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Steady outlook for reefer demand

Global reefer output built up momentum in 2018, and the pace of production has continued to hold into 2019

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FUWA built a record 18,000 TEU of reefer containers in 2018
FUWA built a record 18,000 TEU of reefer containers in 2018

Global reefer production picked up strongly in 2018, when buyers committed to their biggest investment in more than five years, and it has continued to hold steady so far during 2019. Nevertheless, reefer prices have fallen in recent months, as the box manufacturing sector continues to grapple with some significant overcapacity.


Last year, global output more than matched its previous high (of 2015), in both TEU and investment terms, and stood second only to the all-time record set in 2011. Moreover, if 2019 proves to be as good a year as 2018, it will break with the recent pattern, whereby peak years have been interspersed with much weaker ones and so resulted in a fluctuating rate of reefer uptake. This occurred throughout the 10-year period 2008-17, when yearly production ranged between highs of 250,000-300,000 TEU and lows of 100,000-150,000 TEU.


Same again


World reefer box output amounted to 282,000 TEU (143,000 units) in 2018, which was up by 20% on 2017 (235,000 TEU) and almost 80% above 2016. Production had already topped 100,000 TEU (50,000 units) for the opening five months of 2019, hinting at a similar total for this year as was achieved last. One year ago, in the five months up to June 2018, reefer output had likewise amounted to a little over 100,000 TEU, with the leasing sector accounting for much the same 50- 55% share as so far in this year. Both years have also been dominated by the same two lead purchasers Maersk Line and SeaCube Container Leasing. Even the mix of production is broadly comparable for the two years, with a total of 3,000 x 20ft, 49,000 x 40ft high cube and 1,500 specials (mainly 45ft and 53ft) undergoing construction in the opening five months of 2019.


Nevertheless, if 2019 is to match the global performance of 2018, demand will again have to be sustained throughout the second half of this year. The current signs are promising, given that up to 30,000 additional TEU is presently forward-booked for delivery over the next month or so – and this runs ahead of the current year’s peak season period (which should dominate the fourth quarter). The world fleet has recently surpassed 3M TEU (equivalent to almost 1.5M units), representing another milestone, growth amounted to more than 5% globally during 2018 and,even though the rate is predicted to be a little lower for 2019, it will (at 4% or more) still be in keeping with the recent longer-term average. Moreover, as in 2018, there is again the strong likelihood that more than half of all reefers will be purchased for replacement during 2019, rather than purely fuelling fleet expansion, which contrasts with earlier years (when reefer disposal was much lower).


Rental expansion is expected to be higher than for the shipping company owned fleet, and could once again run at more than twice the percentage rate. In 2018, the leased reefer fleet was enlarged by over 7.5%, which compared to the lines’ 3%, and this had followed many years of similar disproportionate growth. By 2019, the leasing sector had gained control of half the world reefer fleet, compared with nearer a third back in 2011, and it is forecast to take delivery of much the same 145,000 TEU of new reefers during the current year as was received last year. Shipping lines, together with other transport companies, will acquire the balance, which amounted to roughly 135,000 TEU in 2018.


Mixed outlook


Despite the underlying strength of demand, the outlook for the reefer box manufacturing industry has remained somewhat mixed. It has long been controlled by just four major names (CIMC Group, Singamas Group, MCI and FUWA), all of which manufacture in China. Their production lines may have been busier in 2018-19 than during the leaner period of 2016, but there is still some overcapacity, and finished prices have been adversely impacted by the continuing intense level of competition, even if materials costs have tended to fall again in recent months.


By early 2019, the 40ft price-average was lower than at any time in the past decade or more, as it then resided below US$15,000 for a ‘standard’ build specification (and including machinery). The price was down by at least 10% on its level of one year earlier, at the start of 2018 (when the 40ft price last exceeded US$16,000), and compared with the US$15,000 or greater still being attained throughout 2016-17, when demand was far weaker. Although some of the more recent reduction is clearly attributable to a decline in machinery costs, the box building side has also taken a hit and been forced to undercut its former price minimum, of around US$8,000-9,000 (per 40ft), which had previously been the norm for many years.


A symptom of the difficulty was revealed last year from the abrupt closure by MCI (Maersk Container Industry) of its relatively new reefer factory in Chile. This ceased activity in June 2018, having been in production for barely three years. Crucially, MCI-Chile had never come close to running at its maximum potential, which could have exceeded 40,000 TEU/year, despite being located in an area of high reefer demand, and having a dedicated plant manufacturing Star Cool machinery alongside the main box building line. However, the whole operation was unable to compete with the mainstream industry in China and, following its shutdown, all the company’s reefer manufacturing (including boxes and machinery) was concentrated back at MCI Qingdao, its main site, which has been in almost continuous use for 20 years. As a result, the global reefer box building industry is once again, as a whole, centred on the Chinese mainland.


The disappearance of MCIChile was, nevertheless, accompanied by the start-up of a brand new factory (also at Qingdao) by Singamas, working in conjunction with the world’s top machinery producer, Carrier Transicold. This had opened for business in April 2018. Their aim, coincidentally, is the same as that which has been long promoted by MCI, namely to produce a fully integrated reefer design at one site, thereby avoiding the need for machines to be shipped in from a separate (and often distant) location.

Sell-off


However, in one of the most dramatic changes to have affected the reefer box sector in years, Singamas has more recently made known that it plans to sell both its new Qingdao and longer-established Qidong reefer factories to the Dong Fang box manufacturing arm of the Cosco Group (see box story below). This transaction will form part of a much larger sale involving much of Singamas’s dry freight manufacturing business, and is due to be completed later this year. Dong Fang has, to date, only focussed on standard box construction. Proceeds from the sale will go to pay off debt and raise additional working capital for Singamas.


Meanwhile, another relative newcomer, FUWA (Guangdong FUWA Equipment Manufacturing Co), entered the fray three years ago, in 2016, whilst the world’s top reefer box building name, CIMC, had pursued a major upgrade in the two years prior to this (2014-15) with its opening of two brand new factories at Taicang and Qingdao. These substituted two older CIMC sites that had been operating since the 1990s, and were closed. Singamas too had opened its other current site (in Qidong) at around the same time, thereby replacing the former Reeferco plant. In short, all of the current existing reefer capacity (with the exception of MCI-Qingdao) has been brought on stream in the past five years.

 

The collective capacity of all plants is currently calculated at around 430,000 TEU/year (assuming some degree of multishift working), with the overall figure up slightly on that of a year ago. The aforementioned closure of MCI-Chile removed some surplus, although it has been more than redressed by the Singamas/ Carrier venture, which has added a further 60,000 TEU of annual capability to that already existing. FUWA was also to enhance its operation in 2018, albeit by only a small amount. Otherwise, the capacities of other more-established factories – comprising those of CIMC, Singamas and MCI – are relatively fixed, and not likely to undergo much change in the near future. A little below half of global capacity is controlled by CIMC, in keeping with its share of output, leaving over a quarter presently in the hands of Singamas, an approximate fifth with MCI, and 5% with FUWA.


Overcapacity


This capacity potential is clearly at odds with demand though, given that the latter has never resulted in an annual production volume much greater than 250,000- 300,000 TEU. In fact, the average for the past decade has been closer to 200,000 TEU per annum, which is equivalent to less than half of all current capacity. Manufacturing will thus have to be increased by well above 50%, on this average, to absorb the worst of the excess and this is unlikely to occur in the immediate future, even if fleet expansion holds steady and the requirement for replacement units continues to rise. Little wonder, therefore, that there are no more plans for any additional reefer box factories, or plant upgrades, in the present pipeline.


However, reefer demand is expected to be sustained, as reflected by the continued investment being made by shipping lines and lessors, both large and small. In 2018, the leasing industry’s reefer purchase was dominated by five major companies, with the same participants also active in 2019. SeaCube has remained the front-runner, although Triton International Ltd (TIL) has cut back considerably this year. Even so, the latter is still in the top rank of reefer buyers. Textainer, Seaco and Beacon have each increased their reefer expenditure (so far) this year, compared with last.


The top five names have accounted for over 95% of all reefer deliveries made to lessors this year to date. SeaCube, alone, received more than 20,000 TEU (mostly as 40ft high cube) in the opening five months of 2019, with Textainer accounting for over 10,000 TEU. Seaco and Beacon purchased around 8,000 TEU and 6,500 TEU, respectively, leaving 5,000 TEU for TIL and 2,000 TEU for newcomer Sun Intermodal. By comparison, TIL already acquired 18,000 TEU through January-May 2018, which then ranked it alongside SeaCube.


On the shipping line side, the top group has changed more markedly, even though Maersk Line has retained its leading position. The only other major lines to have committed heavily again in 2019 are Cosco and Evergreen, as the likes of Hapag-Lloyd, Chiquita and Yang Ming Line have proven much less active than in 2018. They have been replaced by CMA CGM and OOCL, together with various smaller firms – headed by Seaboard Marine, King Ocean and Samskip – all of which have resumed reefer buying in 2019. Yet others, including the Chinese duo SITC and TS Lines, Wan Hai Lines, PIL, Tropical Shipping, Crowley and Eimskip, were prominent in 2018, but are largely absent this year. CMA CGM has already acquired more than 10,000 TEU as reefers to date in 2019, compared with 6,000 TEU going to Cosco, 4,000 TEU to Evergreen and 2,000 TEU toOOCL. Just about all of this production is 40ft high cube, with the majority of 20ft destined either for leasing firms or smaller transport operators.

Mostly mainstream


As is implicit from the overall production total, the majority of reefer building factories have long been focussed on mainstream 40ft manufacturing, with just two (out of the total six) carrying out more specialised work. CIMC’s Qingdao site operates a customised line to meet the growing demand for domestic and other specialised reefer containers (mainly 20ft, 45ft and 53ft length), while some customised construction of 20ft, 40ft and 45ft domestic reefers is similarly carried out by FUWA. Such manufacturing is largely destined for smaller transport operators, often focussed on domestic inland trading, and more than 40 of these have been active reefer buyers in 2018 and 2019.


FUWA, after achieving a record sale of 18,000 TEU as reefer in 2018, constructed close to 4,000 TEU during the latest January-May period, much of which is understood to be of special type. By contrast, CIMC’s two factories delivered more than 45,000 TEU as ‘standard’ 40ft high cube reefer throughout the opening five months of 2019, plus around 2,000 ‘special’ units of 20ft, 45ft or 53ft length. MCI-Qingdao managed a total of close to 30,000 TEU, all of mainstream type – including a significant share that went to its Maersk Line affiliate. It pointed to a further 5,000- 10,000 TEU presently on order and due for imminent delivery, while adding that the factory’s total sale of Star Cool machinery had surpassed 18,000 units for this year. By end-May, Maersk Line had already received around 10,000 x 40ft high cube reefers in total, which added to the approximate total of 30,000 units acquired throughout 2018.


The two factories operated by Singamas have built a little over 20,000 TEU through January-May 2019, with the newer Qingdao site accounting for the majority of business. It accounted for two thirds of all Singamas’s output, leaving the remaining third to be met by the existing Qidong plant. This situation was reversed in 2018, when the combined production of the two factories fell just short of 25,000 TEU, but the Qidong factory then accounted for two thirds, against one third from Qingdao. However, the performance of the latter was limited in 2018 because it had only commenced operation during the second quarter period and so had not been operational for the whole year.


Divide and rule?


Singamas’s design capacity is put at 60,000 TEU/year, and production currently divides between that of integrated design (as developed by Singamas in joint venture with Carrier) and more conventional construction, utilising machinery sourced from elsewhere. The established Qidong plant is also rated to 60,000 TEU/year, which was its original installed capacity. Both factories are understood to be predominantly focussed on mainstream 20ft and 40ft reefer manufacture.


CIMC’s two reefer factories have a combined annual capacity of approximately 200,000 TEU, the majority of which is centred at the larger Qingdao site. However, there remains more scope for the Taicang plant to be expanded in the future, should demand ever warrant it, as this site is more heavily focussed on volume manufacturing than Qingdao (with its ancillary involvement in more customised construction). CIMC reefer lines were actually kept relatively busy in 2018, when their combined output of 160,000 TEU indicated an average utilisation rate of about 80%.

 

Production was also split two thirds to Qingdao and one third Taicang, implying that both factories were probably achieving much the same rate of operational efficiency, despite the Qingdaofactory’s involvement in more complex manufacturing. However, CIMC’s relatively good productivity in 2018 had followed two weaker years, in 2016-17, when its overall rate of annual output had been closer to 100,000 TEU (and was thus equivalent to 50% of capacity).


Nevertheless, CIMC’s longer-term performance has generally been better than that achieved by some of its rivals. Singamas (as is apparent) has been operating at a relatively low rate of productivity for several years in succession, with the current year unlikely to show much improvement. The company’s overall capacity rating may have been doubled last year, to a maximum of 120,000 TEU per annum, but without a significant rise in output, productivity could fall even lower than the 30-40% utilisation averaged since 2015. It has yet to be seen how the impending transfer of its reefer operation to Dong Fang might impact performance.


MCI’s productivity has been generally high, although (as hinted) its Chile factory was never able to run at anything near to its design potential. MCI-Qingdao has proven more successful, and largely maintained a steady twin-shift operation in recent years. Its current annualised capacity is calculated at around 90,000 TEU, assuming 40ft production, and the factory also achieved an approximate 80% rate of productivity during 2018. Much the same is being forecast for 2019, with this level of utilisation viewed as being sustainable over the long term.

 

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