Rate Hikes and Reefer Madness

Rate Hikes and Reefer Madness

 If there is one thing the recent global recession proved—and that’s refrigerated cargoes trade is nearly recession-proof. During the Journal of Commerce Trans-Pacific Maritime (TPM) conference earlier this month, Philip Damas, director for Drewry Supply Chain Advisors, presented a battery of facts and figures showing just how robust the reefer market has become in recent years.

Worldwide seaborne trade of perishable reefer cargoes grew by 4 percent in 2011 (the most recent statistics), while Drewry is forecasting 4.5 percent growth annually in the sector over the next few years. Overall, global demand remained “resilient” during the economic downturn, said Damas. Furthermore, with 2.6 million TEUs of capacity in the sector, it can hardly be considered a “niche trade,” he stressed.

In fact, Damas suggested that several market forces are contributing to what could ultimately result in a reefer capacity bottleneck.

 

Rising rates, less capacity

Last September, Maersk CEO Soren Skou made one of the biggest announcements impacting the maritime reefer trade when he said the liner would implement a $1,500 increase in base rates for 40-foot reefer containers starting in January 2013. Skou explained that the 30 percent rate hike would help fund the necessary investment to expand the reefer sector. Maersk is the undisputed leader in the reefer container trade, handling about 800,000 boxes annually and controlling about one quarter of the worldwide market.

According to Drewry’s benchmarking, reefer rates have already climbed by 33 percent since November 2011, Damas pointed out, and with dwindling capacity on both containerships and specialized carriers, shippers are being dealt a serious blow at a time when they can least afford to lose any momentum.

Bill Duggan, Maersk vice president of refrigerated services, North America, who also spoke at the TPM conference, defended the rate hike on reefers. “Rates have been flat for years,” he said. “We have to restructure rates because it’s absolutely necessary; as a carrier, we need to invest.”

In fact, Maersk has decided not to make any investments in reefer containers this year because the rates simply cannot support it, said Duggan. “We cancelled a half-billion-dollar order for reefers from our factory in China,” he remarked, referring to Maersk Container Industry (MCI), the container-manufacturing unit of the A.P. Moller-Maersk Group. MCI’s headquarters are in Denmark, but the company currently operates two manufacturing facilities in China.

Last year, the Dongguan plant built 220,000 dry containers, while the Qingdao plant manufactured 36,000 reefer containers and 37,000 Star Cool reefers (the brand name for Maersk’s controlled atmosphere containers). If it’s any indication how much the reefer trade is expected to grow, MCI will open a new $170 million reefer factory in San Antonio, Chile later this year.

As to whether shippers are taking Maersk’s rate hike on reefers in stride, that’s another matter. In general, larger shippers have been able to absorb the rate hike easier and in some cases negotiate deals due to their volumes, but smaller shippers are clearly struggling and several have scaled back imports/exports on certain trade lanes.

And, Maersk isn’t the only carrier to announce a rate hike on reefer containers. Mediterranean Shipping and CMA CGM, two big rivals, have also announced sizeable increases. Meanwhile, Hanjin has reportedly stopped accepting reefer container shipments from the Southeast U.S. to Asia because the long transit time is tying up equipment for too long. At the same time, specialized reefer carriers, like Seatrade, Baltic Reefers and others, are at full capacity, all of which is compounding space constraints.

 

Full steam ahead at ports, facilities

Rate hikes on the carrier side notwithstanding, the growing reefer trade is prompting ports and cold storage providers to ramp up to meet demand.

Last month, Crowley Maritime and its customs brokerage company, Customized Brokers, announced the opening of a new cold storage facility in Miami. The Crowley Fresh facility boasts multiple humidity and temperature-controlled coolers and is open 24/7 to handle perishable imports/exports between South Florida and markets in Latin and South America, the Caribbean, Europe, Asia and the Far East.

According to a company press release: “The state-of-the-art facility is ideal for perishable storage or may be used as an in-transit consolidation/deconsolidation point. Crowley Fresh features high-tech cooling and monitoring equipment, including forced air precooling, which can be adjusted to meet and maintain varying temperature requirements. With 400,000 total cubic feet of refrigerated space, the facility also offers additional storage for cargo supplies and non-refrigerated materials.”

Crowley’s Nelly Yunta, vice president of sales, marketing and customer care, told Food Logistics that, “People are eating better, which is driving the demand for more fresh fruits and vegetables,” not only in the U.S., but in overseas markets as well.

Cold storage operators, meanwhile, are focused on providing cost effective services, she said. In addition, “Safety is very important. Cold storage warehouses have to keep up with food safety regulations, making sure they are complying with HACCP and other requirements.”

On February 5, a public-private partnership between the North Carolina State Ports Authority and developer Chuck Schoninger of USA Investco got the green light to construct a cold storage facility at the Port of Wilmington that would handle imports/exports of fruits and vegetables, meat, and other agricultural products. The construction hinges on the award of state and local incentives, but plans call for a 75,000 square-foot facility, expandable to 300,000 square feet.

Agriculture is the primary industry for North Carolina and the future cold storage facility would help alleviate logistics costs for shippers, mostly because business would stay in-state rather than being diverted to competing ports in Norfolk, Savannah and Charleston.

According to North Carolina Agriculture Commissioner Steve Troxler, the state exports more than $3 billion worth of agricultural products annually, and projects such as the proposed cold storage facility could boost that number higher.

Agricultural exports also figure significantly for Louisiana’s ports, including the lower Mississippi River deepwater ports of South Louisiana, New Orleans, Greater Baton Rouge, St. Bernard and Plaquemines. This five-member port complex handles nearly half of U.S. exports and one quarter of U.S. petroleum imports.

 

The Port of New Orleans stands out as the only deepwater port in the U.S. served by six Class I railroads, while 50 ocean carriers, 16 barge lines, and 75 trucking companies also serve the port. Coffee is one of the top commodities and the port has 14 warehouses, more than 5.5 million feet of storage space, and six roasting facilities in a 20-mile radius devoted to this key cargo. Two of the most modern bulk processing operations for coffee are located in the area—Dupuy Storage and Forwarding, which handles coffee, tea, sugar and other commodities with approximately 1 million square feet of warehouse space, and Silocaf of New Orleans, Inc., the number one coffee processing plant in the U.S. and the largest in the world.

New Orleans Cold Storage (NOCS), the oldest cold storage company in North America, operates a dockside cold storage facility at the Port of New Orleans’ Jourdan Road Terminal. The 160,000 square-foot facility houses 10 “super blast” freezing cells.

Last summer, NOCS opened a new 142,000 square-foot cold storage warehouse at the Port of New Orleans that can store 38 million pounds of perishable products and can freeze up to 1.25 million pounds of fresh product daily. Beef and poultry exports are a top cargo at the facility, which is located at the Henry Clay Wharf.

All together, NOCS operates four facilities in the U.S. with over 12 million feet of refrigerated space in three major port locations—New Orleans, Houston and Charleston.

However, despite Louisiana ports’ commanding market share in agricultural trade, the state’s agriculture commissioner warned recently that more investment is needed to capture new business that will materialize once the Panama Canal expansion project is completed in 2014.

Last year, a record $25 billion in farm goods were shipped from Louisiana ports, according to the Southern United States Trade Association. But that amount could jump by 30 percent if the state had a port that could accommodate the longer Post-Panamax vessels that will navigate the Canal in a few years, says Commissioner Michael G. “Mike” Strain.

“The two big issues we face are making sure the Mississippi is consistently navigable, and having a port or ports that can handle the biggest ships,” Strain told the Monroe, Louisiana News-Star. “Ideally, a Panamax-ready port would be built at the mouth of the Mississippi River at or below New Orleans because of the water depth.”

The cost of such a port is staggering, considering it could easily reach $1 billion or more. Yet, trade experts estimate that U.S. agricultural exports will continue to rise as middle class populations expand in developing countries throughout Latin America, Asia and Eastern Europe.

 

Resource Box:

Fastest Growing U.S. Ports in the Reefer Trade (2007-2012)

  • Wilmington, NC
  • South Louisiana, LA
  • Oakland, CA
  • Philadelphia, PA
  • Norfolk, VA
  • Los Angeles, CA

 

Fastest Growing Container Lines in the Reefer Trade (2007-2012)

  • K-Line
  • Mediterranean Shipping Company (MSC)
  • CMA CGM
  • Mitsui OSK Lines (MOL)
  • CSC Sugar
  • Zim
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