China-Europe freight costs threaten UCO trade into 2021

Heavy container congestion at Chinese and European ports has closed the used cooking oil (UCO) flexitank arbitrage on this trade route, with no reprieve on the horizon until next year's first quarter.

UCO flexitank freight costs from China and southeast Asia to Europe have tripled in the space of a couple of months from $40-50/t to around $110-150/t, although many of the issues behind the spike go back much further.

Port workers were cut back and factories temporarily closed when the Covid-19 pandemic first hit earlier in the year, causing a build-up of containers. So with less cargo to carry shipping companies reduced the number of lines to stabilise costs.

The swift recovery in China enabled its factories to quickly restart with the aid of government funding. Soon many businesses routed production and exports out of the country. Now spiking demand for products ahead of Christmas from North America and Europe has only intensified the rush to get volumes out of China towards the end of the year.

"China is pushing export like there's no tomorrow and Europe and elsewhere are buying for the year end," said a trader.

The lack of port workers and drivers to transport cargoes inland by truck means the turnaround time of containers in North America and Europe has lengthened to more than a week from the usual one or two days, leading to a further build-up at ports.

The number of active vessels has yet to recover, meaning empty containers are not getting collected and returned to China and leaving nothing to carry cargoes back out of Asia.

Traders targeted blame on the consolidation in the container shipping industry that has snowballed since 2017. This resulted in just three alliances — 2M, THE and Ocean — controlling 80pc of the market on deepwater trade routes, enabling them to limit volumes that they leverage to raise prices.

"It's double price now. I don't understand why the liner operator is not adding more vessels instead of raising their price," a UCO seller said.

But while market participants complain about the much-maligned shipping companies, the UCO sector is already facing immediate headwinds exposing fragility in the sector.

Chinese UCO exports increased by 27.5pc from a year earlier to 779,000t during January-October, according to latest customs data. But they could now be slowing.

A combination of higher vegetable costs and a second wave of Covid-19 lockdowns in Europe during the off-peak winter season have already punished the market, widening bid-offer levels and stalling trade.

Tighter supplies, labour shortages and the high cost of related vegetable oils sent third-month crude palm oil prices on the fob Bursa Malaysia exchange to 8½-year highs of 3,420 ringgit/t ($840/t) last month.

Soybean similarly hit 5½-year highs of 39.32¢/lb ($867/t) on the Chicago Board of Trade because of bad weather, resulting in increased UCO demand from the Chinese animal feed sector and limiting availability and raising prices for biodiesel production.

The spike in container costs has brought the already vulnerable flexitank business almost to a standstill, with only the odd cargo managing to get offloaded to desperate buyers. But even then closing a deal was still proving problematic.

"Even when you find a customer willing to pay it's still very difficult to actually get the containers," according to one supplier. "I'm not sure how long Europe can do with low volumes from Asia. Some customers are still buying. I think it will support the push to bulk."

But while some traders have touted a switch to bulk or isotank freight as a temporary solution, it is unlikely to cause a significant dent in stranded volumes. Just few have the capability to switch so easily and the underlying problem remains not just a lack of containers but a shortage of vessels.

Isotank costs are not much cheaper than flexitanks. To collect large enough volumes for a bulk order not only takes much greater time, financing and facility access, but also faces inherent additional risks in terms of quality consistency sourcing from many disparate points of origin.

"Bulk is fraught with its own problems with higher risk due to container size and more time needed to draw quality resources from," a collector said.

Hong Kong-based exporters said they were completely stuck without any bulking facilities and limited capacity to transport by barge to mainland China. But bulk UCO prices ended last week $50/t higher than flexitank values at $750-770/t fob southeast China after commanding just a $20/t premium at the end of October.

Traders do expect some relief in container availability after the Christmas rush. "After Christmas, ARA ports should get back to normal assuming Brexit goes smoothly," said one.

But the majority doubt there will be a significant drop in costs until after the lunar new year in February, as exporters generally try to push out orders before the holidays. So global demand and operations may not return to normal until March.

A buyer also speculated that Chinese collectors may take the opportunity to invest in UCO refining to sell to domestic hydrotreated vegetable oil producers, with some having already taken steps in this direction.

But the UCO flexitank market may have hit a wall until late in next year's first quarter, which will keep costs prohibitive and export trade at a minimum.

Amandeep Parmar and Lauren Moffitt

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