Changing lanes: Consortia under the spotlight

CONTAINER shipping has just ‘celebrated’ the 10th anniversary of the most radical change in deepsea liner shipping since containerisation: the repeal by the EU of Regulation 4056/86 that caused the end of the conference system.

It was the consequence of strong pressure from shippers’ organisations to address a perceived market imperfection that allowed shipping lines to operate cartels.

In practice, however, the collapse of Lehman Brothers two weeks earlier and the global financial crash somewhat obscured its impact, but its effect is enduring in leading to the emergence of only three global alliances, slow steaming and 20,000+ teu ships. One wonders if that was what shippers really campaigned to the regulators for.

The debate has not ended. The prospect of another regulatory change in 2020 introduces new threats and opportunities to the players in the shipping industry who are now called upon to give their views on the legal framework exempting liner shipping consortia from the EU antitrust rules that prohibit anticompetitive agreements between companies, known as the Consortia Block Exemption Regulation (Consortia BER).

The discussion has been already fed with the pros and cons of the repeal; the two antipodes of the spectrum being the views expressed by the International Transport Forum and the World Shipping Council, which is effectively a club of the major container lines.

The ITF states that “liner shipping does not have unique characteristics that justify exemptions from competition law, either for conferences or for alliances”, and that therefore the European Union “should carefully consider allowing the [regulation] to expire as currently scheduled, rather than extending it”.

The WSC retorts that the Consortia BER “has made it easier for liner shipping companies to co-operate in an economically efficient manner for over two decades”.

In addition, a joint statement published by the WSC, the International Chamber of Shipping and the European Community Shipowners Associations says that “there is neither an alternative method for companies to self-assess with the same degree of legal certainty nor an alternative form of co-operation that could achieve the same efficiencies.

Therefore, the Consortia BER should be extended for a five-year period beyond its currently scheduled 2020 expiration date.”

A more transparent approach could help considerably and is consistent with the spirit of ‘self-assessment’ that underpins the present regulatory framework that governs the industry.

So, what does the evidence suggest the regulators should do and how can the industry better manage itself in the future to provide a stable environment in which long-run investments can be made in supply chains?

Consolidation in the industry has been rapid. In 2006, the seven leading lines or the alliances of that time controlled 72% of global deepsea capacity.

None had a share above 20%. In 2018, the three major players controlled 85% of the global capacity. Acquisitions in the feeder market have reinforced this pattern. In 2006, measured by deployed capacity, the four-leading north European lo-lo lines were independent. Now the leading four are owned by deepsea lines or stevedores.

Meanwhile the lines themselves are extending their ownership in stevedoring.

MDS Transmodal has developed and maintains a model, which allocates estimated container flows to the services they are carried by and estimates their operating costs and revenues. Results are summarised below.

Globally, estimated unit costs have fallen by 16% and bunker consumption per teu by 30%. There has been an efficiency gain of around $190/teu in real terms all driven by a preference by most shippers for lower rates rather than higher speeds, explaining why round trips have extended from 56 to 77 days between Asia and northern Europe.

The decline in rates since 2014 cannot be explained by a fall in utilisation but by a fall in bunker costs, which have worked their way through to rates through competition even though the lines are now members of just three alliances.

Once bunker costs have been removed from the equation, the revenue enjoyed by the lines can be seen to more or less match costs.

However, the year-on-year severe fluctuation between costs and revenues net of bunkers that is the result of short-term instability cannot help the lines or shippers to develop long-term investment strategies.

Utilisation levels depend, of course, on supply and demand, whose trends can be forecast.

Taking the year 2006 as 100, in 2018 we project an index of 142 for global tonnes and 166 for global teu.

Supply can be readily monitored, including considering newbuilding programmes.

Deployed capacity grew by 150% between 2006 and 2018, while the number of vessels grew by 65%, with a tenfold increase in the number of vessels of over 7,500 teu.

Again, taking the year 2006 as 100, in 2018 we project an index of 177 for global deployed capacity.

Efficient supply chains and product development require shippers to be able to feel secure about the continuity and price of shipping services. It is indisputable that a sustainable industry based on long-term investments in supply chain assets requires confidence on the part of all the relevant parties.

Global container shipping can approach optimum economies of scale and still operate with three (emerging) independent global networks and so provide a competitive environment, and this should perhaps be welcomed.

It would also appear that this has all been achieved without reducing overall connectivity across the global economy. The dependence of world trade on these three alliances is remarkable and it is most important that it can show that the different economies, large and small, remain well connected. UNCTAD has developed an index which measures the port connectivity for any given country and for any given country pairs (LSC Index). MDST has been supplying data to produce this index since 2016.

The latest LSCI suggests that China connectivity increased by 88% between 2004-2018 and by 11% between 2017-2018. The Netherlands, the most connected country in Europe in 2018, grew by 8% between 2017-2018.

Iraq, Qatar, Poland, Morocco and Albania saw their connectivity growing at the fastest rate between 2004-2018. The handful of countries whose index fell during this period (including Yemen and Venezuela) accounted for less than 1% of the global population.

A decline in the number of services has been balanced by an increasing opportunity to tranship although the proportion of containers transhipping is apparently declining. Globally we estimate that the proportion of lifts that are transhipments may well have fallen since 2012 from around 50% to 47% (total lifts minus loaded teu minus balancing empties).

The implication is that, while the opportunity to tranship maintains the level of effective frequency, the market does not necessarily demand that frequency, and for most shippers keeping down costs is more important.

However, given the oligopolistic threat that having only three suppliers implies, it is reasonable to expect a high level of transparency, particularly given that:

• Charter, port and container hire costs are relatively easy to estimate
  
• Only bunker costs are unpredictable, but they can be separately identified
  
• Demand can be reliably forecast on a medium-term basis
  
• Ship supply is more or less certain on a two- to three-year timescale
  
• Rates can be benchmarked
  

Indeed, given the switch to cleaner and more expensive fuel in 2020, lines may well have an immediate interest in making bunker cost calculations available for independent assessment to avoid unnecessary heat and misunderstanding. Using our speed/capacity schedules we estimate that rates may well rise by 15% consequently.

We believe that there is more to be gained by transparency and using independent sources that can agreed upon between lines and shippers to describe the business of container shipping.

This would help the parties to make informed decisions and reflect the fact that for a shipper his shipping line is a vital supplier with whom a long-term relationship must contribute to maximising long-term supply chain efficiency.