B.13 – The Containerization of Commodities

Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

Containers are increasingly being used to carry commodities such as coal or grain.

1. A New Growth Dynamics for Containerization

The investigation of cargo being carried by containers appears to be underrepresented, particularly for commodities and the cold chain. The perception of the container as a transport unit must be expanded to consider the container as a supply or commodity chain unit as well. Containerized freight is commonly characterized by the movement of manufactured goods and parts from manufacturing facilities to retail activities with the whole range of distribution activities in between, such as terminals and distribution centers. This process has substantially benefited from the mobility containerization provided in terms of spatial flexibility and distribution efficiency. The outcome has been the emergence of global production and distribution networks. This underlines that containerization has mainly been investigated from the principle of flow, particularly in light of maritime and inland logistics developments. Issues such as shipping networks and service configurations and the setting and operation of maritime terminals and inland ports have received attention to explain the structure of global supply chains.

The conventional growth dynamics of containerization have mainly relied on an array of factors that include the derived volume linked with globalization, the substitution of break-bulk traffic into containerized traffic, the requirement to reposition empty containers, and a level of transshipment taking place at intermediary hubs. Still, the dynamics based on derived demand may have reached maturity in terms of its containerization potential as many global supply chains are now fully containerized. For the conventional containerized market, this implies that changes are derived from the ebb and flows of commercial activity and much less from the geographical and functional diffusion of the container. As the derived growth function of containerization becomes less dynamic, an increasing share of the growth will develop niche markets and opportunities that were initially bypassed. It is thus important to consider commodity chains as a component of containerization.

Commodity. Resources that can be consumed with no qualitative differentiation. They can be accumulated for a period of time (some are perishable while others can be virtually stored for centuries), exchanged as part of transactions, or purchased on specific markets (such as futures market). Some commodities are fixed, implying that they cannot be transferred, except for the title. This includes land, mining, logging, and fishing rights. In this context, the value of a fixed commodity is derived from the utility and the potential rate of extraction. Bulk commodities are commodities that can be transferred, which include for instance grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa. Their value is derived from utility, supply, and demand (market price).

Commodities, from grain, chemicals to wood products, are among a large array of goods being traded in the global economy and represent a niche for containerization. It can thus be argued that a subsequent phase in the geographical and functional diffusion of containerization will relate to commodities, which represent a notable market potential being realized. Both transport systems – bulk and containerized – have a role to play, implying that the containerization of commodity chains is more likely to be a process based on complementarity rather than on competition since each transport chain has its own advantages. It is clear that for several commodities such as grain, iron ore, and coal, containerization will at best perform a niche role in the total volume handled. Both are likely to benefit since containerization offers speed and flexibility, while bulk offers the lowest transport cost possible. Because of vested interests, in terms of accumulated infrastructure investment and long-standing practices, many opportunities could be captured by commodity producers, large and small alike, over niche markets (high-quality grains, organics, etc.). For instance, about 9% of all the US waterborne agricultural exports are containerized, which accounted for 825,000 TEUs in 2012.

2. Potential Markets

The degree of market penetration of containerization remains to be assessed, and there is a wide variety of levels to which the container can be embedded within various commodity chains. Some commodities are already fully containerized, while for others, containerization is still in its infancy. For instance, 95% of all European coffee imports are containerized since coffee is a commodity of high value and its consumption rather ubiquitous and of a mass-market level. The demand structure of coffee is thus well suited for the benefits of containerization. Many segments of raw materials and food commodity chains are in the process of being containerized, which is starting to account for a notable share of international trade. This process is supported by several factors:

  • The growing availability of containers in transport markets around the world, making it a rather ubiquitous transport product. Yet, this ubiquity is challenged by shortages of containers and of specific container sizes in some markets.
  • Economies of scale in bulk shipping, making the minimum load unit increasingly large and less accessible to smaller commodity exporters. The container is offering an alternative for these exporters.
  • A general rise in commodity prices and growing demand in new markets have made many commodities more prone to be containerized from a value proposition standpoint.
  • Fluctuations and rises in bulk shipping rates have incited the search for alternatives to bulk shipping when possible. Volatility also makes long-term planning for bulk shipping complex and subject to risks.
  • Relatively stable and even declining container shipping costs, particularly in light of rising commodity prices, rendered the container even more attractive since shippers can be confident about the stability of container shipping rates.
  • A propensity towards the diversification of products and their attributes, allowing specialized goods to be carried in containers that can maintain cargo integrity.
  • Global trade imbalances are transcribed in imbalanced container shipping rates, which represent a notable export subsidy for return (backhaul) cargo. For markets having notable imbalances, such as China (exports) and the United States (imports), incentives are acute.
  • Empty container repositioning has created opportunities by making available pools of empty containers that can be filled for backhauls flows.
  • A trend to move processing close to production, particularly for agricultural sectors in developing economies that are focusing on exports for global markets. Unlike unprocessed raw materials or agricultural goods, processed goods are more suitable for containerization. For instance, processed cocoa and cashew nuts are highly suitable for containerization.

Containerization has benefited substantially from economies of scale, particularly for maritime shipping. The container confers few differences in scale economies for a producer as each container is a unique transport unit and since containerized shipping networks are fairly ubiquitous. Barriers to entry are thus quite small as each container is an independent load unit that can accommodate lower volumes without many drawbacks as long as other containerized volumes are present; economies of scale are significant for terminal operators and maritime shipping. For instance, agricultural producers may develop their own markets by sending small agricultural commodity loads through regular containerized supply chains. Thus, containerization can provide the double benefit of permitting the development of global niche markets where numerous small exporters may compete and offer new economic development venues in commodity sectors that could not previously access foreign markets.

Yet, more attention should be placed on analyzing the potential, particularly the time and flexibility benefits, for the containerization of commodity markets. For instance, the opportunity created by trans-pacific trade imbalances has yet to be better captured by the North American commodity sector, particularly in light of expected Chinese demand. The same applies to the European commodity sector in terms of the imbalanced Pacific-Indian-Mediterranean routes. Policy can also be an inhibiting factor. For instance, in 2005 the United States Department of Agriculture started waiving the mandatory inspection of high-quality specialty grain exports, which was imposing undue additional costs for small exporters. This policy was beneficial for exporting identity-preserved grains in containers bound for international markets, particularly in Europe and Japan.

Containerization may also have an impact on the commodity markets themselves. Due to the large volumes concerned, commodities are commonly traded on markets, with large brokers securing an output through various contractual forms. Commodity futures are a legally binding agreement, made at a futures exchange, to buy or sell a commodity or financial instrument at some point in the future. Futures contracts are standardized according to the quality, quantity, delivery time, and location of each commodity. The only variable is price, which is discovered on a trading floor as traders get more accurate information about future market conditions as they unfold. Forward contracts are cash contracts in which a seller agrees to deliver a specific commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated. On the opposite end of the spectrum, spot trading is a transaction where delivery occurs within a short lag between the transaction and its delivery. This also requires standards about the quality of the commodities being traded, which are common requirements for the majority of commodities exchanges.

According to these definitions, the function of distribution could play a significant role in the setting of futures or forward contracts. With the containerization of some commodity markets, a contract could involve allocating empty containers through a leasing agreement to provide the fulfillment capacity at a specified point in time. It would require the setting of container storage facilities near terminals (particularly rail) that would be able to release containers accordingly. This could reduce the expected time frame of a futures contract, making it closer to a spot market contract. Containerization is thus likely to accelerate the resolution of commodity market contracts. A higher level of integration between commodity markets and freight distribution is to be expected.

3. Commodities in Containers

Because of the nature of the freight it handles, the containerization of commodities creates a unique set of challenges. There are several problems related to placing and removing commodities from containers. The first and most fundamental is the locational and load unit availability of containers; they must be available in proximity, in sufficient quantities, and be of a suitable load unit. While for light commodities, the load unit is secondary, the twenty-foot container is the most suitable for ponderous commodities. This is an important factor behind the fact that the twenty-foot container still accounts for more than 27% of the world container fleet. For hinterland transportation, the availability of containers can be an issue as maritime shipping companies own the majority of the global container assets and prefer these containers to be within the maritime system where they generate income for the carriers as opposed to the hinterland where they generate income for truck, rail, and barge companies.

Another issue involves container preparation. Containers are well adapted to handle packaged freight directly (“floor loaded”) or on pallets. This is another matter for commodities, particularly bulks. Some, like grains, would require a container to be thoroughly cleaned before being loaded to avoid any form of shipment contamination. In many cases, container liners will be used to protect the products being carried. The most common liners are made of polyethylene to protect common dry bulk products such as chemicals and minerals. For commodities that require a level of air circulation, such as coffee or cacao, polypropylene liners are used. Another form of lining concerns thermal protection so that goods can be shielded against temperature spikes that could degrade or damage them. It is often required that containers be cleaned once unloaded to be used for other purposes without contaminating other shipments. The usage of dedicated containers is also a possibility as it would reduce preparation costs but would likely imply empty movements and high repositioning costs, which tends to defeat the purpose of containerization (a ubiquitous load and transport unit). Still, specialized containers exist for liquids and refrigerated cargo.

The next issue is related to container loading, unloading and transloading. Containers carrying manufactured goods are dominantly loaded horizontally, either manually or with forklifts. Loading a container horizontally with bulk cargo is a complex task, often requiring a panel to block the back door and hold the loose cargo. Alternatively, containers can be flipped vertically to be loaded or unloaded, but this requires specialized handling equipment. Still, this is an attractive option in situations of constant volume. The usage of different modes to reach the load center (such as rail hopper cars) or the switch from domestic (53 footers) to maritime (40 footers) containers require a transloading operation, which represents additional costs. Some commodity chains, such as specialty crops, also benefit if the chain of integrity is maintained from the origin to the destination. It guarantees the quality of the shipment and product differentiation. This requires the source loading of containers. Containerization supports an increased product variety within the commodity sector, which is less possible with bulk transportation.

Weight is also a major issue as container loads are much lighter for conventional (mainly retail) freight than commodities. The shipping industry has adapted to this characteristic and prefers using larger containers (40 footers, high cube when possible) as they offer more volume for the same handling costs. Retail goods tend to have a higher volume to mass ratio than commodities. Shipping commodities such as grain tend to rely on 20 footers (one TEU) for the simple reason that they can handle each load around 26 to 28 tons. In contrast, a 40 footer, because of structural integrity issues, has a loading capacity of about 30 tons, but this load occupies twice the shipping volume. Consequently, the commodity sector mostly relies on a load unit (20 footers), which is different from many containerized supply chains, such as retail, relying on the 40 footers, particularly the high cube. This results in a problem of load unit mismatch between inbound and outbound logistics.

Weight distribution is also a related problem as containerships are designed to accommodate a specific weight load and distribution. Figures of 10 to 14 tons per loaded TEU are common in operational considerations when allocating containers on a containership. In North America, export containers tend to be twice as heavy as import containers because of the higher commodity share for exports. If a ship is presented with a significant container volume of more than 20 tons per TEU, adjustments in this load distribution must be made. Under normal circumstances where there is an equilibrium between inbound and outbound traffic, a containership presented with a full load of heavy containers could only be filled at 75% of its capacity. This can be mitigated by considering the current structure of trade imbalances in North America, with much of the containers leaving West Coast ports being empty. A scenario implying a full distribution of containers loaded with commodities and empties is thus applicable.

4. Transloading and Terminal Issues

Most commodities extracting regions tend to be located inland. In contrast, manufacturing and consumption tend to take place more in coastal regions. The containerization of commodities relies on a close interaction between gateway ports and inland terminals. A fair amount of containerized freight is transloaded once they reach a gateway. For the North American West Coast, this amounts to about 20 to 25% of all containers. Maritime shipping companies are reluctant to have their containers moving inland as they prefer to keep them within their networks. There is thus a preference at major import gateways to transload maritime containers (mainly 40 footers) into domestic containers (mainly 53 footers) in addition to the significant unit advantage it confers as the contents of three maritime containers are transshipped into two domestic containers. However, domestic containers are not well adapted for shipping commodities (less structural integrity) and cannot be forwarded on export markets. This dynamic has incited the development of container stuffing facilities in the vicinity of major gateway ports. Commodities are brought to the facility (or the terminal) through regular bulk transportation (e.g. trucking, hopper railcars) and stuffed into empty maritime container pools made available by import transloading activities. Transloading also results in fewer maritime containers available inland to be used for exports; the benefits of transloading for importers may impair inland exporters.

Bulk and containers rely on very different terminal characteristics and dynamics. Many bulk terminals were built to handle specific commodities and cannot readily be converted to other uses. Bulk commodities can be stored at port terminals in a relatively compact manner, such as grain into grain elevators or coal and iron ore in simple large piles. The same volume of containerized commodities can consume as much as four times the terminal space. Still, this could be mitigated if the loading process takes place inland, either at a load center or at a satellite terminal. Additionally, the intermodal velocity of containerized freight tends to reduce its spatial imprint since a container spends much less time at a terminal. A container port experiencing a growing role as a platform to export containerized commodities is expected to see a notable increase in the demand for storage space and pressures on dwell time. Since containerized commodities tend to be heavier than regular container loads, it may require adaptations in terminal management and operations (stacking and equipment usage). With volumes large enough, terminals could start to have dedicated sections for containerized commodities, as they already have to accommodate reefers.

5. Containerized Commodity Chains

There is limited evidence underlining that the containerization of commodities is competing with existing bulk commodity chains. The process is more one of an emerging complementary between bulk and containerized commodity chains within global freight distribution, each having its own characteristics:

  • Bulk commodity chains. These chains are commonly based on the specialization of terminals; often by specific commodity since each requires specialized handling and storage facilities. There is also the issue of empty return movements as modes carrying commodities do so in only one direction, with backhaul cargo opportunities almost non-existent. For instance, a crude oil tanker comes back empty after unloading its cargo. Thus, from a transportation perspective, this distribution system is prone to inefficiencies and has a level of usage which is in theory 50%, but lower in reality because of the seasonality of some commodity markets, notably agricultural production.
  • Containerized commodity chains. They are increasingly used, and it is becoming a matter of embedding commodity flows within the containerized freight distribution system. This would mainly concern niche markets where product separation (e.g. different grades of grain), smaller batches, delivery time, and accessibility are more important. The containerized commodity chain, likes its bulk counterpart, also faces the empty movement challenge. However, considering the current international trade structure, higher integration of commodities in containerized freight distribution would actually play a positive role in mitigating imbalances.

The transport of commodities is already characterized by substantial investment in bulk handling equipment, both for modes and terminals. Thus, there is a lot of accumulated inertia in existing distribution channels, making stakeholders such as freight forwarders reluctant to change practices. In light of these powerful stakeholders, how containerized commodity chains can take shape remains to be seen. The most likely processes involve capturing niche markets, accommodating seasonal and regional demand surges, servicing new or expanding markets where bulk infrastructures are not adequate or accommodating low volume situations where economies of scale are difficult to achieve.

Despite substantial imbalances, empty container backhauls cannot be fully exploited because of demand mismatches. It is common for commodity trade that import regions are not the same as export regions. While imports regions tend to be consumption-related and correspond to large metropolitan areas, export regions are mainly rural areas or resource extraction areas with low population densities. One thus attracts a large number of full containers but may not necessarily provide a similar volume of exports. Simultaneously, the other could generate a substantial export volume but does not have a significant import volume. The setting of a cargo rotation would permit repositioning opportunities and help mitigate the availability of containers for exports. Sometimes, due to time and cost issues, repositioning is not performed, and the empty container goes straight back to the port instead of being loaded for the backhaul.

Many commodities, such as agricultural products, have a seasonality. This implies that for a region, there will be a surge in demand at specific times of the year, while at other times, demand would be considerably less. Additionally, seasonality has a geography since harvesting time varies between different regions of the world, which implies temporal and geographical fluctuations in the repositioning of empty containers. Seasonality is also linked with commodity price fluctuations, implying that as one gets closer to the delivery time of a futures contract the market price tends to reflect better the real physical relationship between supply and demand. It is common in the agricultural sector that commodity prices will drop during the harvest season as real output is finally known and that uncertainties are removed. If the output is higher than expected, then prices drop, making containerization a less appealing alternative.

The further developments of containerized niche markets lean on supply chain integration since containerized commodity movements are particularly suitable where there is a significant backhaul movement of empty containers. Since the inbound flows relate to a very different supply chain (mostly retail), effective use of backhaul containerized assets requires a concerted effort between major commodity producers, rail operators, container owners (shipping and container leasing companies), and terminal operators. Over this, inland ports have a role to play by being platforms where inbound and outbound flows can be reconciled more effectively. Still, the availability of containers inland remains a salient challenge for commodity exporters. A mitigating strategy would be for commodity exporters or inland ports to acquire their own containers and thus have pools at their disposal for exports. An issue is that it would shift the “backhaul” problem to the importer as containers will have to wait to get import cargo bound to the region where the container pool is located.

Integrating the movements of commodities within containerized distribution systems involves a new set of challenges as their dynamics differ. Still, there is substantial potential for growth in the usage of containers to carry various commodities on global markets. With the continuing growth of the global population, the agricultural sector and its commodity chains have much to gain from the velocity, ubiquity, and flexibility of containerized freight distribution.

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