Monday, February 27, 2012

When is a Container Shipping Rate Agreement a Freight Cartel?

How Things Have Changed Over Decades
Shipping News Feature

WORLDWIDE – For those of you with long memories time was when a free market economy in terms of international container shipping meant using a conference line or one of the independents such as Lykes Lines who traded outside the confines of the agreements between the major carriers. Freight was allocated according to whose ship was most convenient and the rates on all conference carriers was supposedly identical whilst the independents could trade on a lower tariff if they so wished.

In the next few days the new G6 Alliance, formed from the three members of the Grand Alliance (Hapag-Lloyd, NYK, and OOCL) and the New World Alliance (APL, Hyundai Merchant Marine and MOL) amid allegations of a ‘Super Cartel’ from the Asian Shippers’ Council, will commence services in the latest trend of cooperation between many of the world’s leading box carriers. The early launch is to benefit from the large rate hikes other carriers are imposing. Once again shippers are facing massive increases across the board as the lines try to stay afloat financially in the face of excess new build tonnage and lower or static freight levels.

So here we are, lines openly cooperating, rates equalised and surcharges mutually agreed whilst the bulk shipping sector sees the indices slump with each vessel fighting to offer lower rates than the opposition just to try and cover costs, and that not too successfully. If we look back a few years we see a radically different reaction to such collaboration and try to understand what has changed.

In the early 1990’s numerous large container carriers joined together, quite openly, in what was known as the Trans Atlantic Alliance (TAA). Its stated purpose was to bring stability to the east and westbound ocean trade lanes and its members read like a who’s who of sea freight carriers. And the reason for such an agreement? Simple, too much empty tonnage sitting at sea thus the lines joint statement at the time maintaining that stability could be achieved only by regulating the utilization of existing capacity, in order to allow the increase in freight rate levels (sound familiar?).

So what happened to the TAA? For those who weren’t around to remember, the EU anti trust commission happened. In a ruling in October 1994 quoting infringements in a number of areas of competition the TAA was effectively wound up by EU authorities. In the judgement at the time the Commission ruled that, whereas before the shipping conferences, with around 50% of available trade, had been in competition with several companies who were not signatories to the conference thus promoting fair competition, the TAA were judged to have introduced very large surcharges at very short notice which, whilst benefitting rivals in the short term caused an imbalance in the trade and this fact had been brought to the notice of the EU by several complainants.

Up to the formation of the TAA the conferences excluded certain major lines which ensured competition. As well as Lykes these included OOCL, MSC, Evergreen and several others some of whom were members of other trade pacts such as Eurocorde and Gulfway which effectively were discussion groups to advise each other of rates within Conference and Non Conference companies. Members of the nine east coast USA/ European Conferences could negotiate rates for contract shippers below the agreed partnership rates (sometimes 20% lower) but had to keep all partners advised of such actions.

The anti trust authorities decided that the TAA was not a liner conference agreement and therefore not exempt from EU cartel legislation, and the way the TAA were able to influence the cost of shipping freight across the Atlantic was therefore illegitimate. Obviously, being the EU, the rulings in question take up hundreds of paragraphs but the bottom line was the objectors, which included such notables as various Port Authorities, the Shippers’ Councils of Europe, Germany, Britain, France and Spain, the British International Freight Association (BIFA) plus numerous other freight forwarders and their representative organisations, won the day.

In a few days we shall see swingeing increases across the board from virtually all major container carriers on some of the world’s busiest freight trade routes. Effective immediately shippers can look forward to global ‘Rate Restoration’ programmes meaning up to an $800 leap per TEU for westbound freight from Asia and virtually all other major trade lanes similarly affected. So why are we not hearing screams of anguish echoing through the hallowed halls of the EU this time?

Put simply in the words of Peter Quantrill, Director General of BIFA ‘the world has changed.’ In the intervening years deregulation has left the world a healthier place as regards rate negotiation with an undercurrent of wheeling and dealing that was not present when the TAA was demanding increases. The big container companies are paying the price for ambitious shipbuilding programmes and now, despite the avowed intent to charge much more for their services, nobody believes that the freight salesman’s prime targets, the mammoth buyers of space, are going to pay anything like the published increases.

Nowadays the groups who campaigned so vigorously against the TAA increases do not indulge in tilting at windmills, the huge anti trust fines levied on freight forwarders and carriers alike in the past couple of years as US and global Courts found corruption as they saw it in every nook and cranny resulted in billions of dollars for the Governments’ coffers, millions for lawyers and a severe loss of face (and cash) for many of the big players in the freight community. The Courts’ actions may have had exactly the opposite of the desired effect, frightening industry stakeholders who might otherwise have campaigned against the rise in costs.

None of the representative organisations will now put heads above the parapet over matters concerning pricing for fear of the financial and commercial repercussions. With trade roughly evenly spread on the Asia/ European routes between G6, the new MSC/CMA CGM alliance and Maersk, which, with its new guaranteed delivery service claims it will keep the others honest, and with no major dissenters to speak of as yet pursuing the legal route with concise targeted objections, the EU are presumably happy to let matters lie.

Ron Widdows, CEO of APL speaking for the new G6 alliance is quoted as saying ‘there is no coordination of price in any way, shape or form at work here, so we can’t talk about rates, and from the customer’s standpoint, it actually improves the number of choices and options that they have’, but then that’s what the TAA said. So what is actually the difference between the now defunct TAA and, say, the Transpacific Stabilization Agreement or the new alliances with their obviously coordinated tariffs aimed principally at the smaller class of shipper?

Answers on a postcard please (or add your comments below).

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