DynaMarkets Monitor - Renewed reefer optimism or short-term spike?
At the end of 2019, it appeared as though a storm was brewing for the conventional reefer market; little did the market know that a storm was brewing for the entire shipping industry. While rumours and a limited amount of news stories were circulating in China in regards to the Sars-Cov 2 virus, few foretold or foresaw the scale of the challenges it would pose. Container liners have seen a historic drop in container volumes, plummeting charter rates for boxships and a historic amount of blanked sailings. The tanker market has been a rollercoaster with geopolitical events, supply and demand volatility and price wars generating a short but sweet earnings holiday for owners and the dry bulk sector is only now seeing a boost in its fortunes as a result of the tentative steps taken in some major economies to move to a post lockdown environment, but what about the reefer market? In the fourth quarter of 2019, many were pessimistic about the fortunes of the conventional reefer segment, citing the spectre of high fuel costs on the back of the IMO 2020 regulations and the continued containerisation of important commodities. Fast forward to the middle of 2020 and the situation looks quite different.
In the early stages of the global pandemic, through March and April, the difficulties faced by the major container shipping lines were well documented. The number of blanked sailings increased massively, as did the idle fleet. Both reached historic highs during this period. These issues, combined with wider supply chain disruption as a result of lockdown measures, quarantines and travel restrictions led to a large number of shipments being trapped at source, stuck on route to the destination or sitting on the wharf at the terminal. Furthermore, the supply of empty reefer containers saw a large amount of disruption with carriers unable to deliver boxes to where they needed to be and reefer plugs at ports full to capacity. At the time, ideas were beginning to circulate in regard to the conventional sector seeing an uptick in both demand and earnings as they could make the most of the trials and tribulations of the containerised sector. Those with an intimate knowledge of the entire reefer sector poured doubt on such suggestions given the way that supply chains have been configured or reconfigured over the past few years, but it has come to light that conventional carriers have in fact seen a jump in enquiry, if not if firm business. For example, Rotterdam Fruit Wharf, a major refrigerated breakbulk terminal located in Rotterdam reported in early May that it had seen a doubling in the number of conventional reefer calls when compared to the same period last year. Moreover, as of mid to late June, it was reported that the South African citrus crop has generated interest for conventional tonnage for shipments to the United States. Key reasons cited for the interest in conventional tonnage include equipment concerns, rising surcharges for container shipments and the ability to get the product to the market quickly. The conventional sector, known for its inability to compete with container vessels in terms of fuel efficiency and operating costs, has further benefited from the historically low oil prices and the knock on effect for bunker prices.
However, it has not been all plain sailing, by the end of April some difficulties began to surface. In particular, the issues relate to logistical difficulties in getting fresh produce to the port. Lower warehouse productivity on the back of working restrictions, social distancing and travel restrictions has caused longer lead times and a reorientation of ordering and inventory processes. At many Latin American ports, operations are said to be going relatively smoothly all things considered, although there is an increasing level of restrictions in place. On the whole, ports had started to notice a drop in volumes with some customs procedures taking longer. Yet overall, the conventional reefer market remains in a good place. The fleet continues to see high levels of utilisation and ongoing strong enquiry. Late surges amongst some key cargoes have provided a further boost, such as in the Falklands squid catch.
So what about the remainder of the year. While the peak of the pandemic has seemingly been and gone in some key markets, including China and a number of major European economies, the epicentre has now shifted to Latin America, the world’s pre-eminent shipper of refrigerated cargoes. Furthermore, the US is seeing a rise in cases as a number of states have taken things into their own hands and exited lockdown, in the opinion of leading scientists, too early. As a result, the reefer sector, both conventional and containerised, may see significant supply disruption throughout the supply chain with harvesting, warehouse productivity and port operations all hampered by restricted working practices, heightened levels of sick leave and the introduction of port quarantine policies if seafarers were to test positive.
While fleet utilisation has remained high throughout the first half of 2020 and there has been an uptick in interest for the conventional sector, it remains a niche market dependent on certain cargoes. It is unlikely that the reefer market will see the conventional sector take back any meaningful slice of market share although the flexibility, including the fast, direct nature of its services have certainly provided an avenue for shippers to avoid the worst of the disruption in the container sector.
Overall, while the Sars-Cov 2 pandemic is seen to be once in 100-year event, it has highlighted certain limitations in the containerised trade of refrigerated produce. As carriers do not offer dedicated reefer services, the supply and availability of equipment and service offering is reliant on wider trade flows. The evidence of this reliant has been plain to see in terms of the disruption to reefer boxes and the reduction in services operated. The nature of refrigerated cargoes, with relatively concrete periods in which cargoes are available, requires uniformity and continuity in terms of being able to get the product where it needs to be.
The conventional reefer segment will continue to see hardship in the coming years, its business model makes it susceptible to high fuel costs and thus oil market volatility and it is somewhat inefficient for some major refrigerated cargoes when compared to the largest, most modern boxships. Yet, its virtues have also come to light and some shippers may now start to waver on whether containerisation of refrigerated produce is really the silver bullet. The horrors of the corona crisis, socially, economically and in human life, have shown a silver lining for one beleaguered aspect of the shipping market.