Summary
A shortage of refrigerated containers, and an in-balance in their geographical distribution is seeing raising reefer freight costs and a rescheduling of shipping services to seek to address the in-balance. This could potentially carry costs for smaller ACP exporters of perishable product exports to Europe. This situation is complicating efforts to deal with cost increasing effects of the rules of origin/MFN tariff complication and phytosanitary certification requirements for perishable products shipped along triangular supply chains, through re-routing such to direct shipment to either the UK or EU market.
Press reports suggest ‘a lack of refrigerated containers and sky-high shipping costs’ could threaten South Africa’s prospects for record citrus exports (1). According to the maritime shipping consultancy Drewry ‘a weighted average of rates across the top 15 “reefer-intensive” trade lanes jumped 26% in the first quarter’ of 2021. Rates reached ‘their highest level since the reefer index was launched in 2017’, with ‘demand for specialised reefers….at a decade-long peak’ (2). Further rate increases are expected. This is particularly the case since the ‘reefer trade has struggled to compete with higher paying dry cargo traffic for space’ (2).
There is seen as being a major ‘challenge globally in repositioning of reefer equipment to places around the world where they are needed.’ Surging demand for general freight movement out of China to the US, South America and the EU is not only driving up freight rates bit also seeing vessel space being reallocated to support repositioning of reefer containers. This is ‘causing an equipment stockpile in China.’ The recent blockage of the Suez Canal will have compounded pre-existing problems in this regard (1).
This freight crisis has already impacted on South Africa deciduous fruit exports, with what are described as ‘devasting consequences’ for exports. Reports carried by theloadstar.com, indicated the reefer container sector was ‘far from coping with the seasonal demands of perishables’ (2).
This being noted globally ‘the recovery in seaborne perishables trade is expected to be muted this year by the Fusarium TR4 disease afflicting banana production.’ The Philippines, the second-largest banana exporter has been ‘notably affected by the diseases, where exports contracted by as much as 18% in 2020.’ What is more there are reports of outbreaks in Peru, with this causing concerns in neighbouring Ecuador, ‘the world’s biggest banana exporter’ (3).
Against this background, ‘reefer container freight rates … are expected to remain high’ throughout 2021, with these high prices being ‘supported by continuing disruption across the container supply chain’ (3) Indeed, it is suggested rates could remain high for at least two years (4).
The shortage of reefer containers and rising freight rates is seeing shipper-carrier relations hitting an all-time low. According to Drewry ‘the carriers are very opportunistic and take high-rate spot shipments rather than contract shipments – it is all about money.’ Some carriers are reportedly not even honouring ‘minimum quantity commitments’, thereby forcing shippers to use higher priced spot market services. Along some routes, surcharges are also being faced (5).
Drewry reports freight rate increases have been such that ‘freight spend budgets and sourcing decisions are now on the radar in boardrooms across the globe.’ Indeed, the situation in regard to relations between shippers and carriers has become such the European Shippers’ Council (ESC) ‘continues to urge the EC competition and transport office to “take prompt action” to investigate the behaviour of carriers’ and take regulatory action if required (5).
However, the harsh reality faced is that ‘prices are being pushed upwards by cargo owners with urgent shipments who are prepared to pay premium rates to obtain an empty box and a booking guarantee’ (5).
In terms of the immediate prospect for South African citrus exports it was reported on 14th May the ‘world’s largest specialized reefer vessel, the Cool Eagle’ arrived in Durban, with this helping to ease concerns about the availability of shipping capacity for citrus exports. It is now expected South Africa growers will meet the record-breaking export target of ‘163-million cartons of citrus during the 2021 export season’ (6).
Growing supplies of citrus exports from Southern hemisphere suppliers are being supported by the Covid 19 linked surge in citrus consumption (7). Global demand for citrus is expected to continue to grow in 2021 ‘although at a slower pace than in 2020’ (8).
| Comment and Analysis If despite its size and commercial power, the massive South African citrus industry has concerns about the impact of the availability of reefer containers, the question arises how will smaller ACP fresh produce exporters cope with the rising reefer chargers and capacity shortages? To put this in perspective, the second largest ACP citrus exporter ships to the EU a volume only 8% of that of the South Africa, with only 4% of the value. For major sea freighted cargoes such as mangoes, the tonnages involved for major ACP exporters are only 7.5% of the volume of South Africa citrus exports and 10% of the value. For most ACP countries the commercial power of ACP perishable sea freight exporters is marginal compared to that of the South African citrus industry and insignificant compared to major agri-food exporters such as Brazil, Peru, and Ecuador. In this context, it is likely to be ACP perishable exporters who depend on sea freight who feel most acutely the current squeeze on reefer capacity and rising freight rates. This will compound the problems created for air freighted perishable exports as a result of Covid-19 linked travel restrictions, which not only severely curtailed the availability of passenger based freight capacity, but are now stifling the nascent recovery which was underway in some ACP regions (most notably East Africa) (see companion epamonitoring.net article ‘East African Air Freighted Horticulture and Floriculture Exports to UK facing Devastation Given UK ‘Red List’ Travel Restrictions’, 13 April 2021). The international freight difficulties being faced by ACP perishable fresh produce exporters are further being compounded by the complications generated along existing supply chains by the Brexit process. The creation of a new EU/UK customs and regulatory border is making it difficult to use single ports of landing to serve both the EU27 and UK markets. These complications take two distinct policy driven forms: the rules of origin/MFN tariff complication and phytosanitary certification complications. Citrus and other perishable sea freighted ACP cargoes landed and shipped across an EU/UK border will lose any tariff preferences enjoyed under trade agreements with the final destination countries, if such trade takes place outside of customs supervisions (under the Common Transit Convention, which is an exceedingly difficult and expensive process to access). This is a serious issue in the citrus sector where high MFN tariffs are faced if citrus consignments are relegated to the status of ‘stateless goods’ when onward traded across an EU/UK border. For the last reliable recorded year, the mutual EU/UK trade in oranges was over 164,000 tonnes, for a value of almost €128 million. While the bulk of this is accounted for by Spanish production (around 77,000 tonnes), a trade totalling some 44, 000 tonnes, involves imports and exports to and from the Netherlands, France, and Ireland; with this trade valued at around €32 million. This accounted for around 5% of ACP exports of oranges to the EU28 market in 2019. In terms of overall citrus trade, mutual EU/UK trade was 456,682 tonnes, with some 76.4% coming from Mediterranean citrus producers and some 19.1% taking place with neighbouring countries involved in the re-export trade (Netherland, France, Belgium, and Ireland with the Netherlands dominating and Ireland in second place). This mutual trade was valued at €74.4 million. To the extent this trade involves re-exports of ACP citrus fruit traded across a UK/EU border outside of customs supervision, high MFN tariffs will be faced, despite the nominal duty-free access granted under trade agreements with both the UK and EU. It is unclear what volume and value of ACP trade is affected by this issue. Mutual EU/UK Trade in All Citrus Fruits (fresh and dried) (0805)
Source: EC Market Access Data Base, https://trade.ec.europa.eu/access-to-markets/en/statistics?includeUK=true * Since 1 January subject to the need for the issuing of a phytosanitary re-export certificates by the UK authorities ° Will be subject to the need for the issuing of a phytosanitary re-export certificates by the EU authorities from 2022 For other sea freighted cargoes such as mangoes, the rules of origin/MFN tariff complication is not an issue, since the MFN tariff for mangoes is zero. This being noted the majority of the top ACP fruit, vegetable and cut flower exports face duties of above 10% or between 5% and 10%, if onward traded across an EU/UK border outside of customs supervision. However, for citrus and other perishable supply chains which go through the UK to the EU (i.e., to the Republic of Ireland) problems related to phytosanitary certification also arise. This is a result of the UK’s departure from the common EU phytosanitary regulatory regime which has seen the imposition on 1 January 2021 of standard EU phytosanitary import controls on imports crossing from the UK (and will see similar standard phytosanitary import controls introduced by the UK on goods crossing from the EU in 2022). This now requires the UK authorities to issue phytosanitary re-export certificates for citrus products onward traded from the UK to the EU. This adds to costs and can cause delays in onward shipment of perishable products while the process of issuing phytosanitary re-export certificates is completed. Simple unilateral initiatives are required on the UK side to expedite the re-issuing of phytosanitary re-export certificates (clearly designating officials to deal with this process and published schedules of fees for the re-issuing process). For some products this issuing of phytosanitary re-export certificates is not a straightforward task, since phytosanitary re-export certificates need to be accompanied by the original phytosanitary certificate issued by the designated authority in the producing country. However, since the 1 January 2021 the UK has not required phytosanitary certificates for the entry of citrus and some 10 other products to the UK market (see table below).
This is a divergence from EU requirements where a phytosanitary certificates issued by the designated authority in the producing country are still required for entry to the EU market. This can pose a serious challenge for the onward export from the UK to the EU of citrus and other products where UK and EU phytosanitary certification requirements now diverge. Put simply, if there is no original phytosanitary certificate accompanying the cargo, there is no basis for the appropriate UK authority to issue a re-export certificate. Without a re-export phytosanitary certificate and the original phytosanitary certificate these products would be denied entry to the EU market. This phytosanitary certification complication along ACP-to-UK-to-EU supply chains can be avoided by ensuring an original phytosanitary certificate is sent along with the initial consignments exported to the UK when onward shipment is envisaged. However, the issuing authorities in the ACP country may be unaware of this new complication and may be unwilling to issue a phytosanitary certificate for exports to the UK for products where this is no longer a formal requirement. If so, this issue will need to be addressed prior to exporting. Alternatively, if only a small part of the consignment is to be onward shipped from the UK to the EU this may be seen as a needless additional expense by the company concerned. This is a commercial calculation which will need to be made in light of the wider cost increases faced in shipping the affected products along triangular supply chains requiring movement across an EU/UK border and the costs of using alternative direct shipping services. This is where the current shortage and rising prices of reefer containers comes in. This is causing significant adjustments to shipping schedules, which is constraining the ability of smaller ACP exporters of perishable sea freighted produce to make routing adjustments in response to the new post Brexit trade complications along traditional triangular supply chains. |
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Sources
(1) Freshfruitportal.com, ‘South African citrus Freight capacity and infrastructure may be tested to the limits amid container shortage’, April 12, 2021
https://www.freshfruitportal.com/news/2021/04/12/south-african-citrus-freight-capacity-and-infrastructure-may-be-tested-to-the-limits-amid-container-shortage/
(2) theloadstar.com, ‘Shipping lines can’t cope with booming perishables trade and lack of reefers’, 6 May 2021
https://theloadstar.com/shipping-lines-cant-cope-with-booming-perishables-trade-and-lack-of-reefers/
(3) freshfruitportal.com, ‘Refrigerated container rates up by a quarter in Q1’, 6 May 2021
https://www.freshfruitportal.com/news/2021/05/06/refrigerated-container-rates-up-by-a-quarter-in-q1/
(4) theloadstar.com, ‘At least two more years of freight rate pain for shippers as carriers ‘cash in’, 6 May 2021
https://theloadstar.com/at-least-two-more-years-of-freight-rate-pain-for-shippers-as-carriers-cash-in/
(5) theloadstar.com, ‘Shipper-carrier relations hit ‘an all-time low’ – ‘it’s all about money’, 29 April 2021
https://theloadstar.com/shipper-carrier-relations-hit-an-all-time-low-its-all-about-money/
(6) freshfruitportal.com, ‘South African citrus industry welcome world’s largest reefer vessel’, 17 May 2021
https://www.freshfruitportal.com/news/2021/05/17/south-african-citrus-industry-welcome-worlds-largest-reefer-vessel/
(7) freshfruitportal.com, ‘Southern Hemisphere to export more citrus in 2021’, 18 May 2021
https://www.freshfruitportal.com/news/2021/05/18/southern-hemisphere-to-export-more-citrus-in-2021
(8) gestion.pe ‘Procitrus expects that global demand for citrus will continue to grow this year, although at a slower pace than in 2020’ 17 May 2021
https://www.freshplaza.com/article/9321513/procitrus-expects-that-global-demand-for-citrus-will-continue-to-grow-this-year-although-at-a-slower-pace-than-in-2020/