Despite a relentless cost squeeze in the supply chain iso tank containers are holding their own!

Despite a relentless cost squeeze in the supply chain iso tank containers are holding their own!

The fortunes of the tank container industry are inextricably connected to those of their main patron the Chemical industry. And when we examine some of the problems in the Iso tank container Operating business, especially the extremely competitive market conditions and the resulting cost squeeze in the supply chain, it does not take long to figure why? But let us first examine the state of play of the tank container industry today.
Today few spare a thought about the multitude of benefits associated with iso tank containers, rather to most the virtues are well known and part of yesterday’s news not worth reminiscing about? It is true that few of us stop to marvel over technology common in our daily lives be it our I Pads, LCD screen TV’s, smart watches or our cars. We are all too caught up in all we do every day of the week. But imagine for a minute a World without iso tank containers and with that a return to drums? Payloads returning to a mere 16mton.Imagine that! The accompanying rise in freight cost would indeed be very painful in some and fatal in other cases for producers and traders of bulk liquid products. Not to mention all the inefficiencies that would find their way back into the supply chain? A shippers’ nightmare! Reassuringly iso tank containers are here to stay for good and few will dispute the good tank containers continue to do. It is not just the strength of the basic concept, but the fact that Iso tank containers have been getting better with time. What used to be design diversity converged into one single robust design widely considered to be the most favourable. It is mostly referred to as the collar design that is known to best withstand the rigors of multi-modal transportation and handling that routinely exacts punishing forces during handling and transportation such as impact, shock-load and high tension, dilation and vibration.

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Valves and fittings attained levels of excellence and high in service reliability. Unrivalled functionality of iso tank containers in the supply chain routinely meet the high demands placed upon the integrity of a cargo when it passes seamlessly between the tank storage facility of the shipper and that of the consignee. Enter the moving pipe line!  The census by ITCO in May 2013 suggested that there were around 340,000 iso tank containers world-wide. Total manufacture production was reported to stand at 39700 units in 2012 suggesting global growth of a robust ten percent. This only begins to illustrate and explain the continued replication of a multi modal and intermodal success story. Increasing strong, assertive and incisive global regulatory provisions in IMDG and other conventions and regulatory platforms that favour durable packing over the disposable variety can be expected to gain momentum in years to come. A much overlooked benefit of iso tank containers is its low carbon footprint. A study commissioned by ITCO in 2009 to LCP Consulting concluded that iso tank containers as well as flexi-tanks are far superior to drums in terms of carbon emissions. Even though we cannot take that to the bank the value thereof should not be underestimated at a time when regulatory authorities increasingly scrutinize entire industries, such as happened with the aviation industry, suspected of excessive carbon emissions. At the time the study was concluded, Alan Braithwaite, chairman and founder of LCP Consulting warned that the “tank container industry will not be immune to either the financial penalties of future emissions nor the obligations of corporate social responsibility.”  After 50 years what has not changed is that the iso tank concept is still up against competing packing such as drums, but additionally also IBC’s and flexitanks.

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It is not that Shippers have any doubts about the superiority of iso tank containers especially when the shipment involves high volume and the cargo is regulated as dangerous goods. It is the cost-differential that could persuade shippers to bypass iso tank containers even though today iso tank containers are offered at more competitive terms than ever before? The industry’s capacity to be as competitive as it is relates to it coming of age, its depth, breadth and maturity and indeed the sheer quantum of available tank containers that have been in advanced stages of depreciation. This involves tank containers preserved from preceding decades that are still at the disposal of Operators. Indeed to explain the competitiveness of tank container Operators the ‘hidden’ economic power lies in the quantum of ‘operationally fit’ tank containers that withstood the test of time in defiance of life span according conventional wisdom. As the World experiences aging of its populace so do tank fleets but following well-designed repairs, refurbishment and re-manufacture programs the life span of tank containers extends much beyond what is generally assumed.  Still all of the above does not mean that all is well in the tank container industry. Iso tank container as well as chemical tanker demand is closely related to sustained economic growth and to a large extent tie in with the health of the global Chemical industry. And when one takes a close look and read the masses number of reports about the state of play there it would appear conditions are not rosy at all. But…….the tank container industry has no place else to go even though there are a variety of other bulk liquid producers vying for the services of tank containers Operators, the Chemical industry remains its main patron. Read on! Together with dry freight containers iso tank containers can arguably be viewed as the barometer of the World economy and since the 2008 economic crisis that nearly brought the global financial system down the barometer still points to low air pressure and unsteady weather ahead. However on the bright side we do see spells of sunny weather. It is not that for the iso tank container industry economic down turns is anything new. Quite the contrary since its inception some 5 decades ago the industry has indeed weathered a wide variety of storms, big and small, only to come out better when sustained economic growth returned. The confidence that the industry’s fortunes will turn for the better explains the continued investment in newly built tank containers UN Portable tank T11, attractively priced and for bulk orders presently several thousand dollars below the once rather static US$20K mark.  It cannot be anything else but confidence when we see many of the new builds stacked up in what are often already congested tank depots. The industry would not have gotten to where it is today without the wide variety of supportive industry and infrastructure comprising  tank depots, survey organizations, certification bodies and industry representative organizations such as ITCO and @tco. Training institutes such as New Alchemy contributed to the development of more skilled Operators. Whereas the vast majority of iso tank containers for carriage of bulk liquids are of the general purpose variety with large capacity UN Portable tank type T11 being the virtual default choice for most Operators and Lessors, let’s not forget that over the last 5 decades the industry also mastered to handle highly specialised cargoes carried in equally specialised tank containers of mostly of UN Portable tank type T14-T22. These are products ranging from the class 6.1 high toxic products such as dimethyl sulphate to products susceptible to polymerisation such as MDI. Another example would be the ‘napalm like’ spontaneously combustible cargo yellow phosphorous an inorganic product derived from molten phosphorous rock. And transporting these cargoes in tank containers also means having to clean the tank containers at the tail end of the movement or when dedicated at the end of a contract. The hazard and complexity of these cargoes require high specialised cleaning installations, high safety and environmental standards and skilled Operators. No quick rotor jet water spin possible here for some cargoes might erupt in fire upon contact with air such as is the case with yellow phosphorous that is transported under water and nitrogen blanket, others could polymerise such as in the case of MDI when in contact with water. In the industry segment that caters for specialised food transport too, high levels of sophistication have been attained. What particularly stands out here are tank containers that meet aseptic cleanliness standards a technology brought to market by Hawaii tank. The food transport business is and will remain a niche business that service the transportation needs of a wide variety of industries that produce edible products, ranging from dairy products, food colorants, beer and wine, fruit juices,  potable spirits, vegetable oils, animal fats and other. Another specialised segment involves the transport of high purity electronic chemicals, chemicals used mainly for cleaning of electronic components such as printed circuit boards. Such electronic chemicals that could be products such as formic or phosphoric acid, require tank containers that are inert, something that is achieved through lining such tank containers with fluoro-polymer linings such as PTFE. But even though the industry has made much progress, concerns remain. Far less favourable global economic conditions reduced the proverbial pie it shares. Iso tank containers from once being the chicken with the golden eggs has become a commodity and that change brought along a brand new set of mostly economic problems.  One has to do with what some claim to be a brain drain that involves the departure of the brightest and the best and secondly fewer of the same variety interested to launch a career in the tank container industry? This comes at a time when the industry is in transition and a course needs to be charted to the next stage of its development. Threading water in this context is an unattractive proposition. What would be required even though this is admittedly easier said than done would be some measure of economic restoration of the industry back in the direction where it came from. In other words increase the size of the pie.  Yet…….after all has been said and done, what is sure is that the industry may be down but is certainly not out. When it comes to trade some say that the World is getting smaller! Globalization has enabled industries around the world to muscle in on markets that used to be geographically remote and beyond reach but today are just one mouse click away. This also holds true for what is considered the largest patron of iso tank Operators i.e. the global chemical industry.

Markets everywhere are effectively brought within reach of chemical producers everywhere through the availability of competitive freight of Ocean going tankers and tank storage terminals. From a freight cost perspective it makes perfect sense to use tankers for the deep-sea journey and iso tank container for the distribution to the region. Riding on the crest of globalisation, chemical producers around the World are effectively able to compete right in their competitors’ backyard.  The Asia Pacific region thanks to the large contribution of China features as the World’s largest producer of chemicals immediately followed by EU before the countries under NAFTA, Latin America and the rest of the World.

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Additional refining and chemical manufacture capacity has in recent years been added in China, India and Middle East notably Saudi Arabia, the United Arab Emirates and Brazil in S. America. Amongst these the Middle East has become the fastest growing world region for chemicals manufacture. Globally, concentrations of refineries operating upstream and downstream chemical manufacture clusters vertically as well as horizontally integrated chemical companies that co-exist in symbiotic relationships where downstream manufacturers symbiotically feed on the output of upstream companies. For example downstream chemical companies obtain their feedstocks such as naphtha or aromatic solvents from adjacent refineries. Clusters of chemical companies often benefit from common infrastructure (proximity of a main port, terminals, storage & transport

infrastructure, pipelines etc..) easy access to feedstocks that gets piped into their plant and the sharing of common resources such as power and water supply and effluent treatment. Such clusters have proven to highly successful amongst other by their scale, and major reduction of cost in the supply chain. Such clusters have become common around the World. Close to home Jurong Island is home to some of the world’s biggest and most successful names in the petroleum and petrochemicals industries such as ExxonMobil, Shell, ChevronTexaco, BASF, Sumitomo Chemical and Mitsui Chemical. A whole cluster of vertically integrated chemical companies now co-exist in a symbiotic relationship in Jurong Island. With the creation of Jurong Island, Singapore’s chemical industry has grown from being a major oil refining centre to a modern day chemical hub offering both vertically and horizontally integrated industry services. To date, more than 70 leading petroleum, petrochemical, specialty chemical and supporting companies enjoy a suite of dedicated support infrastructure and services. These include a well-planned, efficient and vigilant security system; practical and relevant manpower training; IT for communications, safety and security; and now research and development facilities with state-of-the-art equipment for chemical analysis and characterisation. The existence of such infrastructure ensures that Jurong Island companies receive the necessary support for their day-to-day operations as well as future growth of their businesses.

The overall growth of refining and chemical manufacture capacity sloshing in what remains a weak global economy not only continues to adversely impact the margins of chemical producers it also poses an existential threat to some that are unable to compete with companies in Middle East, China and India. Especially the yields of chemical commodities have been adversely affected. The low price of commodities is a function of their wide availability thanks to the large scale chemical manufacturing locations around the World. Chemical commodities consist mostly of base chemicals that cover petrochemicals and derivatives and basic inorganics. Fine and Specialty chemical on the other hand such as auxiliaries for industry, paints and dye’s, agro products and pigments move up considerably in the value chain and so do their margins.  Less supply –high demand translates to higher value and margins. Typically fine and Specialty chemicals are produced in small volumes.

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It is no surprise that more chemical manufacturers are investing in manufacture of Specialty Chemicals. In Saudi Arabia for example one such project involving manufacture of specialty chemicals that stands out isSadara, a Saudi Aramco/Dow joint venture. It is the largest petrochemical facility ever built in a single phase. It is expected to come on stream in 2015. Isotank containers feature prominently as the preferred means of transportation to nearby and overseas markets. Trans- national corporations such as Exxon-Mobil, BASF, Dow, Shell and Sasol, not surprising play a large role in new developments especially in Middle East. This could come at the expense of production in their countries of origin. When it comes to global bulk liquid transportation the largest proportion of cargoes carried are commodities. In their quest to reduce cost and raise margins chemical producers continue to look at supply chain cost as one that has scope for reduction. This has been on the agenda for very long and can be expected to remain there.  Supply chain costs represent an average of 8-10% of sales revenue for chemical Companies. At over 30 % supply chain cost represents a much higher proportion of the net value added. Whereas deep-sea tankers continue to offer the lowest freight cost by far, the parcel size of a minimum 1000-2000Mton leaves shippers of smaller parcels but one alternative, the iso tank container. Freight rates per Mton of ocean going tankers depend on parcel size and trade route. For stainless product tankers the east bound route to FE, the freight rate hovers around US$120-135/Mton. To get to the bottom line numbers one needs to add the tank storage terminal’s Receipt, Handling and Dispatch charges (RH& D) but even then considerable savings will remain.

The ranks of Tank container Operators have continued to increase since the nineties. One could divide tank container Operators in three groups
1) Super large and large size tank Operators lately referred to as Big Tank, Operators that offer global bulk liquid transport services including intercontinental services and also service regional markets 1

2) Medium Size Operators that that offer global bulk liquid transport services including limited intercontinental services but often a greater focus on regional service. As the case may be it could also be the complete opposite with more emphasis of intercontinental trade and less or no regional trade.

3) Small Size Operators that offer regional and or domestic transport services with limited or no forays into intercontinental trade

Fleet size 1       10000-30000     2     >500-5000             3 25-<500

1 Exception is Bertchi, it has a fleet size of 15000, but most trade is in Continental Europe

The global leader of the Operator community is Stolt Nielsen with an estimated 30,000 tanks followed by the first runner up Hoyer Global with an estimated 25000 units. The second runner up would be Swiss Operator, Bertchi who comes in with 15000 tanks. The third runner up would be a tie between Interbulk and VOTG each with 10,000 units.

Source Tank Guide 2013 published by HCB

Interestingly when you look close enough at the top 5 you don’t see classic type tank container Operators but much more than that you see sizeable organisations that offer diversified in products and services. Operators that combine products and services that leads up to or fully represents something that is called Total Global Bulk Logistics. Having said that, technically a claim to be Total Global Bulk Logistics Operator requires these activities to be integrated and that may not yet be realised.

Still there is a lot of commercial power and dynamics in combining a range of products and services. Cross fertilisation is one significant by product. Total Global Bulk Logistics is all about doing just about everything that the large Chemical majors require to handle their bulk liquids in all respects i.e. tank storage, ocean going tankers, tank containers, IBC’s, flexi tanks, and drums. A Supermarket for Chemical producers, really! Stolt Nielsen again comes out tops. Stolthaven’s global network of tank storage terminals tie perfectly in with their fleet of chemical tankers and their large fleet of tank containers. Under the banner of Total Global Logistics also comes both other transport equipment operated via different modes of transport. In USA, Canada and Mexico, Stolt-Nielsen Rail Services (SNRS) operates a fleet of more than 500 tank cars. Road tankers too take an important place in Total Global Bulk Logistics and it should be mentioned that both Hoyer and Bertchi operate sizeable fleets. Lastly some Operators such as Interbulk and Hoyer operate bulk powder tank containers. This along with their requirement for gas bulk logistics, too, continues to be a core need of Chemical producers.

The primary launch pads for iso tank container shipments are the busy global shipping hubs such as
W European ports, Rotterdam, Antwerp, and Hamburg, Le Havre and Rouen. In USA, Houston, Los Angeles, Long Beach, New Jersey,Philadelphia, Boston and Baltimore where in Asia Shanghai, Ningbo, Xingang, Busan, Kaoshiung, and Singapore are the main shipping pivots.
Operators compete on each and every trade route tooth and nail on the basis that (except for dedicated movements) at destination a tank container get emptied, cleaned and reloaded with a return or onward load. In the absence of onward or return loads a tank container Operator will attempt to charge a shipper for a repositioning movement from the non-demand to a demand location. I say attempt because under the present market conditions agreeing this additional cost with the shipper is uncertain. The challenge to balance their fleets continues to be firmly placed at the feet of Operators. To extricate their tank containers from non-demand locations Operators have to ‘repo empty’ or  pursue limited ‘export opportunities’ that only  cover a portion of the total cost such as sea freight. The Operator in such case accepts to bear the cost of all else i.e. the tank container, insurance, documentation, the Iso tank container charges, haulage and cleaning at destination. These are often referred to as ‘deficit movements’ movements where Operators heavily subsidise cost. As long as deficit movement tie in with profitable onward movements that is all fair and good but sadly that is certainly not always the case. Markets remain extremely competitive. What chemical producers and tank container Operators have in common is the ongoing quest to reduce cost. With cost pressures on the rise something has to give? In some circles there have been discussions about noticeable reduction in the ‘in-service’ maintenance standard of tank containers. It is commonly known that the ‘in-service’ repair standard practiced by most Operators is far apart from the ITCO industry standard –ACC, a standard more commonly associated with the Leasing co. community. As said markets are extremely competitive and the bar to enter the tank Operator trade in very high. It is only the long established large and medium size tank container Operators that have over a considerable period of time developed a comfortable density of trade with customers at both ends of a trade route resulting into two way trade. Small Operators and newcomers with their smaller fleet face significant and often unsurmountable challenges to rival that and if they manage once or twice it is not unlikely that they fail the next. And even if these newcomers manage to quote a shipper in most cases their quote is unlikely going to be competitive enough.  This is because, as mentioned earlier, the long established Operators have large fleets that include large numbers of tank containers many of which have been fully depreciated and in the fleet mix these Operators actually have an unbeatable competitive advantage, one that drives cost down, and resulting from this is a much lower daily tank container charge. Newcomers on the other hand mostly operate leased tank containers and hence have much higher cost to start off with. Notwithstanding the above newcomers continue to seek their fortunes in the tank container Operating industry. Most emulate existing business models and end up doing the exact same thing as the existing players only to find out that the only leverage they are left with is precisely something they cannot afford to leverage on i.e. pricing. This is what Harvard business school guru, Michael Porter, had to say about emulating existing business concepts. He said “going forward it will no longer be good enough to be ‘best in class,’ or ‘best in an industry.”  He went on to say  “competing with a business rival on the same turf is bound to become destructive.” “What will become increasingly important going forward is to be different! For new tank Operator entrants to have a shot at success they should try and carve out niches where they have a competitive advantage that drives cost down or that differentiates their products and services. Back in the eighties often a competitive advantage was arrived at on the back of the iso tank container capacity. In the absence of CAD (computer aided design) there were limits to capacities manufacturers then could scale, and year over year capacities were stretched at a snail pace. At one point 23cbm tanks were the largest possible. Those that had them outperformed the ones that did not until they too caught up. Today no stretch remains with 26000litre tank containers the ultimate capacity, constraint as multi modal tank containers are by the container vessel slot size. It does not mean that new ideas could not suddenly shake up conventional thinking. Exsif, the World’s largest leasing company got the industry to sit up in 2012 when they suddenly introduced a 40ft tank container. Going by the moniker”Intermodal 407”  Exsif introduced it as “a highly flexible and cost-effective alternative to transporting liquid products in the more expensive DOT 407 tank trucks in US intermodal market.” The slot size of container vessels, for now, puts a cap on iso tank container capacity. Is there scope to break out of the mould perhaps? Arguably there is! WEW, in Germany, part of the Buhold group of companies introduced a 30Kl tank container, 2500mm wide, in the nineties. WEW named it 4 leave clover a fitting name as a four leave clover mimics the shape of the tank shell. Today reportedly they can make that same tank container in Iso size. The visionary behind this design was WEW’s founder Helmut Gerhard. In one of the Marichem trade shows in end nineties in Europe, WEW showcased this patented design with shell made of carbon fibre. That was long before they started manufacturing aircraft out of carbon fibre.

But even if we can’t increase payload by making tanks larger, could there be scope to make tanks even better? There is no doubt that one part of the tank specification one that goes to the very heart of an iso tank container has scope for improvement I.e. tank shell material. With bulk chemicals getting more complex in composition many also test the limits of the corrosion resistance of austenitic stainless steel 316. Several forms of corrosion of which pit corrosion is the most prevalent are now endemic in the industry and this throws a spanner in the wheel of asset preservation and plans to further extend lifespan through refurbishment and remanufacture. It is thought that some of the Duplex steels that boast a much higher corrosion resistance could offer solutions following in the footsteps of stainless Ocean going product tankers where Duplex steel 2205 has been the default choice for these tankers for many years.

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With the exception of limited small niche markets and hybrid Operators the entry barrier for aspiring new tank container Operators in terms of height is of the Mt. Everest variety that is if an aspiring new Operator enters with a profit intention? Last time I looked social enterprise has not yet made its way into the tank container industry. The question is do these newcomers know that? What might be a hybrid Operator, and do these exist? A hybrid Operator straddles chemical manufacture and logistics. Hybrids usually have a parent which is a Chemical manufacturer. These do have a leg up over regular Operators as they are assured business or base load from their parents. Daelim, Korea and Sinochem in China meet this description. Deeply ingrained and established trade relations with chemical shippers together with scale are the perquisites to sustaining profitable Operating business. But what about the chemical shippers on the opposite side of the aisle? How might we expect chemical shippers to view iso tank containers and their logistic services providers? In the final analyses, it is absolutely clear that Chemical shippers need iso tank containers as much as the Iso tank container Operators need chemical shippers. Constraint as shippers are in their choices, as said iso tank containers are often the only option for parcels below 1000Mton, especially when a cargo is hazardous. Besides the driving force behind specifying iso tank containers as the ‘packing of choice’ are the buyers of chemicals. Tank containers are a norm. And shippers know that if they don’t supply in iso tank containers their competitors will. In view of the competitiveness of commodities the larger manufacturers in most cases call tenders for their geographically diverse tank container transport needs. Such tenders specify the trade routes and terms of trade. It is fair to say that increasingly a large fleet size and seniority in the trade have become prerequisites to become invited to participate in tenders. For newcomers the door to participate in tenders is mostly shut. That is because the chemical shipper has over time assembled the right quantity and mix of Operators to service all of their needs. If these tenders manage to do one thing well it is once again to drive freight cost down. Scale appears to be a perquisite to sustain a profitable tank Operator business. If this starts to dawn to the small Operators out there we might see more mergers and acquisitions going forward. It is inevitable that the present economic conditions in the tank container industry could take its toll on the smaller Operators.

Jaap Huigen