U.S. exporters and logistics companies aren’t the only ones banging on the government’s door to take action against global container lines for alleged service failures and unfair pricing during the pandemic.
The clamor from global forwarder and shipper organizations about anticompetitive behavior got so loud that five competition authorities, including the U.S. Department of Justice, on Friday established a working group that will meet regularly to share intelligence and coordinate investigations of suspected antitrust violations.
Many buyers of ocean transportation say the carriers have manipulated tight capacity during the pandemic through deferred and canceled sailings, and other measures, to drive rates up, resulting in record profits estimated to top $200 billion last year. A combination of antitrust immunity, a dozen years of consolidation that has left eight major carriers partnering in three alliances and an expansion into broader logistics services and control of data has enabled the largest carriers to dominate the market.
It’s the definition of an oligopoly, argue many users.
The collaboration among the Justice Department, Canadian Competition Bureau, the Australian Competition and Consumer Commission, the New Zealand Commerce Commission and the U.K. Competition and Markets Authority parallels a review underway by the U.S. Federal Trade Commission into whether anticompetitive conduct by large retailers and distributors contributed to supply chain disruptions.
It follows a joint campaign launched last summer by the Federal Maritime Commission and DOJ to ramp up oversight of foreign ocean carriers regarding unfair rates and fees. The FMC is also conducting an audit of whether carriers are using their concentrated market status to overcharge shippers container late fees at ports.
“While the Competition Bureau has offered businesses flexibility in contributing to legitimate pandemic response efforts that benefit Canadians, we want to be clear: We have zero tolerance for any attempts to use pandemic-related supply chain disruptions as a cover for criminal collusion that harms consumers and damages Canada’s economy,” Commissioner Matthew Boswell said in a statement.
Organizations representing cargo owners and freight agents said the collaboration among governments is positive because no single country can properly oversee the conduct of foreign-owned shipping lines and examine their activities within powerful alliances.
The European Union was notably absent from the liner shipping investigation. It is the largest container import market after the U.S., but regulators there appear to be taking a wait-and-see approach.
Last week, the European Association for Forwarding, Transport, Logistics and Customs Services (CLECAT) called the global container lines a cartel and requested the European Commission investigate the degree of concentration, consolidation and coordination within the industry. The request repeated one made by a consortium of shipper groups last April for an investigation into market conditions and the behavior of the carrier industry.
“The profiteering of ocean shipping carriers resulting from their capacity management strategy allowed them to acquire the market power and financial war chest that they are now using to vertically integrate, increase rates and drive out independent freight forwarders in the downstream market. New discriminatory conduct towards freight forwarders, the key organizer of service delivery across all modes of transport in door-to-door operations, will ultimately disadvantage shippers and end consumers because of restricted choice in services and higher rates,” it said in a statement.
Various freight interests have warned for years that industry consolidation, combined with carrier participation in vessel-sharing agreements, is tilting the playing field against customers and that container lines should no longer enjoy exemptions from competition law. The dislocation of shipping networks and regular circulation flows of containers resulting from the economic shock of COVID and subsequent record demand for consumer goods jammed up ports worldwide, exacerbating inefficiencies that predate the pandemic.
Carriers have been able to defer or cancel bookings, use their alliance structures to shift vessels to the busiest trade lanes while leaving other regions short of capacity, and be selective about how much export cargo to accept.
In Australia, backlogs were made worse by work stoppages, resulting in shipping lines omitting major ports, congestion surcharges, slow container returns, gridlock at empty container yards and fewer empty refrigerated containers being repositioned in the market.
Exporters once benefited from favorable rates as carriers sought backhaul business but now are getting left behind as vessel operators quickly collect containers so they can pick up more high-margin import loads. Now they are fighting over available equipment and complain it can take weeks or months to place a vessel booking to reach key markets, which is driving up spot and contract rates — the same concerns voiced by U.S. agriculture exporters.
Many shippers have resorted to stockpiling containers, exacerbating inflationary pressures, according to the Freight & Trade Alliance and the Australian Peak Shippers Association (FTA/APSA).
Food-grade containers are often not clean enough, but when exporters complain, they are met with a take-it-or-leave-it attitude from yard operators and carriers unwilling to intervene, the shipper organization said in a paper to government officials examining potential maritime reforms.
The FTA/APSA warned that some Australian exporters may be forced to relocate elements of their supply chains to foreign countries to remain competitive.
A major complaint of U.S. cargo interests is that ocean carriers are applying late pickup fees even when ships are still stuck on a vessel and can’t be accessed because the carriers are starting the clock based on the scheduled delivery date and not the actual time of discharge from the vessel.
Carriers insist they have deployed every available vessel to handle the record cargo volumes and that the driver of supply chain backlogs is the enormous demand for goods meeting up against operational outages caused by unforeseen circumstances.
The World Shipping Council has said that the current situation is not caused by lack of competition, noting last year that there were more than 50 ocean carriers operating in excess of 1,000 vessels that provide about 180 liner services to U.S. importers and exporters. It said the so-called Herfindahl-Hirschman Index demonstrates that the U.S. international liner shipping market, based on current vessel capacity, is very competitive and that the DOJ uses this metric in its determinations.
The ocean carrier group also reiterated that container rates, while volatile, have typically been much lower and favored shippers over the past 15 years.
Forwarders and logistics companies in many regions say they face market-access challenges because some container lines now refuse to enter into contractual arrangements for regular service, forcing them onto the more expensive, and volatile, spot market.
The first sign of carriers refusing to sign contracts with logistics intermediaries came Jan. 1 from Hamburg Süd, a subsidiary of shipping giant Maersk, in the Australia and New Zealand market. Maersk has since expanded the strategy of focusing much of its coverage on multiyear contracts for the largest shippers and other carriers, such as CMA CGM, appear to be following suit.
The development represents a material loss of direct capacity for forwarders — perhaps as much as a fifth of their normal bookings that provided some sort of short- to long-term rate protection in exchange for minimum quantity commitments. And shippers of all stripes are seeing less of the cargo honored by the fixed contracts because of ultra-strong market conditions.
“We continue to provide evidence of prejudicial shipping line practices, surcharges and freight rates increases. Further investigation is essential,” Paul Zalia, director of the Freight & Trade Alliance, said in a statement.
Groups representing importers, exporters and freight forwarders are urging authorities to repeal antitrust exemptions that allow carriers to discuss operational issues as part of their alliance structures.
“A combination of factors has enabled the carriers to cherry-pick the highest volume shippers for longer-term contracts and relegate others to the spot market, where they will pay multiples of the rates offered to the favored few. Linked to this discriminatory strategy, freight fowarders are being ‘disintermediated’ in the process,” CLECAT said. “In the meantime, access to container capacity, carrier schedule performance and service reliability has further dropped.”
Large container lines — Maersk, CMA CGM and Mediterranean Shipping Co. in particular — have been using their new riches to buy more freight companies and compete directly with third-party logistics companies in providing value-added services to insulate themselves from commoditized port-to-port transportation. In the past year, Maersk has acquired two international freight forwarding companies, two customs brokerages, e-commerce delivery platforms in Europe and the U.S., and last week paid $1.8 billion for Pilot Freight Services to tap into its trucking and last-mile delivery network geared to e-commerce shippers.
“The vertical integration is particularly unfair and discriminatory as carriers — enjoying an exemption from normal competition rules — are using the windfall profits to compete against other sectors that have no such immunity,” said CLECAT Executive Director Nicolette van der Jagt.
The FTA/APSA this month recommended to the Australian Productivity Commission that protections provided to shipping lines under competition law be repealed. An alternative ask is for shipping lines to be regulated by the Australian Competition and Consumer Commission, or that a federal maritime regulator be appointed to safeguard importer and exporter interests, especially the appropriateness of shipping line and terminal surcharges, fees and penalties. The groups are also calling for guaranteed minimum service levels and notification periods of at least 30 days for any new fees, as is required in the U.S.
In its filing, the shipper group pointed to carriers imposing congestion surcharges on customers in September 2020 when there were labor actions at Port Botany in Sydney instead of directing the penalties at stevedores that failed to meet service standards.
“If not collusion, it is clearly a case of ‘follow the leader’ facilitated by a market without genuine competitive tension,” the document said.
Similar concerns are being voiced in the U.K.
“We are convinced that the well-documented chaos within the container shipping sector is leading to commercial power becoming increasingly concentrated, resulting in diminished market choice and competition, and distorted market conditions,” said Robert Keen, director general of the British International Freight Association, in a statement.
“BIFA members fully accept that a free market economy is open to all, but are increasingly concerned that the activities of the shipping lines, and the exemptions from legislation from which they benefit, are adversely and unfairly affecting their customers, especially freight forwarders and [smaller] businesses.
“The facts speak for themselves. During a period that has seen EU block exemption regulations carried forward into U.K. law, there has been huge market consolidation. The pandemic has highlighted and accelerated this development, which has also contributed to dreadful service levels, and hugely inflated rates, with carriers allocating vessels to the most profitable routes with little regard to the needs of their customers,” he said.
CLECAT noted that antitrust immunity also gives vessel operators exclusive control of supply chain data and the ability to set data standards, further their ability to limit competition and control rates for end-to-end services.
“There are no limits on the exchange of information between service providers that are now being vertically integrated, which makes information leakage into forwarding and inland distribution functions possible and inevitable,” the trade association said.
The Ocean Shipping Reform Act approved by a wide margin in the House notably attempts to address a proliferation of surcharges for late pickup and return of containers to port terminals and reduced service levels for export shippers.
The new rules, if they become law, would require ocean carriers to certify that demurrage and detention charges comply with the FMC’s guidelines on reasonable charges. Ocean carriers are also prohibited from declining export bookings if the containers can be provided in a timely and safe manner, and are going to a destination the carrier already has on its schedule.
The legislation also shifts the burden of proof in regulatory proceedings from shippers to the container lines and allows the FMC to self-initiate reviews of carriers’ business practices.