Maritime regulations could increase shipping costs in 2020

The International Maritime Organization (IMO) has set new regulations for the shipping industry that take effect January 1, 2020.  The new regulation will reduce the limit of sulphur emissions from 3,5% down to 0,5%.  

This is a drastic reduction which is estimated to save hundreds of thousands of lives each year. The pollution from container ships, cruise ships, and other large vessels is greatly attributed to the bunker fuel they use. Bunker fuel is essentially the leftovers after the more valuable fuels like gasoline and diesel are refined out of raw oil. The fuel is often solid and needs to be warmed before being burned, resulting in a raw exhaust that pollutes not only the air, but also the port areas where these ships dock.

The new regulations will have a positive effect on the environment, but they also present challenges to the shipping industry. To meet the new emission standards, the ships will need to use different versions of low sulphur fuels, the kind many people use to fuel their cars and SUVs. The demand from the shipping industry will compete directly with current demand for clean burning diesel for personal and commercial vehicles.

Another challenge is the refining capacity. Demand for these cleaner fuels is likely to skyrocket in 2020, but the refining industry is unlikely to have the infrastructure to deal with that demand in place so soon. Key ports in the US and Europe may have access to the cleaner fuels, but secondary ports around the globe, like those used by Specialty Coffee Industry, may not. 
 

How will this affect Specialty Coffee? 

The short answer is cost. 

The cost of clean, low sulphur fuel is almost double that of the Bunker fuel that is currently used. That price differentiation could increase even more during the first part of 2020 as demand for cleaner fuel suddenly spikes. Shipping costs will rise as that price increase is passed along to customers. 

Speed reduction 

The IMO is also proposing a speed reduction of ships by 10-20% in order reduce emissions. That means coffee will spend more time on the sea, and more time at port waiting for those ships to arrive to collect it. This could potentially impact the quality of the coffee, and the window of time we have to roast and sell it. 
 

Geographically dependent products

If the cost of shipping increases as significantly as expected, the manufacturing industry will likely move production that has been outsourced, to China and other countries, back to the markets where the manufactured products are consumed. 

This is not an option for coffee. The ideal climatic conditions for growing coffee are found in countries around the equator, while its consumers are overwhelmingly in the Northern Hemisphere, with emphasis on the north! Our industry doesn’t have the option of moving production to another part of the world, so we are entirely reliant on shipping to bring our product to market. 

The coffee industry will be dependent on shipping no matter the price, but the pain may be temporary. The initial price increases could come down over time as supply comes closer to meeting demand. However this could take several years. 
 

Planning for the IMO

So what can we do in the meantime? Plan ahead! We can offer some alternatives that can help hedge costs against the rise of shipping costs.  

1. Forward planning

Planning your future buying with our sales team for 2019 and 2020 can help. By buying ahead we can lock in pricing with our suppliers to offset future increases.  

2. Refrigerated transport

Reefer containers are available from several of our origins, we just need some time to book them (see the paragraph above). Your sales person can help organise this. 

3. Freezing coffee

CCS also offers frozen storage in the US and the EU. Buying ahead and freezing coffee, either at one of our warehouses or locally at your own local facility, can mean that you are roasting a cheaper supply while the rest of the market is paying for more expensive shipping. That will keep you competitive.

Keeping you informed

We are always working to keep our clients informed of changes in the market.  Please contact our sales team to discuss your future planning, and subscribe to our newsletter for more updates.   

Refrigerated Containers for Ethiopian Coffee

Innovation in Shipping

Our visit to Ethiopia a few weeks back was only my second time at origin. I expected to be inundated with information pertaining to all aspects of coffee production. After all, everything you are experiencing at that time and place is the precursor to the longevity and quality of the coffee, more so than during any other time in a coffee’s life cycle. If things are out of sorts at origin, the coffee is unlikely to express what it is capable of. It’s heavy stuff.

On top of this, I had just started a new position in Buying, QC & Sample Management at the Collaborative Coffee Source. That makes me the link between the producer’s hard work and the coffee community yearning for long lasting quality beans. My focus on this trip was to understand what is being done and what could be done better next time around. Altering fermentation times? Thinner layers on the drying bed? More selective picking? All seemed to be common suggestions that are given to producers and are absolutely key to improving quality and longevity! But perhaps the most interesting thing I learned during the trip was an innovation I’d never heard of: refrigerated containers.

Heleanna Georgalis of Moplaco Trading has been using these "reefer containers" for one customer for a few years now, and her customer speaks very highly of the results. Coming from George Howell Coffee, famous for pioneering the freezing of green coffee, I’m well aware of the positive and lasting effects that climate control provides. As you can imagine, I was excited and astonished to learn that refrigerated containers exist.

Moplaco Trading, Addis Ababa

Reefer Containers - How Do They Work?

Coffee harvested and processed in Ethiopia will make its way to the Port of Djibouti, located about 400km away on the shores of the Red Sea. There the coffees are transferred into a reefer container and stored at 18°C (64°F) and 60% humidity for the remainder of its (often) month-long journey across the ocean. Nitrogen, oxygen, carbon dioxide levels are also regularly checked to ensure proper storage.

The pallets are loaded in and arranged with air space between the coffee and the wall, while air is circulated throughout the container to prevent pockets. Refer to the graphic below (courtesy of www.cma-cgm.com):

How Much Does It Cost?

For the time being, only 40 foot containers are available to be refrigerated (the standard size is 20 foot). Why is this? Well, since 2000, the number of companies moving reefer container ships has dropped by 60%, so availability is very low. Companies who purchase reefer ships need twenty years to recover the initial cost, versus two years for a normal container ship.

But, there is hope. One company, Seatrade Reefer Containers, continues to purchase and use reefer containers in their fleet. Due to the slower  delivery times of container ships over the last few years, shipments (from all goods industries) are getting to their destination well after their intended arrival dates. Late shipments have translated into more food spoilage. Seatrade hopes these delays in container delivery will cause an increased need for reefer containers, and a resulting increase in their availability. But for now, they are still a cost to consider carefully.

This means there are two options:

1. Find a way to fill a 40 foot container. This either means purchasing large volumes, or sharing containers with other buyers.
2. Move a container below maximum capacity. Of course, this is a more expensive option as the cost is spread out over a smaller volume.

Costs fluctuate, but the breakdown at the time of writing is this: if a normal 20 foot container costs around $900 to move from Ethiopia to your nearest port, the cost is 2.1 cents per pound. A max capacity 40 foot reefer container, over the same distance, would cost around $2,900, or 3.4 cents per pound. A 40 foot reefer container, filled to half capacity, then would then cost 6.8 cents per pound.

Does refrigerated shipping provide enough value to justify this additional expense? Could you make the money back by having your 88-point Ethiopian coffee hold up for two extra months? Being cost conscious is entirely necessary for a business to be sustainable so your budget may not lend itself to this kind of transit. However, for around ten dollars more per 60 kilo bag, it may be a wise investment not having to discard bad roasts of tired coffee.

Logistical Considerations

To arrange reefer containers for your coffee we'll need some advanced notice. As mentioned, containers are currently limited in quantity and require a bit extra planning. However we think it's worth the extra effort. For now we are offering reefer containers from Ethiopia and we hope to add more origins in the near future.

Please contact me if you have questions! I am excited by the potential of this shipping innovation and keen to discuss how reefer containers might work for you.

Matt