Monday, March 31, 2014

EU Container Shipping Exemption Continues to Reduce Freight Anti-Trust Prosecutions

Proposed 5 Year Extension of Consortia Regulation Welcomed by Industry Groups
Shipping News Feature

EUROPE – WORLDWIDE – Today (31 March) sees the closure of the latest public consultation by the European Commission regarding consortia within the container shipping market and, given the billions of euros and dollars we have witnessed the freight industry having inflicted on it for global cartel activities in the past couple of years, the response from some of the most influential bodies in the sector has been swift and thorough and the opinions forthcoming now are, somewhat predictably, favourable given the preliminary announcement emanating from Brussels.

Only twelve weeks was given for this latest consultation, EU rules forbid less than one month but as the previous request for opinions was held less than a year ago the authorities felt this adequate. Following a review of the responses to the latest survey the EU Advisory Committee for Restrictive Agreements and Dominant Position still has to be consulted before the official text as to the way forward is rubber stamped and released.

As it stands there is block exemption to the operation of ‘liner consortia’ which is valid until 25 April 2015 from which time these inter line co-operations would become illegal. Having read the responses to the consultation so far and considered the matter the Commission is apparently minded to allow the current situation with container consortia being excluded from normal antitrust regulations assuming certain conditions are met, to run for further five year term, the maximum period allowed under EU regulations. The Commission’s draft regulation can be seen here. Meanwhile antitrust prosecutions of box carriers deemed to have breached the rules will continue.

Three of the shipping industry’s leading bodies have responded with a jointly agreed set of comments on the EU decision, the World Shipping Council (WSC), the European Community Shipowners’ Associations (ECSA), and the International Chamber of Shipping (ICS) have detailed precisely why they feel extension of the exclusion is justified saying throughout the history of the Council and Commission regulations concerning liner shipping consortia, the Parliament, the Council, and the Commission have consistently found that consortia bring economic benefits. Despite a somewhat counter intuitive set of circumstances the WSC quotes from two previous Council and Commission Regulations saying:

“Joint-service agreements between liner shipping companies with the aim of rationalising their operations by means of technical, operational and/or commercial arrangements (described in shipping circles as consortia) can help to provide the necessary means for improving the productivity of liner shipping services and promoting technical and economic progress.”

“Users of the shipping services provided by consortia may benefit from the improvements in productivity which consortia can bring about. Those benefits may also take the form of an improvement in the frequency of sailings and port calls, or an improvement in scheduling as well as better quality and personalised services through the use of more modern vessels and other equipment, including port facilities.”

The latest (and incidentally greatest in terms of TEU capability) announcement regarding open cooperation between the box liner groups is the P3 consortium which has caused so much interest, and indeed controversy lately, as we see the three largest container carriers in the world join together (for history go to Search Box and enter P3). The lines have to walk a potentially devastatingly expensive line in the way they put these deals together, historically we have seen what were considered normal cooperation in past years interpreted as collusion and corruption in later days, with the resultant bonus in fines for the regulatory authorities.

The three respondents to the EU Commission report point out several relevant factors which they say supports the decision to leave current conditions well alone. They insist that the fundamental characteristics of the liner shipping industry that have been the basis of the consortia block exemption since 1995 remain unchanged today. Specifically they say, the industry is not concentrated, there are no regulatory barriers to carriers entering markets, and the industry struggles with overcapacity for structural, cyclical and seasonal reasons, but such excess capacity cannot be utilised or easily idled. Capital and operating costs are high and the industry is extremely competitive with shippers having an array of service choices. Profits (where they exist) and returns on investment typically lag behind those of other major industries. In short, the industry is a very challenging one for vessel operators and is a favourable one for the European importers and exporters that use the services of those vessel operators.

The point about profits is a key one, many of the box carriers suffered terribly during the dark days following 2009 and for many things have not greatly improved since. For a lot of these companies the object of profits is survival rather than shareholder dividends and over capacity remains a spectre, particularly for the mid-range companies which increasingly need to combine offerings to ensure good service on any particular route.

The WSC, ECSA and ICS state that the trend toward larger container ships which we are witnessing, many ordered during halcyon days before the ever increasing levels of trade showed itself to be a bubble, plus the rising cost of fuel, are the principal factors which have actually changed since the inception of the current regulations. The three quote Alphaliner’s figures to convincing effect saying:

“In January of 2007 there were just 2 container vessels in excess of 10,000 TEUs. As of December 31, 2012, there were 162 such vessels. By the end of December 2016, based on analysis of order books, there will be an estimated 281 container vessels over 10,000 TEUs. Also, the next largest container vessel size (7,500 to 9,999 TEUs) has grown from 145 ships in 2007 to 326 ships at the end of 2012, with continued projected growth by the end of 2016 to 437 ships. These vessel size increases are in addition to an earlier increase that occurred between 2005 and 2006, when the size of the largest container vessel jumped from 9,500 TEUs to 15,500 TEUs in a single year. The largest container ships being delivered today have a capacity of 18,000 TEUs [and above].”

Whilst the new vessels have taken account of the requirement both for increased fuel efficiency and lower emissions, bunker fuel has doubled in price in the six years to 2013 and there are signs that the new MARPOL regulations insisting on low sulphur content will kick conventionally heavy oil powered ship outgoings even higher. The much increased running costs can only be countered by more efficient operations by all box carriers, which effectively means more pooling of resources if shipping companies are not to go to the wall.

The three collaborators point out the obvious, larger ships equate to lower per unit costs, but only if they run at capacity or something near to it. Utilisation rate is critical to realising the designed efficiency of the larger vessels, and consortia are an important tool in attaining efficient utilisation rates. In many cases carriers simply do not have enough cargo to fill ships of this size on their own and vessel sharing allows carriers to use these large, expensive assets more efficiently than they otherwise could.

The statement issued by the WSC, ECSA and ICS concludes with a thinly veiled vote of thanks to the Commission saying that the consortia block exemption regulation, by removing legal risk from the mix of factors that must be evaluated by carriers considering consortia, allows those carriers to enter into, amend, and leave consortia based on grounds of economic efficiency, and not legal risk avoidance. The three believe that this in turn, makes consortia more fluid, more efficient, and more responsive to market forces.

They conclude that consortia are an integral part of the liner shipping industry, and they best serve the interests of all interested parties, shippers, carriers, regulators and the public, provided the rules that govern them are plain and transparent. They state that the current consortia block exemption regulation provides that clarity and transparency, and the shipping industry therefore strongly supports the Commission’s proposal to extend the applicable date of the consortia block exemption regulation until 25 April 2020.

Editor’s Note: To get a feel of the container market as it was we harked back in a 2012 article to the days of the Conference Lines at which time we pointed out that cooperation between container shipping lines seemed a valid target for these same European authorities back in the day (well 1994 actually).

To see just how much trade has now been seen as corruption in the logistics industry of late type cartel into the News Search box at the top of the page.