Judgment day

Judgment day This may be the year to judge whether the EU liner conference ban actually works as intended.

By Eric Johnson

      As the container shipping industry stages a recovery in 2010, a sharper focus will likely be placed on the effects of the liner conference ban enacted by the European Commission in October 2008.
      The 12-month period following the ban provided an imperfect Petri dish in which to measure the ban's effectiveness on carrier-shipper relations as a steep downturn in container demand plunged most lines deep into the red last year.
      That led to drastic rate cuts which benefited shippers beyond what European Union regulators intended when they outlawed conferences in trades to and from Europe.
      But as volumes and rates rebound, a clearer picture is likely to emerge this year about whether the ban will indeed provide a fairer playing field for shippers to compete.
      The most apparent change is that lines have amped up their collection of surcharges on everything from bunker costs to terminal handling to document fees.
      'There are a plethora of surcharges and I don't think anyone would argue it's not more complex now,' said Rod Riseborough, chief executive of Container Trade Statistics, the information dissemination entity that has emerged from the now-defunct European Liner Affairs Association (ELAA). 'Whether it's better or worse, it doesn't matter. It's changed. Surcharges aren't going away anytime soon.'
      Riseborough was speaking at Containerisation International's Global Liner Shipping conference in London in mid-April and wore the look of someone who's been through the tumult of the last few years. The ELAA used to lobby on behalf of liner carriers to keep the conference system in place. Riseborough, it seems, often finds himself defending the conference system even now that it's gone.
      'It seems to be expected (from shippers) that things, like 30-day rate increase notices and caps on terminal handling charges, should continue in an open market,' Riseborough said. 'Why? It's now a different business. I'm sure the volatility of rates will continue to become greater. It's an unrealistic expectation to expect the good bits for shippers to continue and the bad bits to go away.'
      Yet Adam Rashid, head of supply chain solutions in Europe for Sony, said shippers will learn to live with the consequences of a conference-free environment.
      'Shippers pay for freight, and we have never been satisfied by conferences,' Rashid said. 'After more than 100 years, they're gone. We wanted it that way, and if it doesn't work for us, that's life.'
      While most have theorized that 2009 was not the best year to gauge the effectiveness of the liner conference ban in Europe, Rashid had an alternate view.
      'Was it perhaps the ultimate test of a conference-free system?' he said. 'From summer 2009 through spring 2010, carriers have reduced supply and pushed up rates, all without the help of conferences. It's quite an accomplishment actually.
      'I think the rest of the world should follow the EU and make the industry as liberal as possible,' he continued. 'In the first half of 2009, there was a mixture of economic pain and uncertainty. But it looks to me that shipping lines have a lot of confidence in dealing with this new environment.'
      Riseborough said, however, that lines initially struggled to cope with lower demand and no ability to coordinate capacity and rates.
      'There's no such thing as supply and demand at the moment,' Riseborough said. 'It took lines two to three months to realize there wasn't enough cargo to fight for market share.'
      He said the current level of fleet idling (roughly 7 percent in May and as high as 12 percent in 2009) is 'the first time I'm aware lines have done this,' adding that lines will keep a constant check on capacity to ensure rates don't drop to such low levels.
      'A box going from Hong Kong to Rotterdam is a box going from Hong Kong to Rotterdam,' Riseborough said. 'It's very difficult to differentiate yourself. There are 380 sailings a month from Asia to Europe, and half are going to the same ports with the same transit times. The only way to differentiate is transit times, port rotations or inland transport. There's not a better mousetrap.'
      Little has changed, in terms of Sony's relationship with its carriers, since the EU ban on conferences began, Rashid said.
      He looked at the difference between the highest and lowest bid Sony received for annual ocean service from Shenzhen to Rotterdam in 2007 and the bids the company received this spring. In 2007, the difference was 25 percent. This year it was 28 percent. Rashid said Sony threw out the numbers for 2008 and 2009 because 2009 bids were abnormally low and in 2008, the company felt carriers artificially inflated rates in anticipation of the coming glut of capacity.
      'If you (use) more frequent than annual negotiations, you might see a change,' he said.
      He then theorized that the end of liner conferences might eventually make carriers operate more responsibly.
      'When is the first shipping line going to break ranks?' Rashid asked. 'When will the first line feel comfortable going after market share? I think carriers will break ranks and cut rates. There are still a lot of empty ships.
      'If it happens, it will stop rates going up, and to my mind, it will show that lines will be able to act in a responsible way, yet with a net benefit to shippers,' he continued. 'Carriers will be reluctant to repeat 2009 again, and so I think there's an opportunity where rates will fluctuate between breakeven and somewhere above breakeven.
      'The conference system encouraged rates to go up, or better yet, it did not stop rates from going up. But it did stop them from going to uncomfortable levels (for carriers). In my opinion, the bandwidth of high and low rates will become narrower. The width of that band will show whether the conference abolition has worked.'