In the end, the first half of 2016 was no more difficult than the forecasts predicted that it might be. However this is scant comfort for the reefer owners and the container lines, which struggled with each other and between themselves to secure cargo volumes that were lower year-on-year, at a time when bunker costs were on a rising curve. Lower rates and higher operating expenses led, inevitably, to a significantly lower average TCE yield for both large and small segments than for the corresponding period in 2015.
In such a perfect storm of a year, it is difficult to identify many positives for reefer operators other than to state that it could have been worse! The industry can count its blessings that the most recent El Niño did not wreak the damage its previous incarnation did to the Ecuadorian banana industry in 1997. In fact, according to exporter association AEBE data, in the first six months of the year the world’s largest banana exporter shipped a total of 162m boxes, 1m boxes more than the January to June figure in 2015. There had been fears of an El Niño-related 30 % reduction in volume this year!
Given the structural change in the business model, the trend towards charterers fixing on COA and liner terms means that the spot trade is exposed. The very few spot positions fixed between January and end June, whether bananas or deciduous fruit from west and east coast South America, meant that any operator without contract cargo struggled. The market also missed Med banana charterer Rastoder, which has scaled back its involvement in reefers since the end of last year. Although Rastoder now moves the bulk of its bananas on third-party container services, it could always previously be relied upon for a reefer charter if the price was right.
After three good years for the small segment, the first six months of 2016 was extraordinarily difficult. Demand for capacity was first hit by a premature end to the N Cont to Algeria potato trade and then the lack of a squid season between February and April. However the greatest impact on demand was indirect — it came from the low oil price on energy-based economies and their national currencies, which led to import quotas, foreign exchange restrictions on trade and talk of self-sufficiency in seed potato production. Both owners Lavinia and GreenSea withdrew tonnage from the market in May, which tightened supply and led to a new equilibrium. On the positive side, this should provide a more profitable platform for the second half of the year.
What used to be the bellweather fixture of the health of the reefer industry, the 5-month Canary Island tomato charter, was eventually fixed on Time Charter to two vessels in the Lavinia operation, the Frios Nagato and Mogami. Last year three larger vessels were fixed: two from Seatrade and one from Star Reefers. The rate was reported to be similar, in the low 70s c/cbft. The delay in fixing the contract led to speculation that FEDEX had ‘defected’ to the container carriers. That the business has remained in reefers is good news for both Lavinia and the wider specialized reefer community, which continues to face aggressive price competition from the carriers.
From seasonal volumes in excess of 350K MT, the Canary Island tomato business has been in steady decline since the mid 1990s. The 6 % reduction in volume of tomatoes shipped from the Canary Islands to the UK and N Continent last season was partly offset by a rise in shipments of cucumbers. The total tomato export crop for 2015-16 fell 4 171 tonnes to only 61 751 tonnes according to producer associations FEDEX and ACETO. In contrast, cucumber volumes rose from 22.8K MT to 23.2K MT. With another season of a similar export total likely, this explains why only two of the smaller vessels in the reefer fleet have been chartered.
Corporate
In the text accompanying its results for the first six months of 2016, Star Reefers (Siem Shipping) said it was in the process of preparing an application to de-list from the Oslo Stock Exchange, following approval for the action at the company’s AGM in May.
In the period under consideration, Star posted net earnings of USD 6.4m compared to USD 5.3m in the corresponding period in 2015 and achieved this figure despite a reduction in top line revenue. Gross revenues were USD 94.9m (USD 101m), and net revenues after voyage expenses were USD 78.1m (USD 80.7m).
Under current circumstances, this was an impressive financial return for the reefer owner/operator. With the writing now firmly inscribed on the wall for spot trading large tonnage, Star’s strategic decision to focus almost exclusively on contract business has continued to pay dividends, despite the ever increasingly hostile market environment. However it is not just the strategy that has delivered the results — Star’s success proves that high specification, fuel-efficient specialized reefers can add value and be cost competitive with the carriers.
In contrast, container shipping finds itself in increasingly difficult financial straits. It appears that more aggressive cost-cutting, including new pressure on terminal costs, consolidation and the development of larger alliances, are the only tools left in the box for an industry on its knees — and it only has itself to blame.
Container lines are enduring a “severe revenue contraction”, after the first series of six-month turnover figures reported by carriers were down an average of 18 % on the same period of 2015. Sales are contracting faster than carriers can cut costs, and unless there is a significant uptick in freight rates, there will be industry losses of “at least USD 5bn” this year and this will spark a further flurry of M&A activity, claims consultancy Drewry. If the carrier depression continues apace, full-year revenue is on course to plunge below that of its lowest point in 2009, a year when the industry suffered collective operating losses of USD 19bn.
OOCL, Hapag-Lloyd and market leader Maersk Line reported interim losses of USD 57m, USD 158m and USD 114m respectively; however more worryingly, all three suggested that a return to profitability was a very long way away. “Freight rates dropped in the second quarter of 2016 to record low levels; we made a loss as we were unable to reduce costs at the same speed. We are not satisfied with our second-quarter result,” said Maersk Group and Maersk Line CEO Soren Skou. Mr Skou said he thought container rates had “bottomed out”, given recent jumps, albeit tenuous, in the spot market indexes. However, he admitted that rates would “remain under pressure” for some time due to low demand and chronic overcapacity.
The group maintained its guidance that “of an underlying result significantly below last year”, and added that it would be reducing its capital expenditure for 2016, from around USD 7bn to approximately USD 6bn. It will be interesting to see whether reefer equipment is sacrificed in the drive to cut costs. Maersk Line needs to spend upwards of USD 300m annually just to maintain the size of its reefer container fleet, which is by far the world’s largest. With rates struggling just as much in reefers as in the dry segment, it is becoming ever harder for the Danish carrier (all the carriers!) to justify such investment.
There is potentially worse to come, as the increased use of containers is being blamed for environmental damage. The International Plant Protection Convention (IPPC) of the UN Food and Agriculture Organisation was the first to issue a warning. It said that the “biological spill” from sea containers can spread exotic species capable of wreaking ‘ecological and agricultural havoc’ across borders. It said that while oil spills garner much public attention and anguish, these spills represent a greater long-term threat and do not have the same high public profile.
In a paragraph entitled, ‘Trade as a vector, containers as a vehicle’, the report says while invasive species arrive in new habitats through various channels, shipping is the main one. “And shipping today means sea containers: globally, around 527m sea container trips are made each year the IPPC estimates — China alone deals with over 133m sea containers annually. It’s not only the cargo — it’s also the steel units themselves that can serve as vectors for the spread of exotic species capable of wreaking destruction.
An analysis of 116 701 empty sea containers arriving in New Zealand over the past five years showed that one in 10 was contaminated on the outside, twice the rate of interior contamination. Unwelcome pests included the gypsy moth, the Giant African snail, Argentine ants and the brown marmorated stink bug, each of which threaten crops, forests and urban environments. Soil residues, meanwhile, can contain the seeds of invasive plants, nematodes and plant pathogens.
“Inspection records from the United States, Australia, China and New Zealand indicate that thousands of organisms from a wide range of taxa are being moved unintentionally with sea containers,” the study’s lead scientist, Eckehard Brockerhoff of the New Zealand Forest Research Institute, told a recent meeting at FAO of the Commission on Phytosanitary Measures (CPM), IPPC’s governing body.
Damage goes well beyond agriculture and human health issues. Invasive species can cause clogged waterways and power plant shutdowns. Biological invasions inflict damages amounting to around five percent of annual global economic activity, equivalent to about a decade’s worth of natural disasters, according to one study. Factoring in harder-to-measure impacts may double that, Mr Brockerhoff said. Around 90 % of world trade is carried by sea today, with a vast panoply of differing logistics, making agreement on an inspection method elusive, Mr Brockerhoff concluded.
Although he did not mention the banana industry, it is surely no coincidence that leaf disease Black Sigatoka has proliferated over the past decade since containerization crashed the banana party. How long will it be before the movement of containers is blamed for the dissemination of Panama Disease TR4? It would also not be a surprise to discover that kiwifruit disease Psa-V spread so rapidly over different continents for the same reason.
The second report reveals the environmental cost of the inefficiencies of container shipping. In an article published by Hellenic Shipping News, the CEO of Cadiz, Spain-based Connectainer Intermodal Solutions Jesús García López claims that finding more efficient ways to utilize empty shipping containers to limit their movement around the globe will significantly lower CO2 and other greenhouse gas emissions. Sr García López estimates that about 21 % of all containers moved per year are empty, and that the percentage stays fairly constant — in other words, as the total number of containers shipped each year increases, so does the number of empties.
The problem, López said, is that “If we calculate the CO2 emissions of a 40-foot empty unit repositioned from Algeciras, Spain to Shanghai, China, the result is around 328 kg per container in only one leg.” In addition, normal movement within a port generates about 6 kg of CO2 per TEU.
Sr López suggested that simply working to reduce movements rather than optimizing costs would lead to more flexible repositioning management, as well as making a serious impact on reducing greenhouse gases. “If main shipping actors could reduce empty movements by 30 %, there would be a saving of 145.8m kg of CO2 per year,” López said, citing his own company’s research.
When the carriers next attempt to take the moral high ground on greenhouse gas emissions, it would be worth considering the impact that poor load factors, surplus equipment and idle tonnage has on the environment, as well as the dangers of ‘biological spill’ noted by the FAO.
Economic progress in all its forms always comes at a cost — however this cost should surely not be at the expense of the environment, particularly when the damage in this case can be managed, mitigated or avoided. At the very least, the cost of minimizing the harm to the environment should be borne by the consumer
Click "Continue" to continue shopping or "See your basket" to complete the order.
