Reefer market poised for growth but faces supply chain challenges

Lara L. Sowinski | Jul 09, 2016 9:00AM EDT

The expanding global cold chain stands out as a bright spot in the broader international trade and transportation sector, especially among major container ship lines, most of which reported negative operating margins for this year’s first quarter because of record low freight rates.

Capacity cuts and proposed general rate increases aren’t helping much, and back-to-school and holiday shipments may not provide anything more than temporary relief.

By contrast, the global refrigerated ocean transportation market is forecast to grow steadily at a compound annual growth rate of about 4 percent from 2016 through 2020, according to research firm Technavio. That’s good news for container lines investing heavily in their reefer business and others in the global cold chain sector, from shippers to logistics providers and cold storage operators.

Perishable fruits and vegetables, fish and other food products account for most of containerized refrigerated shipments. But other goods, including temperature-controlled chemicals, medicine, pharmaceuticals and floriculture products increasingly are migrating toward ocean freight.

Steve Schommer, director of logistics and transportation for The Sun Valley Group, the largest producer of flowers in the U.S., emphasized the need for a reliable and integrated cold chain during the JOC’s 16th Annual TPM Conference in Long Beach in March.

Floriculture, or flower farming, is a $32 billion industry. It ranks as the third-largest U.S. crop, and growers in California make up 75 percent of the market.

Sun Valley imports flower bulbs from New Zealand and the Netherlands. Importing from different hemispheres allows the company to maintain its schedule to deliver flowers for various holidays throughout the year. “Like us, flower bulbs are living and breathing, and they are very sensitive to temperature,” Schommer said. “If too cold, they will die. If too warm, they wake up and start growing before they’re supposed to, so cold variances are critical for our shipments.”

Competition from Colombia and Ecuador is also stiff. “Because of that, we have to do everything right when it comes to cold chain management and cost control,” he said.

For example, the Global Shark Tracker app allows someone to track a single shark around the world, “but I can’t track my container that way,” he said.

Trust is another attribute Schommer said is lacking. “We need partners that we can trust, that we can rely on. In some cases, that’s the major differentiator between one logistics provider and another,” he said. “So if you can just do that, we’re with you.”

Pharmaceutical shippers also are looking more closely at ocean freight for their temperature-controlled shipments. “FiercePharma Manufacturing,” a business-to-business website covering the pharmaceutical industry, reports that AstraZeneca intends to shift about 70 percent of its shipments to ocean within the next year or so. The reason is the high number of costly temperature excursions the company encountered with air shipments — 25,000 to be exact, with 7,000 significant enough to require a detailed investigation. Only 1,700 temperature excursions occurred during ocean shipments, with 300 of those requiring an investigation.

Another presenter during the TPM Conference, Modality Solutions President Gary Hutchinson, described a lane validation project he designed and tested for a pharmaceutical client that was shifting its product from air freight to ocean. “The pharmaceutical industry is aggressively pursuing ocean freight instead of air,” he said. During this transition, “they’re going to be asking the ocean carriers a lot of questions. They’re not trying to be a pain; it’s just that the industry is so heavily regulated,” which is evident in the validation process that’s required if a company wants to switch transportation modes.

The lane validation performed by Hutchinson and Modality Solutions involved multiple temperature data loggers placed throughout a reefer container to show proper temperature and air flow. Thermal blankets were custom fit around the pallets to provide extra insulation in case of power loss, and accelerometers recorded shock and vibration throughout the journey, which started in Long Beach, California, and headed to Sydney, then to Melbourne, Australia, before returning to Long Beach.

“It may seem like overkill, but pharmaceutical shipments can be very costly,” Hutchinson said.

Aside from new business segments such as floriculture and pharmaceuticals, the reefer shipping sector is betting on growth in new and emerging economies, including Cuba. Although it’s still in a nascent stage, the potential for U.S. agriculture exporters is huge. According to the U.S. Department of Agriculture’s Foreign Agricultural Service, outside of sugar, Cuba’s agriculture production is stagnant, meaning the country must import 60 to 80 percent of its food. Poultry is one of Cuba’s top imports, and the country is the fifth-largest export market for U.S. poultry producers.

“The United States has huge structural advantages in exporting to Cuba,” the FAS said. “Chief among them is location. The U.S. is less than 100 miles away, meaning lower shipping costs and transit times, especially when compared to current top competitors, the European Union and Brazil. This is strategically advantageous for the U.S., because bulk commodities and highly perishable agricultural products can be shipped to Cuba in manageable quantities, overcoming storage and other infrastructure limitations.”

With more than 11 million people, Cuba is also the largest country in the Caribbean in population and area. Its rising GDP will result in higher incomes and a growing middle class, which in turn will lead to increased consumption of meat, dairy products and processed foods, all of which the U.S. can supply competitively, the FAS said, while growing numbers of tourists also will boost demand for high-quality food.

Crowley Maritime and CMA CGM operate services that call Cuba’s Port of Mariel, while others such as the Port of Mobile are eager to establish trade ties with Cuba. Trade organizations and industry groups already have conducted trade missions to Cuba in anticipation of the lifting of the U.S. trade embargo.

Communication and service are two areas that shippers of temperature-controlled products say container lines need to improve. Schommer pointed to “gaps in communication” as a top challenge. Service is another issue, he said. The seasonal nature of floricultural and agricultural products combined with their short shelf lives mean having reliable equipment when and where it’s needed is mandatory.

At the same time, slow-steaming remains a challenge for shippers, and one that’s not likely to go away. Indeed, it’s an issue that specialized carriers such as Seatrade are quick to highlight in their bid to remain competitive with container lines in the global reefer shipping market.

“Specialized reefer operator Sea-trade is investing in a new building program of fully containerized reefer vessels, seeking to differentiate itself from the liner container carriers with shorter transit times, direct routings and reefer-dedicated box shipping services,” consulting and research firm Drewry wrote in its 2015 Reefer Shipping Market Annual Review & Forecast. “In doing so, it has rebranded itself an FDD operator — fast, direct and dedicated. The company has firm orders for six vessels of between 500 and 700 FEUs of reefer capacity, and options for a further six.”

Perry Bourne, director of international transportation and rail operations for Tyson Foods, joined Schommer in his call for better service from container lines and cold chain providers at large. “Perishability and shelf life in our business is critical,” he said.

Most of Tyson’s exported product moves by truck or rail, and then gets transloaded into a reefer ocean container. Temperature control, loading and the proper use of dunnage, the transloading process … chilled meat can easily spoil if all these things aren’t right, said Bourne, who added that transit schedules and consistency are critical, as are fixed-day sailings and arrivals along with a steady supply of reefer containers.

Nonetheless, “Slow-steaming re-mains an issue,” he said.

Bourne also recounted the impact of the 2014-15 U.S. West Coast port disruption on Tyson’s business. The purpose wasn’t to implicate a particular provider or organization, but rather illustrate the vulnerabilities perishable shippers are exposed to when there is a break in the cold chain, even if it’s an infrequent or unlikely event.

“We’ve had disruptions at ports before, but not like this,” Bourne said. Tyson was slapped with demurrage charges from Union Pacific and BNSF railroads that totaled in the seven figures. In addition, “We had an over $80 million hit to our bottom line in the third quarter of 2015 because of it,” Bourne said. “The sad part is it really increased costs for the shippers, and we had no dog in the fight. We were dealing with impacts that affected our business and yet we had no control over them.”

Bourne said it would help to develop more freezer space in the interior of the U.S. “along with more space from California to Washington to unload railcars and trucks when cargo cannot be moved to the terminals and vessels.”

The fallout from the disruption went beyond spoiled shipments and added costs, he said. “It prompted foreign customers to question their U.S. suppliers’ ability to serve their needs. As a commodity shipper, we can easily lose business to Australia and other meat-producing countries.”

Jamie Overley, CEO of East Coast Warehouse & Distribution, described some of the challenges for ports. Larger ships mean more concentrated volume and the need for sufficient terminal space for more inbound-outbound containers, he said. Ports also need to invest in systems and technology to handle increased truck flows.

As for the transportation infrastructure, he said, “In the U.S. we have decaying roads and bridges, and lack of adequate funding.” Overley also mentioned shipping capacity constraints because of ongoing consolidation and alliances. Rail also has their work cut out, he said. Coal and energy have long been the “bread and butter” for railroads, but as these segments decline, the railroads must focus more on consumer goods, intermodal and other business and “win back” this business from the trucking sector.

Javier Botello, director of business development for Americold, pointed to changes in the consumer market that are impacting cold storage providers and by extension, other partners in the cold chain. “Today there are more customized orders and a greater variety of temperature requirements. Americold and other service providers in the cold chain are asked to do more value-added services,” he said.

The food industry’s response to changing customer demands mean a lot more local food is sourced from micro-suppliers, which adds to distribution complexity and more labor-intensive work, Botello explained. Furthermore, “We’re filling trucks with 50 to 100 different SKUs now and making smaller, but more frequent deliveries. Retailers, meanwhile, are striving for supply chains that are closer to the point of sale, and they’re optimizing their inventories so they’re not as big as before.”

Food safety is also an issue that’s moved to the forefront for all parties in the supply chain. “The heightened awareness on food safety is making recalls more prevalent. It’s not that food is less safe today. It’s that the industry is more diligent,” he said. “Technology innovations are enabling industry to be better equipped to handle recalls, so we can respond quickly, accurately and identify the affected product.”

To build a seamless and integrated cold chain that supports temperature-controlled products as they move from farms and manufacturers to end-users throughout the world, every transportation and logistics provider must be excellent and bring to the table a willingness to be flexible, creative, innovative and collaborate with other stakeholders — providers and shippers alike.

Tong Zhu, chief commercial officer for container and real estate at The Northwest Seaport Alliance, said ports play an important role in helping shape the cold chain of the future. That role and responsibility is changing, too. “The days of simply being a landlord port are over. We must play a role in driving a higher level of service in terms of reliability and consistency,” she said. Ports can also influence the types of development that take place. For example, Zhu said, “We can be intentional in choosing the types of business we want to attract on port-owned land, and help drive and facilitate operational solutions.”

The NWSA is investing millions of dollars in infrastructure improvement projects, Zhu said. Marine terminal operators are adding more reefer plugs to accommodate growing reefer capacity. Lineage Logistics is expanding its cold storage facility in Tacoma — tripling frozen capacity at the facility to more than 93 million cubic feet in the Pacific Northwest region, and Preferred Freezer Services has made a significant investment in Washington State. The company’s Richmond facility is the largest public refrigerated warehouse in North America and the largest automated freezer in the world.

Much of the exported reefer cargo handled by the NWSA originates in the central U.S. and moves by rail to the port complex, Zhu said. “Our gateway is dual-served by UP and BNSF. They are capable of adding more capacity, 30 to 40 percent more, to grow along with the rise in shipments of temperature-controlled products.”

The NWSA is already one of the top U.S. export gateways for reefer shipments, and Zhu expects to see more growth. “Growth in exports through our gateway is bright,” she said. “While the strong U.S. dollar dampened some of that activity, growing demand in Asia for protein as well as safe, quality American food is strong. The growing middle class population in China, India and Vietnam coupled with consumers’ willingness to pay a premium for American food is a plus.”

On the import side, growing ethnic diversity and population growth in the state will continue to drive expansion in temperature-controlled imports, she said. Free trade agreements also are helping boost the global reefer market, Zhu added.

According to Overley, technology is becoming as important as cost selection when it comes to supply chain partners. Technology improves speed, agility and ability to handle temperature-controlled products safely and quickly to avoid waste and foodborne illness while assuring optimal shelf life. It’s also key to responding to the challenges associated with e-commerce and omnichannel fulfillment.

Like other cold chain executives, Overley envisions the cold chain of the future will provide complete product visibility, optimal product lifecycle, reduced costs and maximum flexibility that will exceed customer expectations.