China’s cold chain: supercharged growth, but freezing margins

The cold chain is growing longer and more complicated, while domestic refrigerators are getting bigger, and blowing agent technology in China is changing, too. Simon Robinson and Jane Ho take a closer look at the fast-developing Chinese cold chain market.

Increasing wealth, Internet shopping and time-poor consumers with better things to do than visit the local market are a powerful driver for convenience food across the world, and China is no exception. The most efficient way to get this food to consumer is as chilled and frozen food.

China’s consumers are some of the most well-connected in the world, and they already use companies such as Alibaba to buy the necessities of life on line. Food is a natural progression, and retailers are evolving to meet these demands.

This has to be supported by cold chains, and the large online retailers, including Alibaba, are building their own frozen, chilled and ambient distribution systems. ‘When people try this type of shopping experience, they find it is easy and time-saving,’ says Qiang Ge, who works in marketing and sales at Cannon Far Eastern.

‘When people try this type of shopping experience, they find it is easy and time-saving. 

Qiang Ge, Cannon Far Eastern.

Demand for chilled and frozen food in China is growing rapidly. It reached 180 million tonnes in 2018, a 22% increase on the previous year, according to the China Federation of Logistics & Purchasing’s cold chain logistics committee.

The overall capacity of China’s refrigerated warehouses was 52 million tonne, or 130m m³, last year. This is an increase of 19% from 2017. Second- and third-tier cities, notably Wuhan, Hangzhou, Fuzhou, Jinan, Chongqing and Dalian, showed strong momentum. An additional 40 million tonne capacity will be needed this year if the country’s growing demand is to be met.

Chinese research institute Forward Intelligence estimates that the national market will come close to CNY 380bn ($53bn) in value in 2019, up from CNY 300bn in 2018. And it will continue to grow – the institute predicts the market will reach CNY 470bn in 2020. This represents compound annual growth of 16%/year.

Sprouting up

Over the past few years, ground has been broken across the country for the construction of a number of warehouses with capacities of about 10,000 tonne. However, there are concerns that some of these may prove hard to lease, either because the design is poor, or because it is difficult to see which market they will serve. Customised warehouses that are based on local demand and infrastructure conditions will lead to more sustained growth.

While the market for chilled and frozen distribution is growing, it is also becoming more concentrated. The sector’s heavyweights, Sinotrans and China Merchants Americold, have established the joint venture Sinotrans Cold Chain Logistics. Delivery giant SF Express has also teamed up with US-based HAVI Group to set up New HAVI.

Two factors are stimulating demand for chilled and frozen distribution. First, China is now importing more food than ever. Imports exceeded $70bn in 2018, more than 15 times the value of imports just 20 years ago.

A few new government policies may also have positive effects. For instance, China’s ban on the transport of live pigs following the outbreak of African swine fever this year will boost the business in the short term. The government has stipulated that pork should be slaughtered and frozen before transport.

It’s cheaper by rail

While the number and size of cold stores across China is growing, so is the number of insulated containers; these predominantly use polyurethane as insulation. The country had an estimated 164,000 refrigerated containers (reefers) in 2018, up 33% from 2017. China also moved 1.6 million tonne of chilled and frozen products by train last year. Railways are a particularly cost-effective way to move large volumes of frozen and chilled food long distances. The country has been investing in this method of transport, and rolled out nearly 20 new refrigerated freight trains in 2018.

Cannon has been involved in this business for many years in the West. Ge explained that the company’s experience in building components such as reefers, refrigerated containers for use on boats and rail and road distribution has been invaluable to the business.

For example, it has supplied machinery to the state railway carriage and wagon construction company that enables it to make insulated and refrigerated rolling stock. ‘We have several important customers for reefer trucks,’ Ge said. ‘We have several plants going into production. This is an interesting trend.’

Companies involved in the cold chain for food include Alibaba, Tao Bao and JD eMarket.

‘The companies which operate online are each building their own specific cold chain,’ said Maysta’s Daniel Fan, who is deputy director of the company’s innovation centre. ‘This includes items such as reefers, chilled or cold rooms, and refrigerated cabinets of different sizes. Its growth is made possible by government strategy.’

Greater integrity

Cannon’s Ge added that the government has taken a real interest in food safety. It has realised the importance of the integrity of the cold chain, from industrial freezer to the consumer.

‘The government is starting strict laws for food safety in transport,’ he said. ‘Rigorous temperature control along the food chain, along with the government setting tough requirements, are helping to grow the industry. For example, the truck transporting chilled food must be properly insulated, and it must have a compressor keep the products cold.’

The days of putting food into a polystyrene box with some ice and hoping for the best are over, he added.

‘The companies which operate online are each building their own specific cold chain.’ 

Daniel Fan, Maysta

These new laws are providing a huge opportunity for the reefer market and, in turn, for Cannon. ‘We are developing solutions for this market,’ he said. The reefer market could take 80% of the new requirements for insulated transport products. ‘The opportunity is greatest when a new customer wants to enter the market. We are starting to get a lot of interest for the application.

Frank Zang, managing director at Bradbury Machinery (Shanghai), agreed. ‘The cold chain is growing, and China is a big country,’ he said, adding that the Chinese cold store association believes the market for cold-store construction is growing at 15-20%/year. There is great market potential for Bradbury, which specialises in making insulated metal panels following its purchase of Puma in 2015.

He stressed that the growth in the cold chain is designed to help spread some of the benefits that dwellers of China’s developed coastal regions have to people located in the west and north of the vast country. ‘China is exporting cold food to Europe, the US and India,’ Zang said. ‘The players in this sector are very good and want one product for transport and insulation. China is even exporting food to Vietnam – they have the demand.’ Companies are even exporting insulated panels to Vietnam by sea. ‘This is expensive, but demand is there. But the market is not big enough to support a dedicated plan.’

The Chinese insulated board market is 40% PIR and 60% PUR, according to Emanuele Bellazzo, sales manager for insulation board lines at Hennecke OMS said. However, Maysta’s Fan believes the use of PIR in China is slightly unusual. This is because the formulations often contain some polyether polyols, which are easier to process on Chinese equipment, he said.

A new gas blowing

While the cold chain is growing in complexity, the blowing agent used in the insulating foam will change by the end of 2020 as the market moves away from HFC 141-b. Pentane will become the predominant blowing agent technology, because of the balance it offers between price and insulation performance.

‘The price of HFO is high,’ and formulations based on water are very technically demanding, claimed Maysta’s Fan. Formulations are under development, but there are problems with the foam shrinking and it can be a challenge to make it adhere to metal panels. Foams blown with water have a high K factor, but that advantage is balanced by the shrinkage in addition problems. He believes that China can solve the issues with water technology, but it will take time.

Bradbury’s Zang believes it represents a real opportunity, but there are challenges. ‘The market is very competitive, with international and local players,’ he said. ‘We make everything here, from foaming systems to products for Tier 1 cold chain operators.’ Tier 1 suppliers in this context are the national cold chain suppliers. The company has a factory in Shanghai which supplies the national market.

The move from 141-b affects both the cold chain and the final chilled container – domestic refrigerators. ‘Pentane has safety and storage issues,’ Fan explained. ‘These can be costly to solve, and it is easier for larger players to do this. But medium and small companies have problems with safety.’

Another problem, he said, is that HFOs are too expensive for most of the market. ‘Perhaps the next step, if not to use pentane, is to use a mixture of 245 or water and 245,’ he said. ‘There are formulations in the market at the moment. The answer changes from customer to customer. Whoever can make the right additive package with silicone will make money in the domestic refrigeration market.’

Two or three biggest producers use pentane, Fan said, and they also use a mixture of 245, pentane and LBA and C5. These combinations give low K factor and high insulation. Refrigerators made this way are exported to Europe, and the balance are sold domestically. However, most pentane-blown fridges made in China are sold in China.

Cluster together

For machinery makers, it looks like the era of rapid refrigerator production capacity growth has passed. Ge said that in 2018, the Chinese market shrank slightly.

Hennecke sales manager Sawyer Chen agreed. ‘A lot of investment has happened,’ he said. ‘Now it is slowing; they have enough capacity for the market. New business is about retrofitting or replacement of old machines.’

He added that five to eight years ago, they received many enquiries for the new plants. ‘Now there are about half the number of projects and they are more complex,’ he said. We have to include new customer demands. Historically, there was just one mix head, while now there can be two. Processing is more complicated.’

‘China is even exporting food to Vietnam – they have the demand,’ 

Frank Zang, Bradbury

In China, he said, 80% of refrigerators are made at three production hubs, in Guangzhou, Chengado and Hufai. Hennecke has even had projects to retrofit all of the machines on an individual production site.

Cannon’s Ge said his company is more focused on customisation of production. This is becoming necessary to meet customer demands as refrigerator makers move away from standard products.

In the future, it is possible that there will not be a fixed size for a refrigerator, leaving manufacturers having to deal with different, and more complex, product mixes. By using digital technology the final customer will send their needs one by one to refrigerator manufacturers. Haier has already started doing this.

Fill faster

Consumer demand is changing, too. ‘The trend in China is for consumers to want larger domestic refrigerators,’ Chen said. ‘These can be 500L capacity, or bigger. To meet this demand, refrigerator producers need bigger fixtures, upgraded mix heads and meters. They also need rigid polyurethane formulations with a high flow rate.’

'New business is about retrofitting or replacement of old machines'  

Sawyer Chen, Hennecke

The rate of fill has doubled over the past 10 years, he said. About 10 years ago, flow rate was typically 1kg/second, but now it could be 2kg/second. ‘We need big mix heads and have to adopt to the components which are being made,’ Chen explained. ‘This could mean a change the injection point. This has been done traditionally from the bottom through the compressor core. Now, it is about using two or three injectors, or moving to vacuum-assisted filling processes. When the process changes, then the machinery has to change.’

Chen said his company builds machines to customer demands, but standard machines are more commonly supplied. About 20% are customised. The cold chain sector faces challenges These include regional imbalances in warehouse capacity, and some produce sectors such as agriculture are battling with first-mile logistics problems. Meanwhile, Hubei, Hunan and Shandong provinces have too much capacity and, in some cases, outdated facilities. In 2018, a total of 2 million tonne of refrigerated warehouse capacity was hard to lease to users.

Despite these problems, with a rapidly growing cold chain and an established domestic refrigeration market, there are plenty of opportunities for raw material suppliers and machinery makers in China at the moment.