Thursday, July 7, 2016

Container Freight Shipping Lines Now Bound to Rules Regarding Price Hikes to Avoid Antitrust Breach

European Commission Extracts Promises on Future Cargo Tariffs
Shipping News Feature
EUROPE – WORLDWIDE – The European Commission has accepted commitments by fourteen of the world's largest container shipping companies which have given undertakings aiming to increase price transparency for customers and to reduce the likelihood of coordinating prices in the future. The Commission had expressed concerns that the box freight companies' practice of publishing their future price increase intentions might harm competition and customers by raising prices for their services to and from Europe, in breach of EU antitrust rules. Speaking following the EC's decision, the Commissioner in charge of competition policy, Margrethe Vestager, said:

"Container shipping accounts for the vast majority of the non-bulk freight carried by sea to and from Europe. Competitive shipping services are therefore essential for European companies and for the EU's economy as a whole. The commitments offered by the fourteen carriers will make prices for these services more transparent and increase competition."

Fourteen container line shipping companies have tended to regularly announce their intended future increases of freight prices on their websites, via the press, or in other ways. The carriers are CMA CGM (France), COSCO (China), Evergreen (Taiwan), Hamburg Süd (Germany), Hanjin (South Korea), Hapag Lloyd (Germany), HMM (South Korea), Maersk (Denmark), MOL (Japan), MSC (Switzerland), NYK (Japan), OOCL (Hong Kong), UASC (UAE) and ZIM (Israel).

Initially, China Shipping was part of the investigation but after it restructured and exited the container liner shipping business, the Commission found that it was not necessary for it to offer commitments.

These price announcements, known as General Rate Increases or GRI announcements, do not indicate the fixed final price for the service concerned, but only the amount of the increase in US$ per transported container unit, the affected trade route and the planned date of implementation. They frequently effect sizeable increases of several hundred US$ per TEU.

General Rate Increase announcements are made typically 3 to 5 weeks before their intended implementation date, and during that time some or all of the other carriers often announce similar intended rate increases for the same or similar route and the same or similar implementation dates. Carriers are not bound by the announced increases and some carriers have indeed postponed or modified announced general rate increases, possibly aligning them with those announced by other carriers.

The Commission had concerns that General Rate Increase announcements do not provide full information on new prices to customers but merely allow carriers to be aware of each other's pricing intentions and may make it possible for them to coordinate their behaviour.

Announcing future price increases may signal the intended market conduct of carriers and by reducing the level of uncertainty about their pricing behaviour, decrease their incentives to compete against each other. Because the announcements provide only partial information to customers, and may not be binding on the carriers, customers may not be able to rely on them and therefore carriers may be able to adjust prices without the risk of losing customers.

This practice may lead to higher prices for container liner shipping services and harm competition and customers, in breach of EU and European Economic Area (EEA) competition rules' ban on concerted practices between companies (Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 53 of the EEA Agreement). In order to address the Commission's concerns, the carriers offered the following commitments:

  • The carriers will stop publishing and communicating General Rate Increase announcements, i.e. changes to prices expressed solely as an amount or percentage of the change;
  • In order for any future price announcements to be useful for customers, the carriers will announce figures that include at least the five main elements of the total price (base rate, bunker charges, security charges, terminal handling charges and peak season charges if applicable);
  • Price announcements will be binding on the carriers as maximum prices for the announced period of validity (but carriers will remain free to offer prices below these ceilings)
  • Price announcements will not be made more than 31 days before their entry into force, which corresponds to the period when customers usually start booking in significant volumes (typically, customers plan their shipments between 4 weeks and 1 week before they need to move their consignments) and;
  • the commitments will not apply to:
    • communications with purchasers who already have an existing rate agreement in force on the route to which the communication refers
    • communications during bilateral negotiations or communications tailored to the needs of specific identified purchasers.

After carrying out a market test of the commitments, the Commission is satisfied that these adjustmnents address its concerns. They will increase price transparency for customers and reduce the likelihood of concerted price signalling by binding the carriers to the prices announced. The Commission has therefore made the commitments legally binding on the carriers for a period of three years starting from December 7, 2016.