese Ministry of Agriculture and Rural Affairs claimed in late June that ASF was under control in China. But more reliable anecdotal reports say the disease has already taken as many as half of the country’s breeding pigs. The government has reported 137 outbreaks so far, but many more are going unreported, most recently in southern provinces such as Guangdong, Guangxi and Hunan. The losses are not just from infected pigs or pigs that are culled from herds that have infected pigs. Many farmers are sending pigs to market early when reports of ASF get near their farm. Many farmers are unsurprisingly hesitant to re-stock - restocking farms previously infected with ASF is risky because the virus can survive for weeks outside a host, potentially living on in a farm that has not been thoroughly disinfected!

In the first six months of the year, 13 reefer/freezer vessels with an average age of 32 years and a total capacity of 5.3m’cbft, were demolished. Of the total, 9 are 420’cbft or larger with an average age just above 30. The 4 smaller units had an average age closer to 35. With scale now being more of a curse than an advantage in the spot banana trades, the end is surely close for those large vessels that are not viable switching from seasonal southern hemisphere grapes into citrus into kiwifruit..?

Well, yes and no! The demolition of the larger units coincided with the Fresh Carriers’ (FCC) announcement that it had commissioned three 570’cbft high cube newbuilds with deck stow capacity for 100 containers, giving a total above and below deck capacity of 6,800 pallets. Key to the order is support from kiwifruit marketer Zespri, which will be able to deploy the units on voyages into core Asian markets China, Japan and South Korea. The charterer estimates that the units will be able to complete as many as 6 voyages each during the season should FCC be able to add butternut squash and apple cargo in March and April. Presumably for the remainder of the year the units will load bananas from the Philippines into the very same markets.

In contrast, the picture looks universally much brighter for the smaller segment. Although there are still a few too many ships in 5 of a 7-year cycle to challenge operators to make the 100c/cbft TCE necessary to justify the commissioning of a newbuild, this will change over the next 2-3 years when many units become obsolete, either as a result of IMO 2020 or just because age catches up. The average age of the 100-300’cbft sector at the start of this year was already above 30. The remaining 2 years of the cycle are when extra demand from squid charterers ordinarily sends the TCE yield spiraling well above the 100c/cbft mark for a sustained period.

Despite the optimism, there is no immediate indication that Seatrade plans to order more than the four Orange Class units, which were delivered in the first four months of the year and which form part of the GreenSea operated fleet. Under current market circumstances it is surely a question of when, not if, a further order will be placed.

The small segment also dominated Sales and Purchasing activity. Greek owner Lavinia acquired the 549’cbft blt’99 Esmeralda, one of the remaining 9 MPC vessels in the Seatrade operation. Realistically, Mr. Laskaridis is the only game into town in reefer S&P. This is partly because he will pay more of a premium on scrap value than Far Eastern interests, but mainly because he will get an almost immediate return on his investment if the squid catch in the South Atlantic over the next 2 years is as big as has been forecast. Unconfirmed reports claim Mr. Laskaridis is interested in/bidding on all the remaining MPC units.