LOOKING INSIDE THE BOX: EVIDENCE FROM THE CONTAINERIZATION OF COMMODITIES AND THE COLD CHAIN Jean-Paul Rodrigue Dept. of Global Studies & Geography, Hofstra University, New York, USA Theo Notteboom ITMMA - University of Antwerp and Antwerp Maritime Academy, Belgium European Conference on Shipping & Ports – ECONSHIP 2011 Chios, Greece, June 22-24 2011 TIMEFRAME: 25 minutes

What’s in a box? Do you really know me? Growth Factors Market Potential What’s in a box? Commodities in Containers Commodity and Cold Chains The container is more than a transport unit; a supply and commodity chain unit.

Growth Factors for Containerization

Containerization as a Diffusion Cycles: World Container Traffic (1980-2010) and Possible Scenarios to 2015 Adoption Acceleration Peak Growth Maturity 1966-1992 1992-2002 2002-2008 2008 - New (niche) services Productivity gains Reference Network development Productivity multipliers Divergence Depression Source: Drewry Shipping Consultants. Niche markets Massive diffusion Network complexities

The Main Driving Forces of Containerization: The Importance of Niches Derived Economic and income growth Globalization (outsourcing) Fragmentation of production and consumption Substitution Functional and geographical diffusion New niches (commodities and cold chain) Capture of bulk and break-bulk markets Incidental Trade imbalances Repositioning of empty containers Induced Transshipment (hub, relay and interlining)

Market Potential

Commodity Group and Containerization Potential Category (SITC) Examples Containerization (Existing or Potential) Food & Live Animals Meat, Fish, Wheat, Rice, Corn, Sugar, Coffee, Cocoa, Tea Low (grains) to high (coffee, cold chain products) Beverages & Tobacco Wine, Beer, Tobacco High Raw Materials Rubber, Cotton, Iron ore Commodity specific Fuels & Lubricants Coal, Crude oil, Kerosene, Natural gas Very limited Animal & Vegetable Oils Olive oil , Corn oil Chemicals Salt, Fertilizers, Plastics Low to average Manufactured Goods Paper, Textiles, Cement, Iron & Steel, Copper Machinery & Transport Equipment Computer equipment, Televisions, Cars Very high (already containerized) Miscellaneous Manufactures Furniture, Clothes, Footwear, Cameras, Books, Toys

Growth Factors behind the Containerization of Commodities Outcome Growing availability of containers More containers available on freight markets. Ubiquitous transport product. But: container shortage peaks and slow steaming Rising demand and commodity prices More commodities in circulation (usage of containerization to accommodate growth). New producers and consumers (marginal markets penetration). But: equipment mismatch Fluctuations and rises in bulk shipping rates Decrease in the ratio cargo value per ton shipping rate for commodities. Volatility (rates) and risk (hedging). Search for options to bulk shipping. Low container shipping rates Increase in the ratio cargo value per TEU shipping rate for commodities. Relative rate stability. Containerization more attractive as an option. But: rate stability under pressure Imbalances in container shipping rates Export subsidy for return cargo. Empty containers repositioning Pools of containers available for backhauls. But: equipment and locational mismatch

CRB Index (CCI), Monthly Close, 1970-2011 Paradigm shift in input costs… Reaping the consequences of monetary policy. Could be positive for containerization… Source: Commodity Research Bureau. http://www.crbtrader.com/crbindex/

Income per Capita and Perishable Share of Food Imports “Permanent global summertime” Source: adapted from Lufthansa Consulting, 2009. http://www.choosewindsoressex.com/downloads/data_hub_Mirja_Nissen.pdf

The Usual Suspect: China’s Share of the World Commodity Consumption, c2009 Source: United States Geological Survey (2009), BP Statistical Review of World Energy (2009), Food and Agriculture Organization of the United Nations (2008), International Monetary Fund (2010).

Continuous Commodity Index and Baltic Dry Index, 2000-2011 (2000=100)

Continuous Commodity Index and Average Container Shipping Rates, 1994-2011 (1994=100)

From Bulk to Containers: Breaking Economies of Scale Container as an independent load unit. Minimal load unit; one TEU container. Entry Barriers Limited differences in scale economies for a producer. Incremental / linear cost-volume function. Required Volumes New producers (smaller). Product differentiation (larger variety). Market Potential The variety factor in penetrating the commodity sector.

Containerized Cargo Flows along Major Trade Routes, 1995-2009 (in millions of TEUs) Source: UNCTAD, Review of Maritime Transport, various years. Empties; an export subsidy

Commodities in Containers

Challenges for the Containerization of Commodities Issues Container availability Locational and load unit availability. Weight Limitations to about 30 tons (40 footer). 20 footer the preferable load unit (26-28 tons). Balance between retail, intermediate goods and commodities

Challenges for the Containerization of Commodities Issues Container preparation Pre-use and post-use cleaning (avoid contamination). Dedicated containers? Container loading, unloading and transloading Bulks difficult to load horizontally. Vertical loading / unloading (equipment). Transloading issues. Source loading.

Challenges for the Containerization of Commodities Issues Weight distribution Containership load (10-14 tons per TEU). Trade imbalances create mitigation strategies.

Challenges for the Containerization of Commodities Issues Land consumption at port terminals Space consumption (4 times more than bulk) mitigated by velocity.

Asymmetries between Import and Export-Based Containerized Logistics Distribution Center Customer Inland Terminal Import-Based Gateway Many Customers Function of population density. Geographical spread. Product customization. Incites transloading. High priority (value, timeliness). Repositioning Supplier Export-Based Few Suppliers Function of resource density. Geographical concentration. Lower priority. Depends on repositioning opportunities.

CONTAINERIZED COMMODITIES AND COLD CHAINS

Bulk and Containerized Commodity Chains: An Emerging Complementarity Cost / volume driver Low frequency Dedicated terminals One way flows Bulk Commodity Chain Supplier Customer Port Point-to-Point Consolidation center Time / flexibility driver High frequency General terminals More balanced flows Complementarity Container port Pendulum Services Intermodal terminal Containerized Commodity Chain

The Cold Chain: A Highly Constrained Niche Conditional demand Each product has a specific perishability. Shelf life and revenue. Demand conditional to qualitative attributes. Load integrity Reefers as the common load unit. Packing, packaging and preparation. Empty backhauls. Transport integrity Uninterrupted integrity of the transport chain (modes, terminals and DC). Specialized modes (speed) and terminals? Shipping lines adapting their speed based on the reefer level of the trade lane. Point to point services.

Conditional Demand: Shelf Life of Selected Produce Optimum Temperature (Celsius) Apples 90-240 Bananas 7-28 14 Bell Peppers 12-18 10 Cabbage 14-20 Carrots 14-28 Onions 30-180 Grapes 10-25 Oranges 10-15 7 Potatoes 30-50 Strawberries 5-10 Tomatoes 7-14 12 Various other factors are also at play in addition to temperature, including moisture and ethylene sensitivity.

Conditional Demand: Lettuce Shelf Life by Storage Temperature

Temperature Integrity along a Cold Chain Potential integrity breach Temperature Range Temperature Potential integrity breach Time Transport Unloading – Warehousing – Loading Transport

Reefers and Source Loading: Securing Cold Chain Integrity Cold Transport Chain Transit Time (days) Typical Shelf Life (days) Refrigerated truck / Cold-storage facility transloading / Air 4-5 30-35 Refrigerated truck / Cold-storage facility transloading / Maritime shipping 15-16 Source loading with Reefer / Maritime shipping 55-60 Gain 25 days of shelf life (10 days net gain)

Slow Steaming: Potential Impacts on Commodities and the Cold Chain Longer transit times may compromise some cold chains. More containerized inventory tied in transit (heavier use of modes and terminals). More containers for the same flow capacity (10-30%?). Lower availability of containers in the hinterland.

Conclusion: Commodities and the Cold Chain as Value Propositions Retail and intermediate goods Commodities (balancing) Cold chain (revenue) On some trade routes, the cold chain is the main driver for growth and revenue (South America / Europe).