Friday, March 29, 2024 | ISSN 0719-241X
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July 05, 2004 Reefers burst from famine to feast Even though 2004 had a disappointing beginning


After a disappointing start to 2004, specialist reefer owners and operators head into the off-season in a confident and optimistic mood. A dynamic second quarter produced Spot market rates averaging nearly 40% more than Q2 2003. May’s unprecedented ‘twin peak’ provided the first really tangible evidence that reefer capacity levels are levelling off towards a balanced equilibrium. There is even a growing danger that unless a steady stream of newbuildings is commissioned soon, the combination of rising global reefer trade volumes, increased scrapping levels and a consequent tightening in availability of modern, box-friendly tonnage will send time charter rates into orbit. Spot charterers are becoming increasingly concerned that owners and operators will need to move more tonnage into 12-month and seasonal business, leaving behind an ever-ageing and fuel-inefficient fleet. Charterers who have historically traded exclusively on Spot are examining the implications of seasonal COAs, while S&P activity at both top and bottom ends of the market is reported as still very good. What then are the factors that have influenced this apparent dramatic reversal in reefer fortunes? One look at the unprecedented behaviour of the Spot market in May provides a clue. A Spot market ‘bounce’ took place last year in May and June, so a repeat performance could have been predicted. But the strength of demand for tonnage and the height of the second, ‘twin peak’ took all parties by surprise. And it wasn’t just charterers who were stung – owners and operators caught short for liner positions had to charter in and pay up, albeit less reluctantly.

Market behaviour tells tale

Establishing the reasons for the Spot market behaviour in May is critical for both sides of the chartering divide. Was the rise simply a question of owners’ greater confidence, did it reflect new trading patterns or was there a genuine step increase in global reefer volumes being traded? Not only will the answers to these questions influence period and 12-month TC negotiations this year, they might give the strongest steer yet as to whether the seven-year reefer industry ‘famine’ is over. The Spot market is admittedly less of a barometer of absolute reefer industry performance today than it has been in the past, but the trends it reflects are ignored at their peril. For the first five months of the year in volume terms, both Chile and Argentina recorded increases in fresh exports from 2003. Chile, the world’s largest exporter of fresh produce, is continuing to invest in its fruit industry. But more importantly, it is establishing trade relationships with enormous markets as yet untapped in China and India, which will see tariff barriers lowered and restrictions relaxed. The free trade agreements Chile ratified with the US and South Korea is already reaping dividends. Santiago has also signalled its intention to extend its existing preferential tariff arrangements with the EU.

Despite unfavourable pre-harvest conditions, Argentinean deciduous exports more than matched last year’s record volumes and will continue to rise, while New Zealand has exported record crops of pipfruit and kiwifruit this year. South Africa’s total deciduous exports stagnated, on the other hand, partly the result of unseasonal pre-harvest conditions that affected fruit quality and partly because of the strength of the rand. Moroccan citrus volumes were also reported down on last year. Banana exports are the key drivers behind Spot market movement. The benchmark banana publication Sopisco News reported that with the exception of weeks 18 and 19, banana exports from Ecuador, Costa Rica, Colombia and Guatemala were about level with 2003 numbers. But in week 19, a surge of more than 2.2M additional boxes occupied vessels, leaving the seas off Cristobal virtually deserted, with very little follow-up. Rather than resort to historical precedent, or ‘calendar-fixing’ as it is affectionately known, the aggressive owners of the then-prompt tonnage had the confidence to test the upper limits of the Spot market’s elasticity of demand. It emerged that there was sufficient demand, or rather insufficient supply, for reefer capacity in other hotspots of South America, South Africa and Australia for the momentum established in week 19 to be sustained.

There was simply not enough tonnage available to match banana and other reefer requirements. Worse still for the charterers, owners and operators were forced to charter in to cover committed liner positions, further reducing availability of open ships and keeping rates high. Last year there were just three regular services out of Argentina (LauritzenCool, Seatrade and NYK Star), but this year independent Star Reefers and Baltic Shipping are also involved. Chilean exports in specialist vessels are set to finish historically late this year, with possibly the final ship sailing in week 27. Baltic Shipping is also involved in a regular service out of South Africa for the first time as demand in Russia continues to grow. An extra 15M trays of kiwifruit from New Zealand is roughly equivalent to 100,000 pallets, or 20 reefer ships, on long voyages. However, the issue is not only that there have been greater volumes of reefer produce traded but also that more appears to have travelled in conventional rather than reefer box capacity, absorbing more tonnage and for longer.

Box business boxed

A global reefer box shortage was caused by a list of factors, including: an increase in trade, Asian avian flu, the US BSE crisis and the absorption of a large number of reefer boxes by the Iraq War. Reefer boxes were tied up in ports or in transit while a ban on exports left other boxes idle. Customers were left without in the US, Central America, New Zealand and interestingly Argentina, where reefer box market leader Maersk Sealand had strategically stockpiled boxes with the intention of capturing a greater share of the country’s deciduous exports. Compania Sud Americana de Vapores, Chile’s major reefer charterer, chartered more specialist tonnage in this year than last, because of a shortage of boxes and cost. The increase in box rates alone is estimated to have cost the Chilean fruit industry $50M this year. Circumstances conspired to create an ideal solution for reefer owners wishing to scrap their ships in the first four months of 2004. High bunkers and a shortage of steel encouraged owners to send an unusually high number of units (16) for demolition in the high season.

However, the drop in the market for scrap and the sudden realisation by charterers that there may be a capacity crunch put an end to this. The recent reversal of a deal to scrap the 1979-built spot specialists Norman Star and Saxon Star, and their sale instead into the Russian reefer trade, is symptomatic of the growing sense of urgency felt by charterers looking to protect the margins in their supply chains. The strength of the dry bulk market made reefer vessels a viable alternative much earlier in the season than usual. Freezers and reefers were fixed with fishmeal, fertiliser, bagged rice and sugar. The trend is set to continue during the July to October off-season, which might hold rates above 30 cents a foot over three months, the break-even cost for older tonnage. This is perhaps why, to mid-June, just three vessels had been sent into lay-up. Russia, the fastest-growing market for fresh produce, continues to develop at double-digit rates, as the country becomes economically sound and the standard of living rises. Exports of Argentinean fruit to Russia have risen 25-30% this year, while Russian imports of bananas are forecast to rise by nearly one-fifth. Russia has also imported more fruit from Chile and will do the same from South Africa this year. Growth in Russia will continue to favour the specialist reefer business, because of the vertically integrated structure of its major players and the relative lack of box infrastructure in the major ports.

Reefer futures

So delicate is the mechanism that now balances supply and demand that the above factors combined to drive the market to unprecedented May heights. How, if at all, will this translate into 12-month charter business and the prospects for newbuildings? It is becoming increasingly evident to charterers that the availability and therefore the cost of tonnage, modern and otherwise, will start to compromise margins if the upward trend on spot, seasonal and 12-month rates continues. Owners can now justifiably point to increased reefer business during an extended peak season and an ever-shrinking supply of quality tonnage, while the much-vaunted reefer box threat has proved, so far at least, to be baseless. The 2004 season to date indicates that the reefer box business is not yet in a position to mount a serious challenge of the specialist operators on traditional routes. At best, perhaps the most it can expect to do is take the heat out of the reefer peak season from February to July. However, with charter rates for box ships rising on the back of increased demand in Asia, even in the short term taking the heat out of the peak season might be difficult if the increase in costs is transferred onwards to the customer. Despite the ever-increasing numbers of reefer boxes in circulation, it will be many years before there are sufficient resources for the box business to offer a realistic threat to the specialist reefer industry.

The general increase in global reefer and frozen trade – coupled with new trade routes, which lend themselves to box business rather than specialist reefers – will create new opportunities for box operators but will also create new logistical issues. Box operators will not be able to compete on the same terms as the specialist reefers until there is a surplus of reefer boxes, an excess of box ships – with sufficient reefer plugs to transport them – and sufficient port, logistics and hinterland infrastructure to accommodate the increase at either end of the supply chain. And this is unlikely to happen within the next 20 years, if at all. And another thing… Seatrade’s capture in May of the 540,000ft³, 1992-built Mermaid sisters Atlantic and Pacific on a four-year straight timecharter deal, at a reported rate of 62 cents a cubic foot per month, surprised the market. It was a bold move indeed for an operator that already controls so much tonnage to be so confident as to contract two ships that old and with modest ­container capacity at such a rate. How much of a gamble the company is ­taking will become ­evident in the third quarter when TC and seasonal negotiations begin. However, Seatrade might actually prove to be well ahead of the game. The commercial justification for a newbuilding is estimated at about 80 cents a cubic foot. In short, there appears to be little reason for reefer owners of modern vessels with good box capacity not to be bullish about the prospects in the medium to long term. Whether this optimism translates into newbuilding commissions remains to be seen, but the gradual accumulation of rumours and speculation over the last six months suggests that an order is not far away. However, Seatrade has reportedly been travelling the length and breadth of the planet looking for a yard at which to build the next generation of reefer ships. Such is the strength of the tanker, box ship and dry bulk markets that not only is there no slot available now until 2008, existing slots are allegedly being traded for up to $2M each.  

Fairplay

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