A November 13th report published by United Nations Framework Convention on Climate Change (UNFCCC) reported, that despite the current pledges signed by 195 nations (Paris Climate Agreement) to reduce emissions, in 2030 emissions will still be 9% higher than it was in 2010. The Intergovernmental Panel on Climate Change says the world needs to decrease emissions by 45% by 2030 compared to the baseline year of 2010 to avoid a climate change calamity.

In a recent interview, Greg Tuthill, the chief commercial officer at SeaCube, a New Jersey-based container leasing company specializing in reefers, was asked what at this moment in time is the most challenging aspect of the reefer business? Given the expansive number of factors that influence the movements of reefers any number of answers would have been appropriate. But Tuthill was quick to reply, “I think the most challenging area will be the cost of compliance and cost of decarbonization...”

While the reefer industry, like everyone else, is dealing with many other issues, the overarching challenge is how to handle climate change or more to the point, the expensive challenge of decarbonizing ocean shipping — especially temperature-controlled reefers carried by the ships. And there is a sense of urgency to act now as reports like the UNFCCC’s November 13th evaluation of the shortfall in the efforts to reduce emissions clearly points out.

As Tuthill indicates, “This [compliance to environmental mandates] is going to put some pressure on operators, suppliers, and producers to make sure that we’re doing the right thing to save the planet. And what I mean by that is alternative fuels, more efficient reefers, more environmentally friendly refrigerants. It all comes at a cost. But the cost and investment is worth the dividends — which is cleaner results, lower emissions, lower greenhouse gases.”

The Reefers’ Slot in the Supply Chain

It seems at odds with market conditions — ocean freight rates are bouncing along at rock bottom levels with an over 30% decline — but the orderbook for containerships is the largest in history with nearly 8 million TEUs on order. The tally, (according to Alphaliner statistics) consists of over 920 ships, many exceeding 20,000 TEUs. And as expected, much of this newbuild capacity is concentrated in the top tier of containership operators such as MSC, Maersk, CMA CGM, COSCO, Hapag Lloyd, Evergreen, ONE, HMM, Yang Ming, and Zim.

And what comes with more TEU slots is more reefer plugs and reefer capacity. With the newbuildings the growth rate of reefer plugs is expected to be over 3% this year, over 2% in 2024 and 5% in 2025. This growth reflects a trend over the last few years where the number and percentage of reefer plugs on new generations of ultra-large containerships has risen compared to previous generations of boxships.

As Greg Tuthill explains if “10% of the vessel is reefer”, it requires an increase of 20%-30% of the vessel’s total power consumption to support the reefers’ operation. For example, aboard a 23,000 TEU vessel with a capacity of over 1,100 reefer plugs at 100% utilization, requires 30% more energy demand of the vessels main operating plant. This results in a significant amount of additional fuel burn to maintain the reefer operating requirements.” “So, it makes for a compelling argument to make sure operators focus on more efficient reefer operations…and make sure they aren’t increasing the power consumption from the [vessel’s] main plant to make sure they hit their targets with the IMO [International Maritime Organization],” Tuthill says.

The IMO targets are very much in play for boxship operators and have helped underwrite the newbuilding spree. It is estimated that over 10,000 vessels could be scrapped as a result of being unable to meet the IMO targets. [See AJOT 10,000+ vessels face being scrapped within three years after ‘pivotal’ IMO shipping announcement]

While the IMO formula is both complex and controversial, there are a number of targets that are rapidly approaching with the environmental mandates. [See IMO Chart below]. Coming up in 2025 the Energy Efficiency Design Index, better known as EEDI Phase 3 (only for new ships), will require a 30% reduction in carbon intensity to take effect. The EEDI has different goals for different types of ships. In the case of mega container ships (200,000 dwt built after April 1, 2022) it must be 50% more efficient than the baseline. In 2030 a reduction of CO2 emissions by at least 40% from the 2008 baseline. And by 2050 CO2 emissions must be cut by 79% and total Greenhouse Gases (GHG) emissions by 50% from the 2008 baseline.

But it isn’t just ships that have to be compliant. With reefers being such an important component of the power consumption in the transit, they too could be prematurely rendered obsolete by IMO mandates. Tuthill believes this is happening with reefers like it has with ships, “So, I think what we’re finding is refrigerated containers will start to have a replacement ratio that’s probably shorter than it was or has been, because of the technology efficiency and the demand on operators to make sure their operations from a reefer perspective are more compliant.”

The Reefers’ Edge

Another reason for the uptick in reefer slots is simply the resilience of the reefer trade – reefers usually hold their freight rates better than dry boxes – although the surge in demand coming out of COVID was the exception. Tuthill in his analysis of reefer performance said, “2021 was an anomaly just because freight rates were so high. But if you look across the last 10 years, in terms of rate stability, reefer demand cargo growth, predictability, and perishable cargo profitability for the (shipping) lines, the reefer trade held up better than most other commodities, and the reefer trades seem to be more resilient.”

Tuthill added that the predicted growth rate for 2024 is about 4%. But stability doesn’t mean there isn’t change in the reefer market.

As with the ships and the reefers, “climate change” is causing “more outsourcing now than ever before,” according to Tuthill. Climate change is putting a lot of pressure on growing regions. That in turn puts pressure on suppliers to find alternative sourcing which often costs more. “For instance, citrus used to be primarily coming from Florida and now there are sourcing options out of South Africa. Avocados primarily come from South America and Mexico, and now there are sourcing options out of Egypt. So, there’s all these alternative sourcing options that are creating more and expansion in reefer traffic and longer transits”

Having more sourcing options has made the perishable sector able to better survive what Tuthill calls “supply shocks”. Many of these “supply shocks” are natural disasters, like droughts, flooding, hurricanes, earthquakes, and alike. [Editor’s note: A recent IMF Blog entitled “Climate Change is Disrupting Global Trade” outlines how drought has impacted the Panama Canal and threatens the maritime infrastructure and international trade.]

But even with the increased outsourcing and “supply shocks” the perishable business tends to be a North-South trade, and even with vast improvements in reefer technology they are long and demanding voyages. For that reason, whether it is slow steaming, blank sailings, port omissions or simply longer routes — whatever adds days to the transit, ultimately impacts the equipment and alters the fluidity of the supply chain.

To a degree, reefers tend to suffer less than dry cargo in terms of being subject to slower transit services. “Of course, the longer the transit, the more equipment is needed for any trade because of the equipment velocity decreasing.

In terms of reefer trades, typically there are services that are kind of targeted for reefer trades that are not slow transit, but faster transit. So, they try to preserve some of those services to cater to the reefer shippers, importers, and traders,” Tuthill said.

The Reefer Reimagined

It is often said that “necessity is the mother of invention” and climate change is the “necessity” nudging, if not pushing, invention in liner shipping. And the “reefer” as a facet of that paradigm is undergoing technological changes. When Tuthill was asked about how much the reefer is changing as part of the quest to be more compliant with IMO mandates, Tuthill said, “Obviously the machinery is going to continue to advance. Compressors will be more efficient; evaporators will be more efficient. The machinery itself will probably continue to be designed with better technology that’s tied to controllers, to make it more efficient. On the container side itself, I think there’s going to continue to be advancement in some of the insulation, foaming and construction being lighter, more sustainable, and more durable.”

There already has been some other technological innovations in temperature management, mostly in domestic trades, such as running three different temperature environments in a single unit. But Tuthill points out there is “the idea of trying to be more efficient with tri-modal. What I mean by that, is between vessel, truck, rail,” with the goal of improving efficiencies and with that addressing environmental goals over the entire supply chain.