Reefer shippers fed up with volatile rates opt for longer-term deals with lines

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Reefer shippers are signing contracts with container shipping lines that last for as long as five years, Maersk Line’s head of global refrigerated business Thomas Eskesen claimed.

He told delegates at the Cool Logistics Global conference in Rotterdam this week that the general rate increase of $1,500 per 40ft reefer unit had acted as “a catalyst” for discussions between carriers and shippers to enter a new era.

“A lot of people are simply worn out by the volatility – haggling for $50-100 per box doesn’t bring much advantage in their markets, and we have started signing five-year service contracts.

“In fact, we think this year has been a breakthrough, and in some southern hemisphere markets, up to 60% of the business is now being done under long-term contracts. That means that we can send boxes down to the shippers and make sure that the equipment is there for them,” he said.

He also linked this development with requests from shippers for greater transparency, but argued that this too would cost more to deliver, although it would also enable savings to be made.

“If you have a lot of visibility you can optimise the supply chain – but how does that affect cost, because the shipper will have to pay for it.”

Peter Frederiksen, a member of Hamburg Sud’s executive board, added that he had also seen an increasing interest in long-term arrangements between carriers and their customers.

“A lot of customers would like to get away from volatility, and we are seeing long-term framework agreements that allow for changes to rates on an annual basis, with a quarterly bunker adjustment.

“But not a lot of customers are willing to commit to rates over 12 months, and if they go down they always come back to us,” he added.

Mr Eskesen said that a floating bunker surcharge was “non-negotiable” for Maersk, but did reveal that part of the reasoning behind longer contracts was the $1,500 GRI.

“A lot of customers have said that $1,500 was a lot to chew in one go, so they spread it over three years.

“But another way that has been explored is linking freight rates to commodity prices, so that if the shipper sells to his customer at higher prices then he pays more for the freight,” he said.

However, Mr Eskesen also admitted that despite the fact that a series of other container carriers had also announced large GRIs – introduced around the same time – Maersk had lost market share in the reefer business.

“We have lost double-digit volumes – and we expected that. We have taken a big hit, but we are ok with that; we can’t be everything to everyone and we are not only in the business to capture market share. The yield on reefers has gone up and our EBIT margin is better than the peer group.”

As a result, despite some success in achieving the January GRI, Maersk Line had decided that it would not invest in any new reefer boxes until 2015 at the earliest, which is mainly due to the low levels of demand shown over the course of this year, particularly in recession-hit Europe.

Mr Eskesen said global demand for reefer traffic was likely to see growth of just 1% this year, putting paid to the widely accepted notion that the business was recession-proof.

“That alone means the demand for boxes has gone down, and we are covered for 2014 – any contract signed from now will be well covered in terms of equipment. As far as we can see, for the next 12-15 months we don’t need more reefers,” he said.

However, Philip Damas, director supply chain advisors at Drewry, warned delegates that while the supply of space on container vessels was unlikely to come under any pressure – given that demand is surprisingly low this year and the newbuilding orderbook promises that the global fleet will continue to grow – there could be a shortage of reefer boxes for fresh produce.

“If you are an exporter, don’t worry about availability of ship capacity, but the availability of boxes is getting tighter and something to be aware of,” he said.

But he also explained that it was understandable that many carriers were reluctant to invest in reefer boxes. “It’s a massive investment – the current replacement value of the global reefer fleet is $20bn.”

That said, Hamburg Sud’s Mr Frederiksen said the German line was planning to order more reefers next year, although he declined to cite a figure.

“We have taken a break from ordering for the last two years, so we will invest in the next two years. It will be the usual renewal of our fleet, and possibly slightly over that.”

First published at www.thecoolstar.com.