The South America East Coast Reefer Cargo : A Diagnosis of a Competitive Market

The transport of perishable goods under refrigeration is relatively new in shipping history, and refrigeration was not popularized before the beginning of the Nineteenth Century, in spite of the fact that sea transport for goods is dated from over 5,000 years. Foodstuff transportation between regions was possible only in short distance and perishable goods were not even considered transportable. According to Waals (2010), “To bypass this problem, in 1879 the first ice-making machinery was Abstract

It can be considered that the elements for a consistent refrigerated cargo trade development only came after World War II ending, as merchant ships could cross the Oceans and deep sea trades recover its frequent and regular basis; European countries were all under reconstruction and needed to be supplied (foodstuff inclusive); South American countries have had all production conditions to start a significant export trade of products like meat and fresh fruits.
Nowadays, according to the Brazilian Poultry Raising (União Brasileira de Avicultura -UBABEF) 1 in 2010 Brazil has exported 5.7 millions of tons of meat, with 3.9 million referred to as poultry 2 .Also in 2010, Argentina has exported 395,000 tons of fresh fruit only from Patagonia area 3 , mainly apples and pears, confirming the importance of these two countries in the perishable trade.
This study aims to understand the characteristics and recent development of reefer cargo international sea transport in South American East Coast, including Brazilian, Argentinean, Uruguayan ports and also Paraguayan cargo loaded on transhipment operation.The paper is divided in three sections.The first one describes global reefer cargo transportation general characteristics, i.e., the system comprised by reefer container itself, goods packaging, plugging devices and facilities in port terminals and ships with proper equipment to carry reefer containers.The theory background is based upon the analysis of competitive and structural recent changes in the industry due to a concentration process.The second section reports recent development in five main market aspects: (1) Cargo flows; (2)  Ports infrastructure; (3) Post-Panamax vessels operation and consequent economies of scale; (4) Shippers and carriers' mergers and acquisitions processes and (5) Containerization process.Finally, third section analyses the relationship between shippers and shipping liners and the recent merging process impacts in the competitive environment.

Global reefer cargo transportation market
It is important to quote the technical definition of perishable cargo: "Article that can lose its usefulness and value if not appropriately stored or transported or if it not utilized within certain period".(Business Dictionary, 2011) This paper focuses on perishable cargo, not only sensitive to time but also with a clear need of temperature controlling 4 .
Other settings may also be required like the humidity to prevent dehydration and ventilation to remove ethylene gas (and its effect on fruits' ripening).The temperature control represents a determinant factor for successful refrigerated goods transportation, in a way that temperature control responsibility is a constant carriers and shipping lines concern as temperature diversions are one of the main reasons for cargo damages and claims (MMS, 2006).In this sense, specialists 5 also say that product practical shelf life will be determined by three key factors: cargo preparation, preservation and packaging and the transit time and temperature composition.(Maersk, 2006)   So far, there is no technology available to reverse goods' deterioration caused by temperature effects.Hence the temperature control must be done all through the supply chain, from origin to destination.Any error or miss in temperature control during transportation could have consequences for the remaining cold chain links.This actually explains why perishable goods are almost a synonym of refrigerated cargo or just reefer cargo, as it is usually known in the industry.The paper is focused on foodstuff segment due to its major share in the South American East Coast trades, as further is demonstrated.
Reefer cargo transportation, despite its higher costs and risks (in comparison with general dry cargo), can be considered as a maritime container market worth niche with a remarkable development in the last ______________ Galvão Cassia Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732years, following the several changes that occurred in the international logistics of perishable goods.In fact, shipping this kind of goods became cheaper and trustable and supermarkets and retailers can keep products' range less seasonal, inducing new consumers' habits of foodstuff.
The historic background demonstrates that technological development could not only make shipping industry more diversified, but the market itself expanded.Figure 1 shows in a nutshell the main route directions of perishable goods: very much concentrated in the South-North trade.

The Fleet
Nowadays, the reefer fleet can be divided in two main groups: full reefer vessels and reefer containers.The reefer container is a typical sea-freight container, i.e., a metal box with standard measures in order to secure international standardization and operation on vessels, terminals and Lorries (chassis), and it is equipped with special devices to control inside temperatures.
The sea-container appeared in 1956 created by Malcon McLean and its measure standardization a little later facilitating cargo consolidation and vessel operation 6 .Containers have been largely used in reefer market following mechanical and chemical refrigeration systems' development as portable units.Stopford (2009)   The combination of container, refrigeration portable systems (adapted to containers composing reefer containers) and the development of liner services 7  The containerized fleet capacity has surpassed the full reefer capacity (see Figure 2) due to its advantages as: suitability to smaller lots of cargo; unbroken cold chain (as mentioned before, a key factor for success in refrigerated transport); minimum; intermediate storage elimination and possible door-to-door deliveries (as the container can be carried by lorry to any place).______________________________________________________________________________________________________________ ______________ Galvão Cassia Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732For certain trades, specifically due to volumes and port pairs involved, the full reefer ships present advantages over the container such as: faster transit time, due to the much reduced number of port calls and direct transhipment from vessel to vessel (more relevant in the case of fish catching).In this regard, it is relevant to quote the information provided by Dynamar Consultant (2010) which clearly shows that since late 1990's and all through the following decade there was an increasing number of reefer plugs in a higher proportion that the TEU nominal capacity has increased in the same period.This means that the reefer plug capacity ratio per vessel TEU capacity has increade from 9% in ealy 1990's to 15% in 2010.
As demonstrated, full reefer vessels' capacity is decreasing, as every year larger vessels go on scrapping as new vessels are taken place to service.The direct consequence of this process is cargo containerization.Table 1 shows the forecast until 2015, as presented by Drewry (2010).Unless nothing changes in this trend, one could conclude that the containerization process is moving to a complete substitution of traditional full reefer vessels.How long this process will last, it will depend on how full reefers can survive or re-invent their features, which can be considered very difficult considering the trades' trend as detailed in the next section.

The Cargo
In the last 10 years, perishable cargo reefer volume corresponds to over 50% of the total seaborne volume, as authors analysed from Drewry Reefer Shipping Market 2010/11; FAO database 2005, GTIS, 2006 and Sextant Consultancy.This information alone gives also an important hint on future studies of reefer cargo transported by other transport modes, but for the purpose of this paper, the analysis is concentrated on the seaborne transport of goods.
Table 2 shows perishable foodstuff world trade evolution from 1983 to 2005 resulting in a stable growth rate.That behaviour can be explained by demand for products on regular basis (non-season variations) and increasing population with stable income (indicated by meat group present and forecasted share and exotics as more expensive products, see Tables 4 and  5).The Southern Hemisphere can produce perishable goods during Northern Hemisphere winter, and the fact that Northern Hemisphere has still the largest population (UN, 2011), perishable trade flow is much South-North oriented.

The market
The reefer market can be described, in this paper approach, by a general market 8 composition as the product is transport service offered by reefer carriers (conventional and container); the market place is all the ports located in the South American East Coast as a geographical scope determination; the price is sea freight rates by container, as product/service is the transportation from origin to destination and not the vessel charter; finally the way that carriers offer their service to customers, typically exporting goods firms to all possible trades.The classical market characterization can be applied by relevant information: number of players; product homogeneity and of barriers of entry existence.The product/service (transport) can be considered in general as homogeneous; transport services from A to B, but each company may offer some kind of differential on trade as transit time, vessel type, logistics services, etc.Nevertheless, products/services offered by reefer container carriers cannot be easily replaced by the conventional reefer carriers.Actually, in many cases, the containerization process is a one-way road as reverting the process implies in major additional operational costs.
A clear barrier of market entry is the expressive capital requirement, not only for setting up the service (vessel charters and/or leasing of reefer boxes), but also service management capability, as specialized knowledge is required to combine reefer cargo seasons as well as equipment typology and adequate transit times to products shelf life.For reefer market characterization, Stopford (2009)  commented that: "Perhaps the most interesting aspect of the refrigerated cargo trade from the maritime economics viewpoint is the competition between different transport modes of type of cargo".(Stopford, 2009  9 , power over the reefer carriers can be neutralized; 3.In buyers' side, an increasing growth in their bargain power resulting from an expressive concentration process via mergers and acquisitions' operations can be identified.
4. There is a remarkable concurrence between carriers, and the rivalry is aggressive and permanent.
In other words, the reefer carriers' profitability will depend on their interrelationship, as their reduced number could result in a high interdependence in their pricing policies.This was for sure a very brief application of theoretical competitive analysis to reefer cargo.The market complexity can certainly be approached by other theories that could supplement or even replace the analysis.This, surely, can be a theme for further studies and researches and the theme, regardless of its importance, was considered by authors as being beyond this paper focus.

South American East Coast Reefer Cargo: Market Particularities
The

The cargo flow
The cargo flow analysed presents two basic aspects: first, the imbalance between outbound (exports) and inbound (imports) cargoes.As previously stated, the South American East coast is typically a refrigerated goods exporting area.Therefore, reefer import trades are much smaller in absolute as well as in relative terms, as shown in Table 4.Over the past six years (from 2007 to 2013), reefer imports are growing, as a consequence of the macroeconomic situation (pushed by Brazilian internal market and US Dollar exchange rate to Brazilian Reais and Argentinean Pesos), but it is still a much smaller market than exports.This imbalance leads reefer carriers to an unpleasant situation, lack of return cargo for reefer ships and/or reefer containers.This adds costs which impact shipping liners' pricing policy. 10 5.This fact can be explained by the increasing Brazilian share in foodstuff supply to countries like Saudi Arabia, Iran, Venezuela, Egypt, and, of course, China.

Ports Infrastructure
There is certainly more than one way to analyse ports' infrastructure.The data available for the reefer cargo per loading port is rare and time series were not found to identifying the evolution of ports' capacity for reefer cargo.Table 7 demonstrates container terminals' predominance over conventional reefer ships' terminals.Also, relevant is the official draft informed by ports' authorities: with few exceptions, ports' vast majority presents an average draft of 10 to 11 m, which limits the operation of vessel with larger capacity like the Post-Panamax.
The information collected from the main terminal operators (as per Table 8) give a better main reefer cargo load ports' overview.Nevertheless, South American East Coast ports do not look like the same, but they present infrastructure and operation capital resemblance with a few exceptions 11 .The main ports are still the same established in colonial times, located inside city areas and therefore with limited capacity of expansion or renovation.In general, ports and mainly terminal operators have improved their capacity and structure to meet reefer cargo in containers' requirements.This is clear by crossing the information given on Table 4 and Table 8 (with the equivalent 40rh boxes per week reaching 9,222 in 2012 against a plug capacity of 19,290 in 2010).However, these ports' problems affecting reefer cargo are not exclusively related to perishable products' characteristics, but also to several bottlenecks linked to public ports' policy reflected in accesses from land and by water (dredging still limited to geographical conditions) and terminals' capacity (considering the fast international trade increase versus lead time to build and operate new port areas) improvement requirements.

Post-panamax vessels' operation and respective economies of scale
As mentioned before, carriers all over the world have increased the relation of reefer plugs per TEU in new bigger vessels, as a consequence of reefer cargo containerization.This is a global trend; as South America is one of the main reefer areas, the size of vessels calling the region has also increased.Figure 7 shows an interesting chart of ships capacities' evolution over the last few decades presented by Hamburg Süd, one of the market leaders in the South American East Coast trades.
It is clear that carriers are looking for operational optimization and economies of scale provided by bigger ships, and take advantage of the profitability of reefer cargo share as part of the cargo mix.In this regard, Mr. Simon (Hamburg Süd Reefer department Director) interviewed, said: "The shipping line of course benefits from economies of scale, as with larger capacity we need fewer ships for the same weekly services, but the reefer slot is an expensive investment for carriers, as the power consumption on board increases and also the risk exposure of transporting more perishable cargo on the same vessel."Potentially, rates' cuts could be resulted from Freight Forwarders' actions regarding their traditional consolidating volumes' approach for bargaining volumes and prices.But, this also, as it was identified in the interviews, did not take place (until nowadays, at least).Freight Forwarder participation in reefer business is still low if compared with direct freight market by shippers (3.0% in 2010).

Shippers and carriers' mergers and acquisitions processes
Another interesting phenomenon in South American reefer market is the remarkable concentration process both at shippers' and carriers' sides.Statistic data gathered demonstrate that at both sides shippers (demand) and carriers (supply) have consolidated their operation in several mergers' and acquisition processes.
In The containerization process certainly requires a more detailed investigation which is not the case here, but it is important to consider as phenomena still taking place in the South American east coast trades.

Conclusion
This paper's first important conclusion is that reefer cargo has several trades, flows and transportation requirements, which characterise it as a very specific market niche operated by specialists.The risk of transporting reefer goods is much larger than the general cargo, and therefore shipping liners involved have to be more dedicated and specialized, resulting in a more concentrated market.
As it was previously quoted, oligopoly market operation could be summarized as follows: (1) Reduced number of players; (2) clear barriers of entry; (3) low probability of substitutive services/products in the short term and (4) uncertain and interdependence among agents regarding their pricing policies.
As, especially in Brazil, the containerization process is coming to its end, carriers' efforts are concentrated in their strategic share in the reefer container business.As it was demonstrated, South American reefer market has passed by an important concentration process, leading carriers and shippers to different and more balanced bargain power in their operations.
It is possible to preview that South American perishable goods' trade will keep growing in the coming years, especially considering that Brazil has still a lot to grow in as global player in the foodstuff market 18 , and Argentina has still a significant volume of reefer cargo to containerize in Patagonia and Up River areas.On the other hand, it would be skittish just to say that it will happen in three or five years, as perishable trade market depends very much on economic factors affecting foodstuff international trade and on local infrastructure to support export trade volumes.This paper aimed to analyze this important niche in maritime freight market, focusing on reefer traffic in the South American East Coast.It was possible to conclude that the industry, both sides (shippers and carriers) showed relevant and recent concentration processes.Therefore, from an academic IBIMA Business Review ______________________________________________________________________________________________________________ ______________ Cassia Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732point of view it has accomplished its explanatory purpose on reefer market at the South American East Coast, but is far from exhausting research possibilities in this specialized and demanding niche market.______________________________________________________________________________________________________________ ______________ Galvão Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732 18For example, Brazil is not participating in the fresh banana trades, one of the international reefer business main commodities.
gave the required elements for a rapid and consistent trade of reefer containers.The first reefer container liner service was established in 1971 from Australia and New Zealand to U. S. A. West Coast and further during the 1970s to Europe.(Hamburg Süd, 2010)

Table 2 :Table 3 :
World trade in perishable foodstuff (Mt) Remark: Includes land and seaborne trades Source: Authors' elaboration based on Stopford (2009) based and FAO Yearbook and FAO Yearbook of Fishery Statistics Tables 2 and 3 show the main foodstuff products transported.Cargo seasonality and flows pushed by demand determine how reefer carriers have to operate their fleet, considering not only their risk and return, but also the fact that foodstuff distribution channels are organized on weekly basis.In this regard, the main questions should be: How to operate on weekly basis if the distances between markets are different?How to combine the seasons with the limited capacity increase in the short term?How to get alternative utilization to reefer vessels and reefer ______________________________________________________________________________________________________________ ______________ Galvão Cassia Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732containers during the off-season periods?All these questions remain still as captivating challenges to specialized carriers.Seaborne transport market share of main reefer commodities 2000-2010 Source: Authors on elaboration of data based on Drewry Reefer Shipping Market 2010/11 based on FAO database 2005, GTIS from 2006 and Sextant Consultancy

Table 4 :
______________________________________________________________________________________________________________ ______________ Galvão Cassia Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732South American East Coast Exports vs. Imports (in TEUs) Source: Authors elaboration based on Dataliner/Centronave (2012) When analysing the reefer trades of exports' volumes, it is remarkable how the Middle East and West Africa have increased their share (almost doubled) in the overall trade in a relatively short period (from 2006 to 2012).At the same time, European trades have lost position, as shown in Table

Table 5 :
South American East Coast reefer container share (in % of TEUs) Source: Authors own elaboration based on Dataliner/Centronave (2011) Table 6: Commodity share at South American East Coast ports (all in TEUs, export only) Source: Authors own elaboration based on Dataliner/Centronave (2011) The fresh fruits' share can vary from year to year depending on seasonal factors, like weather and competition with other growing areas (apples from Chile or citrus from South Africa coming at the same time onto European trades).The other commodity groups have more or less stable share and development over the years.The overview on these database calls attention on the increasing concentration of meat group over the period 2006-2012.IBIMA Business Review ______________________________________________________________________________________________________________ ______________ Galvão Cassia Bömer and Robles Leo Tadeu (2014), IBIMA Business Review, DOI: 10.5171/2014.309732