Global regulators are failing to keep the container shipping industry in check, allowing them to wield disproportionate levels of power over service providers and shippers, argues Olaf Merk of the International Trade Forum (ITF).
The need for amended regulation to curb carriers’ power is clear with the industry’s exemption from antitrust law in Europe, said Merk, the ports and shipping expert at the ITF, an inter-governmental organization within the Organization for Economic Co-operation and Development (OECD). Merk, a vocal opponent of the consortia block exemption regulation (CBER), points to how European carriers can jointly contract with port providers and manage capacity together, and freely share operational information.
His comments come as carriers have been able to boost profitability by better controlling capacity in the face of falling demand, partly thanks to rapid consolidation. Lars Jensen, CEO of Sea-Intelligence Maritime Consulting, said in a LinkedIn post this week that if carriers could maintain capacity discipline and first-half rate levels for the rest of the year, the industry stood to see profits of $9 billion.
But Merk told JOC.com in an interview that container shipping profits were not a reflection of carriers’ ability to provide value add to customers, but rather of what he called monopoly rents. “The current situation — higher carrier profits but no service improvements — should be a reason for concern for competition authorities,” he said.
Carriers have been swift to justify the need for blank sailings on the major trades, with Rolf Habben Jansen, CEO of Hapag-Lloyd; Rodolphe Saadé, chairman and CEO of CMA CGM group; and Jeremy Nixon, CEO of Ocean Network Express, pointing out on episodes of JOC Uncharted last month that demand has fallen significantly and the carriers have no option but to take out cost.
So what is the container shipping industry envisioned by Merk? In a recent ITF Transport Policy Matters report, he muses over a future with regionalized trade, smaller firms, smaller ships, more direct port calls, more real competition, independent regulators, and firms with local roots that create local value, care for their local environments, and pay taxes.
He said with many world leaders calling for greater regional sourcing to cut carbon dioxide (CO2) emissions and avoid supply chain disruption caused by global issues such as the coronavirus disease 2019 (COVID-19), long-range containerized transport might be less inevitable than previously thought, opening the possibility of fundamental change.
In the Transport Policy Matters report, Merk even questioned the economies of scale approach that dominates the container shipping strategy and is achieved through unit cost reductions, ever larger ships, and industry consolidation.
“The large majority of the goods we consume are now moved by a handful of very large global shipping companies that source their workforce from developing countries and register their ships in tax havens,” he noted in the report. “These companies have accumulated as much debt as a mid-size country, they emit as much CO2 as a big country, and have difficulties to be profitable except in the most bullish of times.”
Asleep at the helm?
Regulators, Merk says, are not properly overseeing the container shipping industry, creating ambiguity over industry practices, with the coordinated nature of the blank sailings among carrier alliances a case in point.
“The experience so far in 2020 shows that carriers have collectively been able to withdraw enough ship capacity — create scarcity — to push up freight rates,” he said, adding that competition regulators did not appear to be interested in probing the blank sailings.
To match capacity with falling demand, the 2M Alliance and THE Alliance withdrew huge amounts of capacity from the major trades in the second quarter and have extended much of the blank sailings through September. By removing so much capacity, carriers have not only prevented rates from collapsing, but the rates on Asia-Europe and especially the trans-Pacific have remained far above year-over-year levels.
“Various competition authorities do not regularly monitor developments in liner shipping, but look into it when there are complaints,” he said. “We understand that the European Commission has suggested various stakeholders file complaints on these various issues, so we suppose this is what will happen fairly soon.”
On whether blank sailings by alliances infringed on anti-competitive regulations with the European Commission, a spokesperson said, “We have no specific comment.”
Profitability vs service
Merk’s criticism of container shipping is from the perspective of customers of the carriers, but he was not convinced by the argument that the stable profitability levels being enjoyed by carriers would ultimately benefit the larger supply chain through improved service levels.
“There is no perfect competition in container shipping,” he said. “There are oligopolies, on some routes monopolies, so profits are not reflections of being great at providing value add to customers, but rather of monopoly rents.
“Market research shows that around half of the customers would be willing to pay more if carriers would provide better service,” Merk added. “So carriers could be more profitable if they would tap into that market and provide the services that these customers want. Another way of looking at it: Since 2012, the main global carriers have made profits in 18 out of 33 quarters, yet their service levels over that period have declined on various aspects as we showed in our reports.”
The financial performance of carriers is closely watched by the industry following the supply chain chaos caused by the unexpected bankruptcy of Hanjin Shipping in 2016. With second quarter volumes heavily impacted by lockdowns in the major markets of Europe and North America, the strength of spot rates took most industry-watchers by surprise.
Drewry Shipping Consultants even raised the question of whether the high spot rate levels despite weak demand were an indication of carriers profiteering from the coronavirus impact.
“Container shipping lines are one of the few sectors that can be said to be having a good pandemic,” the analyst noted in its latest Container Insight Weekly. “Perversely, despite a sudden falloff in demand for their services, lines look set this year to make more money than they have in a long time as their crisis-management tactics [essentially blanking voyages] has paid off handsomely.”
But the notion that carriers were profiting from the coronavirus was given short shrift by Jensen. He said the global merchandise trade was valued at $13 trillion for manufactured goods alone, with ocean freight accounting for a value of about 1.3 cents for each dollar of goods transported.
“The rate increase indicated by the CCFI index thus far in 2020 means that each dollar of goods have seen a freight rate increase of $0.0009 — is that tantamount to profiteering?” Jensen asked.
Greg Knowler, Senior Europe Editor
https://www.joc.com/regulation-policy/global-regulators-failing-keep-container-shipping-fair-itf%E2%80%99s-merk_20200707.html