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Hefty reefer rate rise irks shippers

Posted to Far East Maritime (by on February 20, 2013

Maersk wants to get its US$1,500 rate increase per refrigerated FEU and is prepared to lose business over it.

The attempt by Maersk Line to extract an additional US$1,500 per reefer FEU across the board has understandably put the wind up shippers.

JBS, the world’s top meat shipper, took a dim view of the increase that Maersk began to levy on January 1 and made its views known at the recent Georgia Foreign Trade Conference in Sea Island.

“It isn’t us shippers that are pushing down reefer rates,” a JBS exec told Maersk’s US boss during one of the panel discussions. “It is you carriers.”

General rates increases and a host of surcharges slapped on at various times of the year have long created bitterness between carriers and their customers. The lines maintain they need to drive rates up to sustainable levels and cover additional operating costs during peak seasons, the shippers point to the supply and demand curve that is generally ignored by the carriers.

Few of the GRIs stuck after March last year and various sources say the huge reefer rate hike, or “RRR” as Maersk calls it – reefer rate restructure – has been at most 30 percent successful.

However, the container lines do have a point. Reefer rates are way too low and do not support the massive investment required to operate a fleet of refrigerated containers. At the GFTC event earlier this month, US executives from carriers Maersk, CMA CGM and Hapag Lloyd explained the costs of offering a reefer service, and the numbers are incredible.

Maersk spends US$1.7 billion on its reefers every year. $1.7 billion! The Danish line decided against investing an additional $500 million in the fleet because of the poor rate environment.

CMA CGM is required to pour in $150 to $200 million a year, with each reefer costing %50,000 to place in the trade, plug in and provide a generator.

Hapag Lloyd said a reefer container cost $18,000 to build against $4,000 for a standard dry box.

Compounding the problem are the high costs of repositioning reefers because of the huge imbalance around the world, especially on the Europe-Latin America trade. The CMA CGM exec said the line spends $100 million a year getting empty boxes to where they need to be.

So no one is arguing about the high cost of operating a reefer fleet. What is getting up shippers’ noses is that Maersk decided to levy the rate hikes globally and not on an individual trade basis. The supply and demand balance is different on all trades and shippers argue that to hit all trades with such a huge increase will have a serious impact on their competitiveness.

The supply and demand fundamentals will remain the same, regardless of what the rates do. On those trades where space and equipment cannot handle demand, the rates will be forced up. On other routes where there is excess capacity and low demand, the rates will fall. This will prompt the carriers to further reduce rates to fill ships and it will end up being a race to the bottom.

Shippers such as JBS argue that the reefer rate increases should be lane specific, based on supply and demand and introduced in consultation with shipping line customers.

Whether the market will eventually accept the $1,500 increase remains to be seen, but Maersk is determined to see it stick and is prepared to lose business as a result.