Is Lack of Competition in Container Shipping Driving Poor Service and High Rates?

5-minute read

New Zealand importers and exporters will not be surprised that the Global Shippers’ Forum (GSF) has released its finding that there is a lack of competition in container shipping – that reality has hit this country hard over the last two decades.

The only new brushstroke to this picture is that the GSF believes the true situation is largely hidden because of cooperation between carriers which results in a more highly-concentrated industry than appears on the surface.

Official summations of competitiveness fail to take this into account.

As a result, the shippers say, current measures of competitiveness in the global liner shipping market are incomplete and inaccurate, to the serious detriment of shippers worldwide.

This conclusion is one of the findings presented in the Container Shipping Market Quarterly Review for Quarter 1, 2022, prepared by MDS Transmodal (MDST) in collaboration with the GSF.

As background, MDST are UK transport economists who specialise in maritime and freight transport and provide advice based on quantitative analysis, modelling and sector expertise.

The GSF speaks up for exporters and importers as cargo owners. Its members are national and regional shippers’ associations representing hundreds of manufacturing, wholesaling and retailing businesses in over 20 countries across five continents.

The NZ Council of Cargo Owners is among its members.

The review says that competition authorities until now have relied on traditional but incomplete tools to assess the level of concentration across trades, most commonly the Herfindahl–Hirschman Index (HHI).

However, this indicator does not consider the full extent of cooperation between shipping lines permitted under block exemption and other anti-trust immunity provisions in many countries.

When these ‘inter-alliance’ consortia are included in the calculations, the market concentration is much higher than the index shows.

For example, earlier this year, the US Federal Maritime Commission (FMC) published a ‘Fact Finding Investigation 29 – Final Report’, which maintained that the liner trades serving the USA can be characterised as exhibiting ‘vigorous competition’ based on their HHI index score.

GSF believes the FMC hasn’t got it right. It is an incomplete picture.

So instead, the GSF wants competition authorities to use another measure entirely, the MHHI, which it says is more accurate in its assessments of the container shipping market, particularly of the concentration in market share achieved through all agreements permitted under block exemption and anti-trust immunity provisions.

GSF’s director James Hookham explains why the current situation is not picking up the true picture:

“This breakthrough analysis lays bare the degree of dominance that many shipping lines actually have in the key global trades. Current measures of market concentration are only seeing part of the picture.

“Not only are there consortia operations within the three main alliances, the number of separate consortia that exist consisting of lines from different alliances is also significant.

“Competition authorities should urgently revise their measures of competition to reflect the reality of the container shipping market and ensure they capture the full extent and effects of shipping line cooperation, as experienced by shippers”.

GSF’s contention is that a lack of, or reduction in, competition levels directly leads to poor service quality for shippers.

Mike Garratt, chairman of MDST, says several shipping consortia arrangements involve the constituent shipping lines controlling more than 30% of capacity in Asia to Europe market.

If so, it breaks the principle established in the EU’s Consortium Block Exemption Regulation.

Earlier this year, the British International Freight Association (BIFA) also weighed into this debate, claiming that increased commercial power, diminished choice and competition, and carrier exemption from competition regulations distort the container shipping market.

The shipper organisation threw its weight behind a letter from the European freight forwarders’ association Clecat to the EC Competition Commission, which asked the EC to begin its block exemption review for carrier alliances.

The commission responded by saying it was closely monitoring the sector and no anti-competitive practices had been observed.

Miffed by this stance, BIFA wrote to the UK Government saying: “The facts speak for themselves. During a period that has seen EU block exemption regulations carried forward into UK law, there has been huge market consolidation.”

“In 2015, there were 27 major container shipping lines carrying global containerised trade, with the largest having a 15.3% market share. Today, there are 15 shipping lines organised into three major alliances, carrying that trade, with some analysts observing that the market share of a single alliance on certain key routes could be over 40%.”

BIFA also pointed to a Drewry Shipping report which said the carriers’ combined profits over the past year were in excess of US$150 billion.

“To put that into perspective, this is more than was achieved in the previous 20 years combined, and many BIFA members consider it to be a case of blatant profiteering.”

Most of the discussion above concerns the mainline East-West trades but the diminution of choice for New Zealand shippers, brought about by the global trend for mergers, acquisitions and major alliances in the container shipping industry, is just as evident.

Moreover, even with 99% of our goods shipped by sea, NZ is a small player in the global shipping market, at the mercy of the carriers and global policy decision-makers. We are not able to influence global shipping trends and are essentially a price taker.

It is a threat which has been gathering momentum since the Global Financial Crisis of 2007-08. The rapid decline in global trade when the GFC hit created huge losses for the carriers because there wasn’t enough cargo needed to fill the ships.

A massive oversupply of capacity meant that freight rates collapsed.

A race developed to have the lowest operating cost per unit, and one of the perceived avenues for achieving that reduced slot cost was to increase the size of box ships, rising to 20,000-TEU vessels and over.

Big ships do indeed deliver economies of scale as long as they are full, but one of their restrictions is that they are only capable of operating on the main East-West trades, which have ports capable of taking them.

This encouraged carriers to look at tighter alliances to ensure capacity was filled – or alternatively, take over other brands to increase their volumes.

Across the globe, the three mega-global alliances utterly dominate the container trades with something like 75-80% of global capacity.

Most Kiwi importers and exporters will be siding with the criticisms expressed by the shipper organisations mentioned above. However, there was one occasion when an anti-collusion measure rebounded on shippers here.

In 2005 Maersk took over P&O Nedlloyd, and there was global shipper pressure to prevent the merged carrier from dominating certain trade lanes.

Competition bodies demanded Maersk exit the partnerships P&O Nedlloyd was in, believing they were enforcing greater competition.

Unwittingly, it worked against the interests of NZ shippers. P&O Nedlloyd was involved in a direct NZ-ECNA-UK service with 4100- TEU vessels, and shippers greatly valued it – for meat and other perishables especially, because of its direct routing and speed.

However, the newly-enlarged Maersk could not continue in that partnership when they were also competing against it with their relay services via Tanjung Pelepas in particular.

So the direct 4100 service had to go, and NZ was forced to become mainly dependent on relay services in its container trades.

Let’s hope that whatever measures are taken by competition authorities now, intent on helping shippers, don’t have similarly-unhelpful repercussions.

Source: The New Zealand Shipping Gazette

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