Since the global financial crisis, the container shipping industry has been plagued with government bail-outs, huge corporate losses, and an ever expanding fleet of mega vessels. But the 2016 collapse of South Korea’s Hanjin Shipping, seemingly triggered a new era of reform across the container shipping industry.  Nevertheless, critics reflect on a conservative, even archaic, industry which has been too slow to modernize and adapt to change, and wonder if we are really witnessing a ground zero moment when the tide is at last turning and shipping lines can begin to claw their way back to profitability after years of losses. Or have those operators who made such heavy weather of their recovery from the financial crisis of 2008 still not regained full control of the levers they will need to see them through the coming storms which undoubtedly lie ahead?

Here Peter West who is the Director of the supply chain and logistics company Maia Global, brings Fruit Juice Focus up-to-date with the latest changes in the container shipping industry, recent problems and the likely impact on the international trade of fruit juice products.

The new container shipping landscape

In addition to the shockwave of the Hanjin bankruptcy, several rounds of mergers and acquisitions have seemingly created a new order in the shipping community: Maersk Line have bought the family-owned Hamburg Süd, CMA CGM have secured the NOL Group, Hapag Lloyd have acquired UASC, to mention just a few of the recent realignments.

Even more importantly, this has prompted the introduction of three new mega alliances designed to achieve economies of scale, address the excess capacity problems and maintain more sustainable freight rates – all problems that have constantly dogged the industry. These mega alliances will now line up as follows:

•  2M (32.3%): Maersk (18.5%) & MSC (13.8%)
• Ocean Alliance (26.1%): CGM CMA (10.5%), COSCO (8.0%), Evergreen (4.8%) & OOCL (2.8%)
• The Alliance (16.4%): Hapag Lloyd (7.1%), Yang Ming (2.8%) & the Japanese carriers 1 (6.5%)

The Alphaliner Top 100 2 shows that the container shipping industry still regards itself as very fragmented, with the main carrier still only controlling 18% of the market and the top five controlling a total of 58%. However, further analysis of the cumulative capacities of above-mentioned carriers, shows they control 75% of overall capacity, with the remaining 25% handled by niche carriers on smaller trades. Using those numbers, it means that the number one carrier Maersk Line controls approximately 25% of market capacity and the whole 2M alliance commands 43%.

Despite all this seemingly positive news for the container shipping industry and ever-increasing geopolitical features such as regional trade wars, the escalating risk of terrorism, and growing legislative burdens, it remains vital that the global container shipping industry persist with its transformative initiatives.

Recent changes to carrier services in Europe and the effects on juice producers and customers

From March to May this year the carriers have been implementing the changes to services and rotation as the new alliances come into force, with shipments from Europe being heavily impacted as a result. Space then became an issue for the hub ports as the backlog built up. For example, we have seen containers of juice that have sat at the hub ports for more than 35 days – which is unheard of. In my whole experience of the industry I have not seen containers purposely miss more than two.

The problem hasn’t stopped there. When the containers finally get shipped and arrive at their destinations they have been unrefrigerated for more than five in transit in direct sunlight which raises the issue of potential spoilage of the juice and the compensation and insurance issues. You then have the situation where there has been a shortage for those past five weeks because there is no supply coming in which in turn means that the customers have had to scramble to get other supplies from elsewhere. When the containers finally arrive they inevitably end up with far too much stock.

The outlook for customers in the fruit juice trade

Life is no easier for customers in such an uncertain environment where service contract priorities seem to dictate that choosing a carrier who will still be trading in a years’ time is arguably more important than sourcing the lowest freight rates.

However, seemingly unnerved by the market volatility, exporters and importers are increasingly adopting short-term pricing strategies, effectively gambling on container spot rates in the hope that the market may soon revert to back its downward trend. So, when recommended to lock in rates and commitments for 2017, a customer will invariably ask: ‘But what if rates go down?’ This is the wrong perspective in the current climate because, whilst occasional falls can never be ruled out, the real risk is that substantial increases are much more likely.

The general effect of industry restructuring has been to limit carrier options and services. So with the newly consolidated carriers now inclined to be much more cautious and inflexible, freight forwarders are trying to fill the void by leveraging their global relationships to make life somewhat easier for customers.

All these factors influence market behaviours and can be illustrated by referencing some of these effects on two major trade juice trade lanes:

China to US

The transpacific trade lane from China, carries around 67% of all imported Apple Juice Concentrate to the USA 3. In a sector where packaging and logistics can make up as much as 35% of the delivered cost, managing these spikes will be key to maintaining profitability.

Rate volatility on this trade lane can be demonstrated by looking at the price movements over the past 5 years for dry containers from China bound for the USEC. Average prices in 2012 were USD2500/20’, bottomed at USD550/20’ in 2016, rose sharply to above USD2500/20’ in the wake of the Hanjin failure, and are now hovering around USD1900/20’.

The apple juice producing season clashes with the retail peak seasons moving on this trade lane. So with the transpacific peak season approaching, it is expected that shipping rates will continue an upward trend over the next two quarters.

Brazil to Europe

The South American trade lanes have always been the traditional preserve of major carriers such as Maersk Line and Hamburg Süd. JOC.com estimated in a recent study that if Maersk is successful in acquiring all of Hamburg Süd’s assets, the new conglomerate could control as much as 80% of the market on some major trade lanes from South America 4.

Rate movements on the Santos to Rotterdam trade lane for refrigerated containers dropped from USD3200/40’ in 2012, bottomed at USD1450/40’ in 2016 and since then, have been recovering slowly having now reached around USD1900/40’. Now the Southern hemisphere growing season is well underway, and with the Brazilian orange juice production season  starting this May in Sao Paulo state, we expect rates on these lanes to continue an upward trajectory for at least the next 6-12 months.

Future implications

With industry consolidation well underway, plus a raft of changes in carrier services, the expectation is that carriers are set to remain in the driver’s seat for the foreseeable future. Viewed objectively, available capacity has not reduced but has instead increased, even though the locus of control is now very much in the hands of a few. As these carriers push to increase rates, keep their vessels full and meet new rotations, it seems very likely that the second half of 2017 will precipitate a significant increase in rates – a bloodbath which may once again test the industry’s resilience. Expect many exporters and importers to adopt tactics such as desperate, ad hoc pricing strategies and increasing safety stocks in response to price instability and uncertainty surrounding service performance.

But over the next 2-3 years, rates will again stablise and return to levels at or below the current market. Major trade lanes will be serviced by larger and more economical vessels, bunkering costs are likely to remain at or around their present low levels, and the overall service costs will correspondingly decrease. The recent expansion of the Panama Canal has at last opened this ocean corridor allowing larger vessels from Asia to gain greater access to the US East Coast, which should lead to a long-term reduction in the East vs. West Coast rate differential. And the world will return to normal, if such a term exists anymore.

Gerald McDonald & Company have been supplying the food and drink industry for 100 years. Since 1917 their mission has remained the same – to source the finest quality ingredients for their customers. Demand from the fruit juice industry for more exotic and unusual ingredients has been on the increase in recent years as consumers tastes become more adventurous, and Gerald McDonald are rising to meet the challenge. Fruit Juice Focus talks with Maxim McDonald a director of the company to find out more about this fascinating side of our industry. 

Fruit Juice Focus (FJF): Gerald McDonald has been in the ingredients market for over 100 years now. Can you tell us a bit about the background to the company and how the company has developed over the years?

Maxim McDonald

Maxim McDonald (MM): The company was started in the City of London in the UK over 100 years ago by my great grandfather Gerald J. W. McDonald trading as a spice merchant dealing in herbs and spices. Back then spices were considered an exotic product and the company became well known for being a specialist in this area. Over time they decided to expand into juices, and my grandfather Gerald I. M. McDonald started this side of the business in earnest back in the 1950s when he joined the Citrus Fruit Juice Control Committee. This government backed organisation was set up to help promote fruit juices as a good source of vitamin C in a time of austerity when the government was looking at different ways of getting people to consume vitamin C. From then-on the fruit juice side of the business grew and grew with Gerald McDonald building a name for itself in both the ingredients and the fruit juice market and eventually buying into a citrus processing company in Italy known today as Agres.

We stayed in the City of London up until the year 2000 when we moved out to Basildon, a town 30 miles east of London, in the county of Essex. The decision to move came about primarily due to the need for more space and to consolidate all our activities such as blending, warehousing and administration more efficiently under one roof.  We couldn’t just stay as a trading company any longer, time had moved on and customers wanted more from their supplier.

FJF: Can you tell us how the ingredients market has developed in recent years?

MM: The ingredients market is a lot more interesting and varied than it used to be and there are a lot more products that are available now. In the earlier days it was really just the citrus products – your standard orange juice and lemon – and maybe some of the soft fruits but now there is a whole plethora of choices, I think that is happening with everything. there’s a lot of niche markets opening up, not just for general ingredients but for fruit juices as well.

FJF: Can you tell us about some of the more unusual ingredients you are currently working with?

MM: There is one we are working on at the moment which is a washed seaweed purée. We have been developing this with Agres.

This seaweed that has been specifically farmed and cultivated with the purpose of creating a seaweed purée that can be used in juices and a wide range of other food products. Unwashed it has a fishy smell and taste to it which some people either love or hate, but we have eliminated this through the washing process to produce an ingredient that has a neutral colour and flavour. The benefits of using this in juices and other food products is that it is a rich source of minerals and trace minerals, vitamins, antioxidants, amino acids and fibre and is a particularly good source of dietary iodine – all of which will appeal to the health-conscious consumer purchasing juices with this as an ingredient.

We have been working to wash, process and pack it in asceptic bags and we have introduced lemon to acidify the purée as it has a high ph content. We are pleased with the results and have now launched the product into the market. Feedback from customers has been promising since the sample packs were sent out.

Other more unusual ingredients that we deal with include:

Aloe Vera juice which boosts the immune system – high in vitamins, minerals, amino and fatty acids. Our product has a low aloin content so it does not have the bitterness normally associated with some Aloe Vera products.

Prickly Pear, a fruit from the cactus Opuntia cactus plant – our company in Agres is the biggest processor of Prickly Pear in Europe, which is done to a very high quality in 54 Brix Clarified, 38 Brix Puree, NFC and organic formats. This has been growing in popularity with the rise of cactus water products available in the market. It’s also very eco-friendly as it does not need a lot of water to grow.

FJF: How do you go about sourcing ingredients 

MM: Because we have been around for a long time we know quite a few of the suppliers in the market just from our history but we also travel around the world to visit existing and new suppliers to see what they are offering, to do audits and to check they have all the correct accreditations – that’s something that is becoming more important now as well. We also attend food shows such as the Anuga food fair and the SIAL food innovation exhibition to meet suppliers.

Some of the ingredients trends go in cycles because the prices can vary from year to year for some of the fruits we use. It will depend on what the farmers can get for the fruit. For example, if they feel like it’s not in their interest to produce a crop due to poor price returns then they quite often just stop growing the fruit and move onto something else.

FJF: Can you tell us a bit more about the research and development side of your ingredients business?

MM: We have a team of dedicated people working in our research and development (R&D) who also work in our laboratory checking and monitoring samples. We are finding that the R&D part of the business is becoming increasingly important for our customers. Until recently they undertook their own R&D and just asked us to supply the ingredients to match what they were looking for, but now we are finding more and more customers are coming to us asking for our opinions, advice and suggestions which has added a whole new side to our operation.

HRH Duke of Gloucester and right, Matthew Cousins technical manager

We deal with customers both large and small and, as you would expect, most of our larger customers will have their own R&D facilities. However, for the smaller companies, those for example who might be just starting up in the fruit juice business our R&D facilities provide an important service. A company may come to us with an idea for a drink made up of some unusual exotic ingredients but will not be sure whether the ingredients or blends will work from a production point of view let alone the taste angle.

We sit down with them and explore all the options from the costs of sourcing the ingredients through to the practicalities of the blending and production process giving as much advice and direction as we can in the early stages. For example, they might have what they think is a brilliant and novel idea for their juice which includes an ingredient that is quite difficult to source at certain times of the year. Picking the wrong ingredient could be a costly mistake. It might be ok if the company is still small in five years’ time but if suddenly sales explode and their chosen ingredients are hard to get then they are going to have major supply and production issues leading to delayed or cancelled orders from their customer base leading to people being let down. Therefore early discussions on appropriate ingredients has to be taken into consideration.

FJF: Do you work with clients from around the world or just in Europe?

MM: We import the ingredients from around the world and store them in our specialist warehousing facilities prior to processing and supplying them to our customers. But our customer base is mainly the UK along with exports to Europe and to a growing market in Asia.

Coming back to the Asian market. Last year we opened an office in Japan – Gerald McDonald Asia –  which hasn’t been officially announced yet so this is an exclusive for Fruit Juice Focus! The plan is to replicate in Japan what we are doing here in the UK. And we are going to be exporting a few juices to customers in Japan and also importing juices from Japan back into Europe.

Gerald-McDonald, Maxim McDonald and HRH Duke of Gloucester looking at Yuzu juice

One particular juice we are looking at is yuzu which is a citrus based juice with a taste that is a mix of lemon, mandarin and grapefruit. An interesting taste with a lot of health benefits. Yuzu juice is reported to have three times the amount of vitamin C than normal lemon has and it is beginning to be used in quite a few restaurants in the UK. Waitrose, the UK supermarket chain, has a berry blend that has a bit of yuzu in it and there are some tonics with yuzu in them also. We are now starting to import yuzu from Japan with a view to taking advantage of the predicted demand.

Interestingly the yuzu tree can take many years to grow to full fruit bearing maturity leading to yuzu becoming a very precious fruit. In Japan people not only love yuzu juice, they also use its peels in tea or for seasoning purposes in foods and they even float them in the bath for skin care! The yuzu tree can live for 100 to 300 years or more.

FJF: With your own blending facilities and a research and development lab as well as a packaging facility are you self-sufficient in the whole process of sourcing through to delivery?

MM: Yes, I think that’s definitely one of the value-added services that we offer. As well as blending we then have the ambient, chilled and frozen storage option so everything is stored under BRC conditions and if customers want frozen juice instead of asceptic juice for instance then we can supply that.

We employ more than 50 staff in the UK now and we looking to expand the blending facility as we still have space on this site. For the moment that is! The Basildon location has good links with ports and motorways with the London Gateway and Tilbury port close by and many large companies are settling here including Costa the leading coffee retail chain who have their main UK roastery here.

FJF: Can you tell us about some of the challenges you as a business face going forward and the industry as a whole?

MM: Timing is always a challenge in the fruit juice business because unfortunately nature doesn’t always do what you want it to! Sometimes crop seasons can be late. For instance, this year we were supposed to be getting offered lemon prices from producers in Argentina in March but they are only just starting to come through now. A lot of customers were expecting lemon to be ready much earlier but it has been considerably delayed. This has been due primarily to the weather in the north of Argentina where a lot of the lemon crop is grown. There has been extensive, unseasonal rain and a lot of flooding so it hasn’t been physically possible for anyone to pick the lemons off the trees. You have customers wondering what’s happening and what’s going on and you are trying to hurry things along to get the fruit and the prices in but it’s so unpredictable at times like this.

There is obviously the whole sugar tax issue which affects our customers more than us but in a way we haven’t really seen the full effect of it yet. Because we deal a lot with citrus products like lemon which is not associated with being bad for you it hasn’t really been a problem for us so far. The soft drink companies have really acted quickly to change their recipes before it is actually implemented which is a good thing as we thought they would take much longer to react.

As a business we have high hopes for the Japanese market and are closely watching to see how it goes. It is a very difficult market and we plan to be there for the long term as it will take a while before things really take off there. As mentioned earlier we now have an office in Kobe staffed by Japanese colleagues and we are off to Japan next month to display the company’s products at several exhibitions including the Tokyo Café Show where we are promoting some British drinks there and some of the ingredients that we can offer.

Even though Japanese tastes are very different – they are very big on seaweed for instance whereas in the UK it is just starting to develop – the market is a very mature one like the UK. You get a lot of different products and there are some quite adventurous tastes in Japan just as there are in the UK. We think there are some key similarities despite the different cultures and there are some things that connect the two and we hope to take advantage of that. The Japanese love British food and drink as well so we feel that our investment in Asia will be a positive one for the future of Gerald McDonald.