Will African Swine Fever Bring Seasonal Congestion to Europe's Cold Chain Sector?

China is the biggest pork market in the world, and, with imports close to 2m metric tons in product equivalent in 2018, it is also responsible for 20% of global trade. The ASF outbreak is heavily affecting China’s pork production and is expected to cause a substantial production loss of 25% in 2019, for a total gap close to 13m metric tons in carcass weight equivalent (CWE).

To partially fill the production gap, China has increased total pork imports by 30% in 2019. As per Rabobank’s September ASF Update, we expect that imports will grow further in Q4 2019, given the increased demand for pork linked to the upcoming end-of-year festivals.

Analysis of the monthly pork exports to China from the top five European exporters reveals that Chinese imports from Europe rose in the first seven months of 2019 by 37%, close to 700,000 metric tons in product weight (see Figure 1). Spain, Germany, Denmark, the Netherlands, and France are responsible for 90% of total European exports. Led by Spain, all top five exporters have increased their shipments of pork to China in 2019, and given the declining sow herd, pig supply in 2020 will be lower than in 2019. In total a further drop of 10-15% in pork production in 2020 is currently expected. The ASF outbreak is expected to have repercussions on Chinese pork production well into the next decade. How the European cold chain sector responds to the challenge will ultimately depend on how regulatory, structural, and seasonal constraints are managed.

China’s Licensing System: A Source of Rigidity for the Supply Chain

In order to export pork to China, meat processors and cold chain operators need to obtain a licence from the Certification and Accreditation Administration of the People’s Republic of China (CNCA). The licensing system demands that meat producers respect sanitary and veterinary requirements, and their cold chain partners are required to observe strict temperature limits and storage conditions. Following the indications provided by the CNCA, there are currently 72 registered cold storage facilities in Europe serving pork exporters (though not exclusively), for a total capacity that Rabobank estimates to be close to 3.4m cubic meters.

It is interesting to note that Spain, the biggest exporter, has no specialized third-party cold storage operator registered under the CNCA license scheme. In Spain, the pork supply chain relies only on the refrigerated capacity attached to meat processing plants (slaughterhouses, freezing companies, processing plants). This is also true for the Netherlands, which has only four cold stores but also eleven accredited meat processors with storage capacity attached.

The licensing system would not represent a major constraint in terms of cold-storage capacity. However it could make the pork supply chain less accommodating to extra trade flow and bring out congestion problems in peak production periods.

It’s All About Anticipating

A Danish cold storage operator reported to Rabobank that the increase in Danish exports of pork to China (+56% YTD growth) has forced them to work at full capacity since the beginning of 2019. The congestion is starting to affect non-pork food producers and food distributors in Denmark. From the medium- and long-term perspectives, the Danish food sector might be forced to find alternative cold-storage solutions to maintain a steady flow of perishable food.

Instead of relying on storage capacity, the Spanish pork supply chain aims to maintain high throughput levels, thanks to the fast connections between the producing regions of Aragon and Catalonia and the port of Barcelona. This is made possible by the refrigerated rail service from the Maritime Terminal of Zaragoza to the Port of Barcelona. It guarantees from 25 to 35 weekly services and a dedicated daily train for frozen food. Moreover the ports of Barcelona and Zaragoza expanded the capacity of their two refrigerated container terminals for a total volume of 3,382 plugs in Barcelona and 60 in Zaragoza. The investment seems to be paying off. According to the data provided by the Port of Barcelona, pork shipments to China increased by 60% in the first five months of 2019, with no congestion issues.

Be Ready When Cycles Match

Cold storage operators in Rotterdam are reporting that growth in exports to China have coincided with low levels of potato production, which freed refrigerated capacity to accommodate the extra pork volumes. This favorable circumstance might change as the year progresses, especially if the Netherlands keeps its pork exports to China growing as steadily as it has in the period from January to July (+54% YTD).

In France, the licensed capacity for pork storage is concentrated in Brittany (1m cubic meters). Considering that pork exports to China increased by 46% YDT in the first seven months of 2019, congestion might arise during the peak harvest season for other food products (namely frozen vegetables). The issue could be aggravated by the relatively small refrigerated container capacity in the ports of Brest and Le Havre. If exports to China continue to grow, French operators might need to move pork to other French ports or, in extreme cases, to Rotterdam.

Only the cold chain in Denmark is facing a tough time in relation to the additional export volumes following the ASF outbreak. The cold chain sector in other major exporting countries responded well either via existing capacity, favorable conjuncture, or by anticipating the problem.

For the coming months and years, it will be interesting to monitor how ASF evolves and whether its developments trigger a chain reaction involving cold chain operators in Europe. A crucial factor will be how quickly China’s pork production recovers once ASF is under control.

In conclusion, it is unlikely that ASF will cause immediate investments in additional refrigerated capacity, but, as in the case of Spain, investments aimed at increasing the throughput of the pork supply chain might be the right solution to a problem that, however long it lasts, is temporary and will not impact the structural capacity of China’s pork sector to return to pre-ASF production levels.