Block exemption working
FMC surveys industry to measure impact of EU ending conference system.
By Chris Dupin
Carriers have weighed in on the effect of the European Union's October 2008 decision to repeal the block exemption for liner shipping conferences as part of an investigation being conducted by the U.S. Federal Maritime Commission.
An FMC request for comments drew just 16 responses ' 13 from individual carriers, two from Asian ship owner groups, and one from a consultant. It did not, at least initially, gener-ate comments from individual shippers or their trade organizations, ports and terminal operators, or intermediaries like forwarders and non-vessel-operating common carriers.
But shipper concerns helped motivate the study, with the FMC explaining in the notice of inquiry that it was 'cognizant of recommendations made by the National Industrial Transportation League to the Antitrust Modernization Commission' in 2006 that in light of the EU block exemption repeal, 'it would be appropriate to undertake a review of the antitrust immunity under the Shipping Act,' the primary piece of legislation for regulating liner shipping in the United States.
The FMC will use the answers to the questions as one source of information for a report scheduled to be completed later this year.
FMC Chairman Richard Lidinsky said there was keen interest in the study at a meeting of the European Maritime Law Organization in Dublin in October because it is the first comprehensive look at ending antitrust immunity for conferences in Europe.
Lidinsky's counsel said the FMC plans to move forward analyzing the comments it has received from carriers and their trade organizations, but added the FMC is 'generally quite welcoming if other parties or members of the public would like to submit additional input after our due date. We definitely want to hear from all sides of this issue.'
The FMC could also reopen the comment period.
Range Of Opinion. Some carriers told the FMC that the repeal has been no big deal, while others said whatever effect it may have was masked by the global recession. Yet others noted the repeal exacerbated turmoil in the shipping industry.
The commission posted a questionnaire, and respondents had the option of making some or all of their comments confidential, and they could answer as many or as few of the questions as they liked.
Maersk Line, the world's largest container carrier, told the FMC it has 'not identified any appreciable impact on its commercial activities in any trade lane that it attributes to the termination of the EU block exemption. This is because of effective competition already being in place before September 2006' when the EU announced plans to eliminate the block exemption in 2008.
NYK also said there has been no clear impact that can be identified since 2008. Chandler, Arizona-based consultant Gary Ferrulli of Global Logistics & Transport Consulting said, 'the impacts were minimal: carriers, offerings are roughly the same and reflect market place activities.'
Peter Gatti, executive vice president of the NIT League, said, 'several of the European carriers see little impact on their operations because they weren't using the immunity anyway. This is precisely why we've seen some European carriers making public statements elsewhere that they are expecting at some point for the U.S. to do the same as Europe and because they do not use the immunity ' there will be little to no impact on what they do.'
Recession Masked Effect. APL said the economic crisis 'masked whatever separate impact the revocation of the block exemption may have had,' and that it was 'impossible to draw any meaningful conclusions about short and medium term impacts of the change in EU law.'
Hapag-Lloyd made a similar observation, suggesting the relative impact of the rule change could be better identified after the industry operates under normal economic conditions for at least two consecutive years without conferences.
'That can be expected to be in 2011-2012 (2010 still is an extraordinary year of recovery),' the German carrier said.
'The EU's decision to repeal immunity took place less than three years ago,' said the Asian Shipowners' Forum (ASF). 'There is still too short a period for the commission to fully gauge the longer term impact of the EU's decision on carrier investments in the trade because these kinds of decisions are made over the course of many years.'
Evergreen said the block exemption termination 'affected the development of the Far East/Europe and transatlantic trades,' which are regulated by European authorities. Even though it was not a member of either of the conferences in those two trades, it said, 'the abolition increased the volatility of shipping markets, which in turn affected the stability of supply chains.'
Evergreen added, 'This period of volatility, including vessel layups and service string cuts, was exacerbated by the lack of a stabilizing discussion platform formerly available to conference carriers before the termination of the conference block exemption.
'As a result, recovery in the shipping market was delayed because conference carriers were making individual decisions without benefit of reference to conference discussions and evaluation of market conditions,' Evergreen contended.
In the North Atlantic, Evergreen said that without rate guidelines proposed by the Trans-Atlantic Conference Agreement, 'it becomes easier for some carriers to launch destructive pricing campaigns to gain market shares. Such activities can threaten the survival of small-size, low-cost carriers and thereby affect market competition.' Similarly it said without the 'stabilizing influence of the Far East Freight Conference, the economic downturn has led to destructive pricing wars which have threatened the survival of small, low cost carriers leaving only large size major carriers to compete.'
The carrier said the continued existence of discussion agreements in the transpacific 'helped to decrease part of the volatility resulting from the economic downturn from 2008 onward.'
The Japanese Shipowners Association submitted cargo volume and freight rate statistics from January 2008 through October 2010 from the Japan Maritime Center, which it said illustrated 'the rate volatility of the Asia/EU trade greatly exceeds that of the Asia/U.S. trade, which maintains immunity systems in both port-end countries despite the similar trends in the container cargo movements.'
'Indispensable' Immunity. Antitrust immunity is 'indispensable for the healthy development of the international shipping industry, as well as the whole international trading industry,' the Japanese ship owners said. 'The immunity system is the international regulatory norm, as it is permitted in virtually all major trading nations around the world.' It added it supported Singapore's decision to extend immunity through 2015 without any significant changes to its scope.
The ASF, which represents ship owner groups in 13 Asian countries, as well as Australia, also endorsed antitrust immunity as 'necessary for a healthy international shipping industry.'
|'Shipping is international by nature, and international trade relies on it being able to flourish and respond directly to the needs of trade, not to their own or collective ambitions.'|
|European Shippers Council|
It quoted the review by the Competition Commission of Singapore that said liner shipping agreements have a 'net economic benefit' and provide 'a higher degree of connectivity and service choice for Singapore's importers and exporters.'
The European Shippers Council (ESC) was a strong proponent of ending the block exemption in Europe in 2008, and opposed Singapore's decision in December 2010 to extend its block exemption for liner shipping through the end of 2015.
|van der Jagt|
While the ESC did not submit a comment to the FMC, Secretary General Nicolette van der Jagt disagreed with contentions that ending the block exemption brought instability. 'We believe that this is mainly because carriers are hanging onto the vicious circle of trying to gain market shares,' she said.
The ESC told the Singapore Competition Commission: 'Remaining immunities from antitrust rules hurt Europe's competitors as much as they hurt us: shipping is international by nature, and international trade relies on it being able to flourish and respond directly to the needs of trade, not to their own or collective ambitions.'
ASF said, 'Prior to the EU's policy change, Asia/Europe westbound rates were on average 1.2 times higher than transpacific eastbound rates. However after the EU's policy change, the Asia/Europe rates rose to 2.5 times that of the transpacific rates.' From 2008 to 2010, it also said Asia/Europe rates were more volatile than the transpacific ' 'as a result of the global financial crises, rates in the EU trade suffered significantly more severe drops that were followed by sharp increases.'
Israel's Zim Line agreed volatility has increased in the Europe/Asia trade compared to the transpacific, and said there has been reduced services and greater number of service terminations where there is no immunity. In its comments, it included a table based on Drewry statistics that showed from the second quarter 2008 to fourth quarter 2010 the number of services on the Asia/Europe trade fell 22 percent and North Atlantic fell 31 percent, while the number of services in the transpacific was stable. Similarly in the same period, it said Asia/Europe capacity fell 6 percent and North Atlantic capacity fell 26 percent, while capacity in the transpacific grew 16 percent.
Hapag-Lloyd agreed. 'The major EU trades have experienced more rate volatility over the past two years than the major non-EU trades. We believe this relates at least in part to the stabilizing influence that comes from carriers being able to share market information and discuss general rate trends and establish voluntary rate guidelines.'
Volatility is a negative, Hapag-Lloyd said, because shippers value 'stability and predictability and do not like wild swings in rates and service. In addition, going forward, greater volatility may cause some carriers to be more conservative in long-term planning and investment in expensive vessels and other assets.'
Investment Depressor? 'The lack of a discussion platform in the Far East-to-Europe trade lane ' has negatively affected long-term investment strategy and decisions in regard to vessel capacity in the trades,' Evergreen said.
The ASF made a similar argument, saying rate agreements 'play an important role in mitigating predatory and other destructive pricing practices that undermine the continuation of high level services.'
They noted liner shipping is a capital-intensive industry, with a string of eight to 10 8,000-TEU ships costing $1.3 billion.
'Prolonged rate volatility can lead to destructive competition between carriers.' It said rate wars, 'if left unchecked, could result in carriers leaving the trade, reducing service, being forced out of business, or being forced to consolidate, all of which would reduce competitive options to shippers,' as well as reduced investment by carriers.
Hapag-Lloyd said under the old regime, carriers were able to commit to longer advance notice for general rate increases as well as transparency in and uniform calculation of supplemental charges for things such as bunkers and terminal handling.
Carriers have had to introduce their own bunker charges, and Hapag-Lloyd said terminal handling charges have gone up ' 20 percent on average in Europe since October 2008, less in other areas.
The Japanese ship owners said the average bunker adjustment factor in the Asia/Europe trade 'increases more than that of the Asia/U.S. trade in the case of an increase in marine fuel prices.' It also said the terminal handing charge, 'which has remained virtually unchanged for nearly 15 years in Europe, has recently increased in most European ports around the same time as the repeal,' according to a report prepared for the European Commission in October 2009.
The ASF said there has also been 'a significant increase in shippers' complaints in the EU trades, as shippers have repeatedly informed carriers that wild rate and service swings must be avoided, and they desire the same stability and predictability that is experienced in other trades as the EU trades as well. Difficulties in comparing and negotiating rates and surcharges have also become a serious concern for many shippers.'
The ASF warned rate and service volatility could have 'lasting consequences.' Depressed rates over a prolonged period could lead to service reductions in terms of available capacity, port coverage, direct port calls, frequency of sailings and overall service quality, it said.
Small Carriers. Evergreen said 'the increasing volatility of the shipping market made it harder for small-size carriers to survive the market downturn.'
The block exemption termination 'affected the development of the Far East/Europe and transatlantic trades,' the carrier said. Even though it was not a member of either conference in those two trades, it said, 'the abolition increased the volatility of shipping markets, which in turn affected the stability of supply chains.'
But Maersk disagreed with this, saying it did not believe any class of shipper or liner company benefited from or was put at a disadvantage from the end of the block exemption.
Yang Ming noted that with the end of conferences 'we are no longer able to benchmark the conference tariff and surcharges, and have to handle public relations and other issues independently. To that end, we have, at our expense and at a detriment to our available resources, assigned a new dedicated team whose functions are to ensure EU compliance, develop trade intelligences collection, ensure tariff maintenance, and develop and provide employee education. Overall, there have been more constraints in daily business activities and the cost of doing business has increased.'
Maersk said it would be 'easier to conduct an international liner shipping business if there were more common rules' ' pointing to the proposed United Nations cargo liability treaty, commonly called the Rotterdam Rules, as something that it feels would be beneficial if adopted on a global basis.
What Shippers Want. Gatti of the NIT League noted 'advocates for immunity say it is necessary for rate stability and that shippers' largest concern is for rate stability.'
But he said, 'Shippers in Europe told the competition authorities quite a different story when the question of retaining the block exemption was being considered. They wanted a competitive market where prices and services would be determined by each supplier.
'That requires a determination of what their respective costs are plus a reasonable return on investment,' he noted. That would mean no-frills carriers could offer lower rates, a business model that he said a few European carriers have successfully used for years.
'The authorities in Europe determined that the maintenance of the block exemption provided little incentive for carriers to provide such customized pricing and that left the customer with fewer choices for price and service (one size fits all),' Gatti said.
30 Percent Threshold. While the EU has banned shipping conferences, it has allowed carriers to continue alliances, vessel sharing agreements and other sorts of operational agreements.
Maersk said such cooperation has 'a positive impact on service availability and the cost of liner shipping services.' Its vessel sharing agreements (VSAs) with CMA CGM has enhanced its offerings to the Pacific Northwest and U.S. East Coast. The Danish carrier also uses VSAs with CMA CGM and Mediterranean Shipping Co. to supplement its sailings to the U.S. West Coast.
'Operational agreements permit ocean carriers to reduce their costs by sharing vessel space and have led to the introduction of larger, more efficient vessels in several trades,' Maersk said. 'The economies of scale resulting from operational agreements generally lead to lower prices for consumers,' it added, because carriers pass on some of their savings to shippers.
NYK said, 'With additional tonnage brought through VSAs, we can offer more port coverage, fixed weekly sailings, expansion to new markets, and the ability to adapt based on our customer's changes to their shipping patterns and international markets. For example, in 1995 the first direct calls to Shanghai were established by carriers in the market, but by 2008 there were 52 direct calls to 15 ports in China at a time when ships were getting progressively larger. These expansions of service could not have been possible without vessel sharing agreements.'
The Japanese carrier also noted that operational agreements 'do not just benefit large ocean carriers like Maersk Line. Such arrangements also make it possible for small carriers to compete as they might not be able to operate weekly services as generally required without a string of shared vessels.'
Maersk said it has 'a positive view' of the EU exemption on operational agreements that have a market share of less than 30 percent. It 'demonstrates a proper balance between the application of competition laws and the material impact of ocean carrier cooperation on the shipping markets.'
Gatti said efficiency-enhancing agreements like vessel sharing and other rationalizing services 'are critical functions that must be maintained and those carriers reflecting on the European consortia rules seem to be comfortable with them.
'Generally speaking, the league would thoroughly agree with these views because the carriers' agreements are largely beneficial to shippers,' he said. If carriers are not using rate immunity where it is permitted, there seems no reason for its continued use in trades such as those that touch the United States, he added.
But Hapag-Lloyd said the 30 percent threshold is 'unnecessary and burdensome. Passing the threshold means deeper scrutiny (self assessment) without resulting into any regulatory benefit.'
NYK said, 'Any threshold would likely have more of an effect on smaller trades, as it may potentially limit a U.S. shipper's choice in the ocean service marketplace.'