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THE APPLICATION OF COMPETITION

RULES TO LINER SHIPPING

FINAL REPORT OCTOBER 26, 2005

Prepared by:

In Association with: Institute of Shipping Economics Workgroup for Infrastructure Policy and Logistics Berlin University of Technology

The Application of Competition Rules to Liner Shipping 26.10.2005 FINAL REPORT

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Table of Contents

I. EXECUTIVE SUMMARY .......................................................................................................................I-1 Liner Industry Worldwide............................................................................................................................ I-1 Liner Shipping Consolidation Process and the position of European carriers ........................................... I-2 Liner Operating Agreements ....................................................................................................................... I-2 Evolving Supply Conditions: Hub-and-spoke networks and pricing ........................................................... I-3 International Regulations Review................................................................................................................ I-3 Conference Ocean rates and surcharges..................................................................................................... I-4 Service reliability......................................................................................................................................... I-4 Trends in United States Transport Industry Regulatory Environment ........................................................ I-5 Theory of the Core Applied to the Liner Market.......................................................................................... I-5 A New Model of the Liner Industry based on Theory of Industrial Organisation ....................................... I-6 Conclusion on the impact of Repealing the Block Exemption ..................................................................... I-7

II. INTRODUCTION ................................................................................................................................. II-13

III. GLOBAL CONTEXT......................................................................................................................III-17 A. LINER INDUSTRY WORLDWIDE........................................................................................................... III-17

Market Concentration in the Liner Industry........................................................................................... III-23 Liner Operating Agreements .................................................................................................................. III-27 Evolving Supply Conditions.................................................................................................................... III-32 Pricing Strategies ................................................................................................................................... III-37 Carriers' Profitability Analysis............................................................................................................... III-39 The Container Charter Market ............................................................................................................... III-43

B. POSITION OF THE EU LINER INDUSTRY............................................................................................... III-46 C. INTERNATIONAL REGULATIONS REVIEW ............................................................................................ III-50

United States........................................................................................................................................... III-50 Australia ................................................................................................................................................. III-55 Japan ...................................................................................................................................................... III-57 Thailand.................................................................................................................................................. III-58

D. IMPORTANCE OF THE LINER INDUSTRY FOR DEVELOPING COUNTRIES ............................................... III-60 E. REVIEW OF RECENT EMPIRICAL STUDIES............................................................................................. III-64

Earlier Approaches for Empirical Tests ................................................................................................. III-64 Port Efficiency, Terminal Handling Charges, Surcharges ..................................................................... III-65 Recent Attempts of Empirical Tests ........................................................................................................ III-66 Global Insight’s Scope of Empirical Testing .......................................................................................... III-68 Data Base ............................................................................................................................................... III-69 Regression Analysis: Conference Freight Rates and Utilisation............................................................ III-69

IV. EU LINER TRADE ROUTES........................................................................................................IV-71 A. OVERVIEW OF THE GLOBAL ECONOMY .............................................................................................. IV-71 B. ECONOMIC AND TRADE REVIEW......................................................................................................... IV-73 C. ANALYSIS OF EUROPEAN TRADE ROUTES .......................................................................................... IV-77

Far East ...................................................................................................................................................IV-78 Transatlantic............................................................................................................................................IV-88 South America East Coast .......................................................................................................................IV-98 West Africa ............................................................................................................................................IV-107 Indian Sub Continent .............................................................................................................................IV-118 Southern Africa......................................................................................................................................IV-127 North Europe - Mediterranean..............................................................................................................IV-138

D. ANALYSIS OF CONFERENCE SURCHARGES AND ANCILLARY CHARGES .............................................. IV-146 E. IMPACT OF CONFERENCES ................................................................................................................ IV-151

V. ECONOMIC IMPACT OF REPEAL OF CONFERENCE BLOCK EXEMPTION.................... V-154 A. REFORMS IN OTHER INDUSTRIES ........................................................................................................ V-154

Trends in United States Transport Industry Regulatory Environment ...................................................V-154 Railroad Reform .....................................................................................................................................V-154 Motor Carrier Reform ............................................................................................................................V-155


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Aviation Reform......................................................................................................................................V-156 Impact of the U.S. Ocean Shipping Reform Act......................................................................................V-158 The Transpacific Stabilisation Agreement..............................................................................................V-160 U.S. Transportation Reform and the E.U. Liner Industry.......................................................................V-161

B. THEORETICAL ASSESSMENT .............................................................................................................. V-163 Insights and Shortcomings of Received Theory for the Liner Industry...................................................V-163 A Model of the Liner Industry.................................................................................................................V-168 Analysis and Results of the Model ..........................................................................................................V-171 Summary of Theoretical Assessment.......................................................................................................V-180

VI. FUTURE SCENARIO: IMPACT OF A REPEAL OF CONFERENCES................................VI-183

VII. ECONOMIC IMPACT OF AN INFORMATION EXCHANGE SYSTEM AS PROPOSED BY THE ELAA ................................................................................................................................................. VII-188

A. EVALUATION FOCUS: THE ELAA PROPOSAL...................................................................................VII-188 B. SUMMARY OF THE ELAA PROPOSAL...............................................................................................VII-189

Proposed ELAA IES Will Use Sensitive Information........................................................................... VII-190 Evaluating Information Exchange Proposed by the ELAA.................................................................. VII-193 Evaluation of "pure information exchange activities"......................................................................... VII-193 Evaluation of "other proposed activities” ........................................................................................... VII-203 Evaluation of the overall effects of the whole ELAA Proposal............................................................ VII-207 Conclusion........................................................................................................................................... VII-208

VIII. STAKEHOLDERS’ VIEWS......................................................................................................VIII-210 A. VIEWS AND STATEMENTS OF LEADING ORGANISATIONS............................................................... VIII-210 B. SHIPPERS INTERVIEWS................................................................................................................... VIII-214

Shippers views on the current system .................................................................................................VIII-214 Shippers views on the Information Exchange System proposed by ELAA..........................................VIII-216

IX. CONCLUSIONS ............................................................................................................................IX-217 The Global Container Market ...............................................................................................................IX-217 Theoretical Model Applied to the Liner Market ....................................................................................IX-218 Empirical Assessment of the impact of conferences on Europe’s Liner Trades ....................................IX-219 Impact of Repealing the Block Exemption .............................................................................................IX-220 Impact of the ELAA Information Exchange System...............................................................................IX-222

X. ANNEXES ................................................................................................................................................ X-1 A. MATHEMATICAL DESCRIPTION OF OUR THEORETICAL MODEL ............................................................. X-1 B. ORGANISATIONAL STRUCTURE PROPOSED BY ELAA............................................................................ X-4

Functions of the Organisation Components ...............................................................................................X-5 The Information Processing Function ........................................................................................................X-5 The Trade Route Committee Function........................................................................................................X-6

C. EXISTING INFORMATION SOURCES ........................................................................................................ X-8 Data Products and Sources ........................................................................................................................X-8 Evaluation of existing data coverage........................................................................................................X-11

D. REGRESSION ANALYSIS ....................................................................................................................... X-17 XI. BIBLIOGRAPHY............................................................................................................................XI-26


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Figures Figure III-1 Total Container Trade in Millions of TEUs .................................................... III-17 Figure III-2 Annual Change of World Real Gross Domestic Product and World Trade in TEUs.................................................................................................................................... III-18 Figure III-3 Development of the Annual Share of World Total Container Exports of Regions in Millions of TEUs............................................................................................................. III-19 Figure III-4 Development of the Annual Share of World Total Container Imports of Regions in Millions of TEUs............................................................................................................. III-19 Figure III-5 Container Trade Routes in Millions of TEUs in 2004..................................... III-20 Figure III-6 Development of Trade Imbalances in Per Cent on the Big Three Trades ....... III-21 Figure III-7 Capacity and Market Share of Top 10 Carriers 1992-2005............................. III-22 Figure III-8 Index Of New Building Prices for Container Ships ........................................ III-33 Figure III-9 Representative Charter Rates-Index for Container Ships................................ III-33 Figure III-10 Age Profile of Fully Cellular Container Fleet in 2005 ................................. III-33 Figure III-11 Total Vessel Capacity Cellular Ships Coming into Operation ...................... III-34 Figure III-12 Average Capacity of Ships Operated and on Order of Top 10 Carriers 1999-2005 ..................................................................................................................................... III-35 Figure III-13 Size Distribution of the Full Containership Fleet in TEU............................. III-35 Figure III-14 Fully Connected and Hub-and-Spoke Networks .......................................... III-36 Figure III-15 Freight Rates Development for the Main Routes 1994 – 2005 ..................... III-38 Figure III-16 Return on investment of (deep-sea) ocean carriers and feeder operators on average over the years 2000-2004....................................................................................... III-40 Figure III-17 Revenues per TEU carried as an index.......................................................... III-41 Figure III-18 Revenue margins of (deep-sea) ocean carriers ............................................. III-41 Figure III-19 Returns on investment, supply demand balance............................................ III-42 Figure III-20 Returns on investment and revenue margins ................................................ III-43 Figure III-21 Share of Chartered Capacity of Top Liner Operators (1992-2005).............. III-44 Figure III-22 Development of the Share of Container Exports and Imports in Tonnes on Total Exports and Imports for EU 25 ........................................................................................... III-47 Figure III-23 EU 25 Exports and Imports in Thousand TEU in 2004 ................................ III-47 Figure III-24 EU 25 Imports from Far Eastern Countries in Thousand TEU in 2004 ........ III-48 Figure III-25 Market Share of Top 30 Carriers Grouped by Region .................................. III-48 Figure III-26 Development of Top 24 Carriers' Operating Profit Margins Grouped by Region*............................................................................................................................................. III-49 Figure IV-1 World Economy and Trade Growth ...............................................................IV-72 Figure IV-2 Top Five Container Exporters Over Time.......................................................IV-74 Figure IV-3 Top Five Container Exporters’ Shares ...........................................................IV-74 Figure IV-4 Growth Rates of Containerised Exports by Region .......................................IV-76 Figure IV-5 Europe – Far East Trade Volumes .................................................................IV-79 Figure IV-6 EU Exports to "Other Asia" versus China......................................................IV-79 Figure IV-7 EU Imports from "Other East Asia" versus China .........................................IV-80 Figure IV-8 EU Imports by Commodity-Type from Asia (less China) .............................IV-81 Figure IV-9 EU Imports by Commodity-Type from China ...............................................IV-81 Figure IV-10 Freight Rates by Trade Direction .................................................................IV-86 Figure IV-11 North Europe-East Coast North America Trade Volumes............................IV-89 Figure IV-12 2004 Trade Volume by Commodity Westbound .........................................IV-89 Figure IV-13 2004 Trade Volume by Commodity Eastbound...........................................IV-90 Figure IV-14 Conference Market Share 1995-2005...........................................................IV-94 Figure IV-15 Transatlantic Freight Rates 1993-2005 ........................................................IV-96 Figure IV-16 Europe-East Coast South America Trade Volumes .....................................IV-99


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Figure IV-17 2004 Eastbound Trade by Commodity........................................................IV-100 Figure IV-18 2004 Westbound Trade by Commodity .....................................................IV-100 Figure IV-19 Europe West Africa Trade Volumes ..........................................................IV-108 Figure IV-20 West Africa to Europe by Commodity........................................................IV-109 Figure IV-21 Europe to West Africa by Commodity.......................................................IV-110 Figure IV-22. Europe – Subcontinent Trade Volume 2000-2010....................................IV-119 Figure IV-23 2004 Eastbound Trade by Commodity.......................................................IV-120 Figure IV-24 2004 Westbound Trade by Commodity .....................................................IV-121 Figure IV-25 IPBCC – Average Eastbound USD Tariff Rate Levels 1995-2004 ...........IV-126 Figure IV-26 IPBCC – Average Westbound USD Tariff Rate Levels 1995-2004 ..........IV-126 Figure IV-27 Europe – Southern Africa Trade Volumes .................................................IV-128 Figure IV-28 2004 Northbound Trade by Commodity ....................................................IV-129 Figure IV-29 2004 Southbound Trade by Commodity ....................................................IV-130 Figure IV-30 Europe Southern Africa ISL Freight Rate Indicators.................................IV-136 Figure IV-31 Europe-South Africa Fuel Surcharge .........................................................IV-136 Figure IV-32 Mediterranean-Northern Europe Trade Volume ........................................IV-140 Figure IV-33 2004 Northbound Trade by Commodity .....................................................IV-140 Figure IV-34 2004 Southbound Trade by Commodity ....................................................IV-141 Figure V-1 Number of carriers under the No-Conference Regime and the Conference-Independents Regime. ........................................................................................................ V-175 Figure V-2 Prices under the Conference-Independents Regime and after Repeal of Conferences in the short run (number of firms still determined by the Conference-Independents Regime). ....................................................................................................... V-177 Figure V-3 Prices under the Conference-Independents Regime and after Repeal of Conferences in the long run (number of firms adapted). ................................................... V-178 Figure V-4 Market Prices under the No-Independents and the Conference-Independents Regimes .............................................................................................................................. V-180 Figure X-1 Proposed ELAA IES organisation chart ............................................................. X-4 Figure X-2 Data inputs, processing and output of the IES IDS "black box" ....................... X-6 Figure X-3 Proposed EIS Trade "Committee Forecast Voting Process" .............................. X-7 Figure X-4 Comparison of Global Liner Freight Rates and Utilisation Rate for Head-Hauls 2000 – 2004 .......................................................................................................................... X-18 Figure X-5 Comparison of Freight Rate and Utilisation Indices 2000/I = 100 and Ratio of Freight Rates and Utilisation for Head-Hauls 2000 – 2004 ................................................. X-19 Figure X-6 Comparison of Freight Rates and Demand/Supply Ratio on Transpacific Cap/Utilis. Eastbound 2000-2004 ........................................................................................ X-21 Figure X-7 Comparison of Freight Rates and Demand/Supply Ratio Transpacific Westbound 2000-2004............................................................................................................................. X-22 Figure X-8 Comparison of Freight Rates and Demand/Supply Ratio on Europe - Far East Westbound 2000-2004 ......................................................................................................... X-22 Figure X-9 Comparison of Freight Rates and Demand/Supply Ratio on Europe – Far East Eastbound 2000 – 2004 ........................................................................................................ X-23 Figure X-10 Comparison of Freight Rates and Demand/Supply Ratio on Transatlantic Westbound 2000 – 2004....................................................................................................... X-24 Figure X-11 Comparison of Freight Rates on demand/Supply Ratio on Transatlantic Eastbound 2000 – 2004 ........................................................................................................ X-25


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Tables Table III-1 Current Fleet & Orderbook............................................................................... III-24 Table III-2 Carriers Operated Fleets (owned and chartered) and Market Shares in February 2005. .................................................................................................................................... III-26 Table III-3 Carriers Making up 50% of Total Existing Capacity....................................... III-27 Table III-4 Membership of Top 25 Carriers in Important................................................... III-28 Table III-5 Alliance Membership and Operated Fleets in February 2005 .......................... III-32 Table III-6 Ship funds financing (by owners) in Millions of US$..................................... III-45 Table III-7 Guyana: Sample of Average Freight Rates....................................................... III-62 Table III-8 Freight Rates on the Three Major Liner Trade Routes, 2000-2004 (US$ per TEU)............................................................................................................................................. III-69 Table IV-1 Five Largest Container Exporting Nations .......................................................IV-73 Table IV-2 Containerised Trade by Route .........................................................................IV-75 Table IV-3 Asia-Europe Trade............................................................................................IV-76 Table IV-4 Growth Rates of TEUs – Transatlantic............................................................IV-76 Table IV-5: Summary of 2004 Route Trade Shares, Directional Balance, and Distance ...IV-77 Table IV-6 Carriers, Sailings, Conference Share & Rates ..................................................IV-78 Table IV-7 Alliance Presence in Europe – Far East Trade ................................................IV-82 Table IV-8 FEFC and Total TEU by Direction, 2002 -2004 .............................................IV-84 Table IV-9 FEFC Capacity Utilisation 2003 – 2005..........................................................IV-85 Table IV-10 FEFC BAF and CAF Surcharges....................................................................IV-87 Table IV-11 Market Shares for Top 15 Carriers in Westbound Trade ...............................IV-93 Table IV-12 Market Shares for Top 15 Carriers in Eastbound Trade.................................IV-93 Table IV-13 Conference Market Share 1995-2005............................................................IV-95 Table IV-14 ECSA-Europe Estimate of Deployed Trade Route Capacity ......................IV-104 Table IV-15 The Evolution of direct Capacity, North Europe-East Coast South America ....IV-105 Table IV-16 Container Rates – “Freight All Kinds”.........................................................IV-105 Table IV-17 2003 Southbound Carryings ........................................................................IV-113 Table IV-18 2004 Carrier Capacity.................................................................................IV-115 Table IV-19 IPBCC Trade Growth 1995-2004................................................................IV-123 Table IV-20 Europe/Indian Subcontinent Container Capacity ........................................IV-125 Table IV-21 ESAC and Non-Conference TEU by Direction, 1997-2004 ......................IV-131 Table IV-22 Total Trade and Market Shares by Direction, 1997-2004 ...........................IV-132 Table IV-23 ESAC Liftings by EU-25 Origin & Destination...........................................IV-133 Table IV-24 ESAC Traffic Share by Conference Carrier, in TEU, 2004 ........................IV-134 Table IV-25 Conference Capacity by Service and ESAC load factor, .............................IV-134 Table IV-26 Conference Members and Active Sectors.....................................................IV-141 Table IV-27 Israel Sector (Ashdod & Haifa)-Southbound (Liner In/ Liner Out) .............IV-142 Table IV-28 Israel Sector (Ashdod & Haifa)-Northbound (Liner In/ Liner Out) ............IV-142 Table IV-29 Cyprus Sector-Southbound (Liner In/ Liner Out) ........................................IV-142 Table IV-30 Cyprus Sector-Northbound (Liner In/ Liner Out) ........................................IV-142 Table IV-31 Southern Italy Sector-Northbound (Liner In/ Liner Out) ............................IV-143 Table IV-32 Southern Italy Sector – By Commodity........................................................IV-143 Table IV-33 Greece-Turkey Sector - Southbound (Liner In/ Free Out) ...........................IV-144 Table IV-34 Greece-Turkey - Northbound (Free In/ Liner Out).......................................IV-144 Table IV-35 Commodity Rates (Northbound) ..................................................................IV-145 Table IV-36 Levant Sector-Southbound (Liner In/ Free Out) ..........................................IV-145 Table IV-37 Levant Sector-Northbound (Free In/Liner Out) ...........................................IV-145 Table IV-38 Fuel and Currency Surcharges by Trade Route, 2005.................................IV-146


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Table IV-39 Bunker Fuel Consumption by Vessel Size ...................................................IV-147 Table IV-40 Conference Terminal Handling Charges by Selected Port, 2005 ................IV-150 Table V-1 Comparison of U.S. Transport Segment Deregulation and Impact with E.U. Liner Industry............................................................................................................................... V-162 Table V-2 Non-Existence of a Core in a Market with Three Shippers and Two Carriers V-164 TableV-3 Mixed-Price Equilibrium in a Market with Three Shippers and Two Carriers . V-166 Table V-4 Regulatory Regimes.......................................................................................... V-169 Table V-5 Timing of the game under the Different Regulatory Regimes.......................... V-170 Table V-6 Instability Under the Conference-Independents Regime .................................. V-173 Table X-1: Development of the Head-Haul.................................................................... X-18 Table X-2: Indicative Freight rates in US $/TEU Including all Charges ....................... X-20


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I. EXECUTIVE SUMMARY

II. INTRODUCTION

1. The Competition Directorate General of the European Commission is leading a review of Regulation 4056/86 which lays down the rules for the application of Article 81 and 82 EC and contains a block exemption for liner conferences. This is a consultative paper requested by DG Competition, which has already determined that the block exemption should be reviewed and in the event it does not fulfil the conditions of Article 81(3) of the Treaty that it should be repealed.

2. On 6 August 2004, the European Liner Affairs Association (ELAA) has proposed as

an alternative that a detailed information exchange system be a critical element of a new regulatory structure for liner services.

3. The paper considers the impacts of two distinct options:

a) Abolishing the block exemption entirely, as proposed by the European

Shipper's Council (ESC) with no replacement block exemption; versus b) Replacing the currently existing block exemption with the ELAA information

exchange system (version of 6 August 2004).

4. The purpose of this study is to both theoretically and empirically assess the economic impact of both policy options regarding competition, investment decisions, reliability of services, competitiveness of EU liner shipping, trade and commodity flows, innovation with respect to transport services and infrastructure, employment, and other relevant factors such as port congestion. This study focuses on containerised traffic, which is the most significant part of liner shipping.

5. As regards the acquisition of pricing data, the ELAA and conferences as well as their

members have on the whole been uncooperative in providing this information, even on an indexed basis. It is interesting to note that Charles River Associates were able to obtain confidential revenue data from ELAA carriers for the purpose of a study commissioned by ELAA. It can be expected that if carriers’ organisations commission further studies they will be provided such data III. GLOBAL CONTEXT

Liner Industry Worldwide

6. Globalisation of international production and the international division of labour has impacted container trade resulting in a massive growth in deep sea volumes. Annual growth rates of container trade were two to five times as high as the annual growth rates of the real world gross domestic product. With average growth rates of world total container trade close to 8% during the last ten years, container transport has more than doubled.


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7. The driving forces behind the growth in container trades are the countries in the Far East, and in particular China. From 1995 until now container exports in TEUs from the Far East to the world tripled.

8. Since the Far Eastern countries are dominating world container exports and imports,

the Asian trade routes have become the most important trade routes world wide. In 2004 world container deep-sea trade amounted to more than 78 Million TEUs. The third largest trade route in the world, the Far East to the EU-25 accounts for 6 Million TEUs.

9. Another important observation is that trade imbalances, i.e. differences in container

flow on a trade route with respect to the direction, are becoming wider and wider. Managing the huge increase in trade imbalances represents a challenging and costly task for carriers.

10. For developing countries, access to world markets is vital, as the best strategy for

economic development has proven to be export trade-lead growth. Strategies of reserving cargoes for national lines as promoted by UNCTAD Liner Code not only failed, but impeded growth and raised transportation costs.

Liner Shipping Consolidation Process and the position of European carriers

11. A fundamental basis for the growth of total container trade is an adequate increase of

capacities. To cope with growing demand, carriers have approximately tripled capacity during the last 10 years. This distribution of the additional capacity has also been mirrored by the significant consolidation in the liner industry as a result of company growth and mergers and acquisitions.

12. The top 15 liner carriers currently account for 86% of the global fleet of ships in

service plus the current orderbook. This concentration is higher when considering that the top five carriers account for 50% of the total fleet and orderbook. Of these, four are European based companies with 43% of the total and three of these are EU based companies with 33% of the total share.

13. The European carriers are faring well. Firstly, they have successfully managed to

increase market share from 40% in 2000 to 46% in 2005. Secondly, their operating profit margins were competitive during the last years when compared to Asian and other carriers.

Liner Operating Agreements

14. The traditional form of co-operation in the liner industry has been conferences. However, the number of conferences in the last decade has been in a continuous decline.

15. During the 1980s, independent carriers (non conference operators) began to play a

bigger role. Parallel to the downturn in the number of conferences, alliances and consortia have become more predominant. Alliances represent operational, technical or commercial agreements between carriers to cooperate on a global scale. In contrast


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to that, consortia focus on co-operation between two or more carriers on a particular route.

Evolving Supply Conditions: Hub-and-spoke networks and pricing

16. Carriers have implemented hub-and-spoke networks - using main ports with feeder vessels serving smaller ports which do not have enough cargo for a mainline vessel call - replacing the fully connected traditional port to port services. The rationale is to increase load factors while at the same time reducing the number of ships needed per service string and covering a wider range of (smaller) ports with the feeder vessels from the hub ports.

17. To achieve the maximum utilisation of vessels, carriers have also employed yield

management pricing strategies taken from the airline industry. This shift to yield management was a necessity due to the growing imbalance in trade and the mismatch between the import container locations and the location demand for exports at both ends of the trade.

18. Shippers pay a price to carriers for the transportation of goods or merchandise by sea

from one place to another. This price normally consists of several elements: an ocean freight rate, ancillary charges, and surcharges. Total surcharges can account for up to 20% to 30% of total transport price. The European Commission estimates total surcharges to equal 30% of the total transport price on average. Some shippers, particularly the larger ones, get so-called "all in" rates, i.e. inclusive of surcharges and other charges.

19. Conferences publish their official conference tariffs (as required under Regulation

4056/86). However, they are not willing to publish the freight rates actually charged, nor an index of actual freight rates. The industry is based on confidential pricing or service contracts. In a confidential service contract a shipper commits to provide a certain minimum quantity of cargo or freight revenue over a fixed time period of up to one year. On the other hand, the carrier commits to a certain rate or rate schedule as well as a defined service level (such as assured space, transit time, port rotation or similar service features). For smaller shippers three to six months are more standard. On the US trades the share of confidential service contracts is currently very high, according to the FMC. The share of confidential service contracts on other routes has not been researched in this study, since carriers have been reluctant to provide such information.

International Regulations Review

20. The Productivity Commission of Australia has issued its final recommendations and now calls for the end of its maritime liner block exemptions. Japan has tightened the criteria by which carriers benefit from the block exemption. Thailand has tried to improve competitiveness by strengthening the shippers’ council and carriers are no longer formally exempted from anti-trust legislation. Most countries do not have antitrust exemption for shipping.

21. In the U.S., the Ocean Shipping Reform Act (OSRA) of 1998 triggered significant

benefits, spurring competition in the U.S. liner trades. It mitigated conference power and conferences declined as a result of the OSRA. The U.S. system does not have a neutral private third party providing a form of information exchange. The Journal of


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Commerce’s PIERS product however does provide carrier liftings by commodity and market share on a commercial basis garnered from manifest information that is publicly available in the U.S. IV. EU LINER TRADE ROUTES

22. In this study we considered seven routes (Far East, Transatlantic, West Africa, Sub-

Continent, Southern Africa, Sub-Continent, East Coast South America, the Mediterranean Short Sea trade) which cover two-thirds of maritime deep sea European container exports, and over half of the imports. While conference influence is generally declining on the observed trades, the following results are noteworthy:

• The conferences on the West and Southern Africa routes, as well as the Indian

Sub Continent route, still look and act much like traditional conferences.

• On the East Coast South America route, the conference disappeared in 2004, with little or no impact.

Conference Ocean rates and surcharges

23. There is surprisingly little difference in freight rates between the very long Far East route and the shorter Transatlantic route. Ocean freight rates are not a simple linear function of distance.

24. Conferences have an impact on ocean rates. Their freight rate announcements are

non-binding. Nevertheless conference-announced rate increases do appear to be a basis for negotiation between shippers and carriers for both conference and non-conference carriers. The conference recommended rates are generally viewed as an upper bound for rates actually charged, with each shipper’s discount depending upon the outcome of private one-on-one negotiations.

25. Conferences set surcharges. The conference surcharges that are common are the

bunker adjustment factor (BAF), the currency adjustment factor (CAF) and the terminal handling charge (THC). Non-conference carriers typically follow the conference surcharges. As these constitute a large percentage of the total shipping costs, conferences thus directly set a significant portion of the price for ocean transport services. The evidence in European ports of THCs acting as additional revenue generating devices rather than cost recovery instruments is apparent. The calculation of BAFs is not transparent: the BAF for the Far Eastern route and the South American route are less than for the shorter Trans-Atlantic route.

Service reliability 26. There is no indication that conferences contribute to stability of supply. The fact

that conferences do not manage capacity questions the relevance of their activities for the stability of supply. Note that the end of the Europe East Coast South America Conference (EECSAC) had no significant effect on moving cargoes. In addition the West African trade shows that conferences can contribute to instability. Membership of conferences has been unstable, new entrants into the conference were followed by exit of existing member carriers during the last couple of years. This shows that conferences can be a source of instability.


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V. ECONOMIC IMPACT OF REPEAL OF CONFERENCE BLOCK EXEMPTION

27. First, we review the experience of reform in other modes of transportation in the

United States, which provides indications of what can be expected in the EU. Then we analyse the economic theory. This provides us with the basis for judgements on what will happen if Europe abolishes the block exemption provided to the maritime liner industry.

Trends in United States Transport Industry Regulatory Environment

28. The economic regulation of transportation in the United States has changed significantly during the last 27 years. U.S. government policy changes and new laws liberalising transport have affected the structure, operations and performance of the aviation, railroad and motor carrier industries as well as maritime shipping. The common theoretical foundation is that lower government regulation reduces market distortions and increases consumer welfare through increased competition. The timing and the results achieved differ across these industry sectors.

29. The experience in the U.S. of liberalising trucking, railroad, aviation, and shipping all

indicated that further liberalisation of the liner industry will have a positive impact. All were either heavily self-regulated or externally regulated in the name of “stability”, with similar arguments supporting administered prices and service rather than competition and market forces. All U.S. transport modes benefited from liberalisation and de-regulation, whether they were declining, like rail, or growing, like aviation. Prices fell, there were efficiency improvements and service improved. There was entry and exit; old names disappeared, and new competitors arose. The public benefited from the changes in the industries. In aviation, aircraft utilisation rates increased and passenger and freight fares fell due to liberalisation, both in North America and in Europe, and traffic volumes and services on offer greatly increased. The liberalisation of trucking similarly ushered in better, cheaper service in the US.

Theory of the Core Applied to the Liner Market

30. The ELAA claims that liner markets are “inherently unstable” if unregulated. It views conferences (or an information exchange system) as an indispensable means of stabilising markets (by self-regulation). It was our task to assess these claims by the ELAA.

31. The theoretical and empirical analysis of the liner shipping market is often based

on the theory of the core which analyses the set of “stable market equilibria”. It holds that a necessary condition for the existence of a stable equilibrium is that no individual can improve its position by deviating from the equilibrium. If such an equilibrium does not exist in a market, then the core is empty. In that case any proposed market outcome is unstable in the sense that there is an incentive for a subset of individuals to deviate from it, either unilaterally or jointly on a contractual basis (coalition). Hence, a market with an empty core is in this sense unstable.


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32. The “theory of the core” cannot be applied to liner shipping: This study found that the “theory of the core” cannot be applied to liner shipping. In order to show that the liner market is indeed suffering from an empty core problem the theoretical literature normally comes up with idealised market scenarios. However, these scenarios normally do not fit very well with regular liner shipping. The assumption that carriers charge a price equal to costs for each voyage is not appropriate for the liner industry. The application of the theory does not explain well why the market price should be equal to costs; this superimposes some unexplained competitive process on one side of the market in order to focus on a coordination problem on the other side of the market, thus unduly divorcing the interdependence of the two sides.

33. A basic problem with the theory-of-the-core approach is that it does not take due

account of the working of competition and competition policy. The assumption that individuals can coalesce in any form is unrealistic and grossly violates competition laws. Therefore it seems that a more adequate approach to the liner market might be found in the theory of industrial organisation, which is characterised by a more restrictive view about the implementability of coalitions among individuals.

34. Moreover, it is not explained how conferences would be able to overcome the

supposed “instability problem” of the market. In particular, the potential anticompetitive side-effects of such collusion have never thoroughly been addressed in this literature.

A New Model of the Liner Industry based on Theory of Industrial Organisation

35. The literature on industrial organisation does not adequately consider firms with

lumpy supply, nor does it take market entry into account in the case of cartels. A setup has to incorporate these aspects in order to be applicable to the liner industry with regard to the economic impact of conferences on market outcomes.

36. A new model has been developed: The study’s new theoretical model of the liner

market addresses all the particular features of the liner market that are claimed to be sources for an “inherent instability”. Furthermore, we fully took into account the contestability of the liner market since there are always carriers “ready” to enter the market, i.e. redeploying vessels from one trade to another, if it is worth doing so.

37. The model can be applied to different regulatory regimes:

Two Regulatory Regimes

Name of regulatory regime Economic characterization 1. “No-Conference” forbids carriers to form a conference; as a

consequence all carriers compete as independents. 2. “Conference-Independents” allows formation of a conference as well as

competition by independent carriers. This conforms to the current legislation.

38. To evaluate the economic impact of a repeal of Regulation 4056/86, which allows

conferences alongside with independents, we compare the market result of the current Conference-Independents regime with that of the No-Conference regime. A conference is modelled as a cartel of price leaders.


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39. Note that the results for the Conference-Independents regime and the No-Conference regime can be considered as corner stones for reality. A repeal of Regulation 4056/86 will promote a move of the liner industry from the Conference-Independents regime into the direction of the No-Conference regime.

40. The analysis of our theoretical model shows the following results:

1. Conferences lead to excess capacity (over-investment) or excess pricing and endanger service reliability. The latter effect is due to a possible instability with respect to market participation and conference membership which gives rise to constant moves in and out of the market, as well as in and out of the conference.

2. In the short run, the withdrawal of the conferences system will always lead to lower prices.

3. In the long run a prohibition of conferences will remove excess capacity. As a consequence, the long-run prices can be higher or lower after the repeal of a block exemption. In any case, social welfare will always be higher. Furthermore, taking into account that enhanced competition between carriers can reduce market entry costs in the long run by fostering innovation and efficiency, a repeal of conferences can promote further downward pressure on market prices.

4. We did not find any indication for the fact that competition between carriers leads to an “inherent instability”. Moreover, the potential instability with respect to market participation and conference membership is removed. Therefore, our theoretical results indicate that repeal of conferences will enhance stability of supply.

5. With or without conferences, there can be price volatility. Without conferences, price volatility is due to price-mixing behaviour which is normal activity similar to other industries. With conferences, the source of price volatility comes from the structural instability of market participation and conference membership. This can be a fundamental and wasteful problem, if alone because market entry and exit can be associated with transaction and investment costs.

Conclusion on the impact of Repealing the Block Exemption

41. What would happen if conferences ceased to exist in Europe? We base the following expectations on the results of our trade route evaluation, based on our empirical data, the U.S. experience in transportation reform, and the theoretical model of conferences in the liner industry.

42. Impact on Ocean Rates: Moderate Price Declines – At present conferences do have

an impact on rates. The annual rate guidance may influence rate negotiations, and the fact that conference members assemble and exchange views may have some influence on rate levels. Thus, we expect the ocean rate impact to be moderate, but with some declines. Moreover, increased competition puts further pressure on carriers to innovate and improve performance which is the basis for stronger rate reductions in the future.

43. Impact on Ancillary Charges and Surcharges: Reductions expected. Surcharges

are under criticism for their size, and how they are determined. In the absence of conference setting, the united front by conference and non-conference carriers on


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surcharges will at least weaken or even disappear, lowering overall rates. Note that carriers can still apply individual formulae to calculate surcharges for their customers or move farther towards „all-in rates“ for the sake of simplicity. However, we do not expect that in the absence of conferences shippers will be forced to individually negotiate THCs with the terminal operator.

44. Total transport prices will decline: The cumulative effect of moderate reductions in

ocean rates and a significant decrease of surcharges and ancillary charges will result in a decline of total transport prices for maritime container transport.

45. Positive Impact on Service Reliability on deep Sea and short Sea trades –

Theoretical insights and recent experiences, e.g. the West African trade, show that conferences are likely to have de-stabilizing effects on liner markets. On the other hand, there is no indication that the loss of the conference on the South America East Coast trade had a negative effect on the stability of supply. Therefore, due to the experiences from other industries, our theoretical results, and our trade route analysis, we expect that service reliability could improve but definitely will not be reduced if conferences are abolished. This applies to all trades – thin versus thick, North – South versus East – West and deep Sea and short Sea.

46. Positive impact on developing countries: The Repeal of the block exemption could

lead to improvement in service reliability on the thin North –South trades (see West Africa example). Furthermore, in particular the African trades suffer from high transport prices which directly cut into the developing countries’ GDP growth. The expected transport price reductions will benefit African countries. Exports from these countries, i.e. low-value commodities with a relatively high transport cost share, could become cheaper on the world market which may contribute to GDP growth.

47. Impact on service quality and innovation is expected to be positive due to increased

liberalisation of the market similar to the airline industry, but this will depend on the individual carriers’ investment policies.

48. Positive or no impact on the competitiveness of EU liner shipping firms: European

firms are doing well in terms of profitability and capacity share and in a more competitive environment they should be able to compete and grow.

49. Positive impact on Small carriers: None of carriers are actually small by the

European definition. Liberalisation gives small carriers the opportunity to grow fast if they follow an innovative business model (for instance the Ryanair example in the airline industry). The success of small carriers depends on their ability to adapt to a competitive environment and not on their actual size. Small carriers may join alliances or find niche markets in a liberalised environment.

50. No impact on investment in capacity: Vessel ownership is a normal business risk.

Carriers will continue to invest in container capacity. Investment decisions are taken by individual lines and are based on long term strategies. The chartering market offers some operational flexibility and it can also offer lines the option of separating some of the risk of ship ownership from the risks of liner operations.

51. No impact on market concentration: Concentration is a process independent of the

repeal of the block exemption regulation. Carriers are integrating horizontally and


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vertically (buying terminals), a trend reacting to customer demand for door-to-door services. Vertical integration provides greater reliability to the Carrier to provide such services if they control all the key elements of the transportation chain.

52. No impact or positive impact on port calls: the trend to hub-and-spoke system leads

to more regional ports being covered by feeder services (in theory and also in practice, the smaller vessels have to be deployed somewhere). Liberalisation of air transport led to more regional airports being served.

53. No or positive impact on EU trade: Transport prices for maritime containers are

expected to drop. Sea container trade account for about 40% of EU external trade. Therefore, a drop of transport prices is likely to have, at least marginally, a positive effect on EU external trade.

54. No impact on employment: No impact on investment in vessels and no impact on

reliability of services is foreseen, therefore there will also be no impact on employment neither on vessels nor in ports.

55. Other Cooperative Arrangements May Increase – Without the minimum amount of

industry-wide cooperation that conferences provide, joint ventures, consortia and alliances are likely to increase in scope. The trend is there anyway, as conferences have declined.

56. Other Sources of Information Will Emerge – The functions of the conferences in

terms of representing carrier views on trends, seeking and providing information, setting surcharges, and responding to policy issues, are all legitimate functions which will migrate to other organizations in the absence of conferences.

VI. ECONOMIC IMPACT OF AN INFORMATION EXCHANGE SYSTEM AS PROPOSED BY THE ELAA

57. One useful way of dividing activities undertaken by the "system" as proposed by the

ELAA is to distinguish between proposed "pure information exchange" activities versus "other" proposed activities. While ELAA calls their regime an "information exchange system", it is clearly much more than just that.

58. Pure information exchange activities – The ELAA proposal consists of exchange (in

various ways) of the following types of data:

• Trade size and capacity utilisation • Commodity developments • Capacity developments (including number of sailings) • Price indices • Liners’ own market shares • Other relevant developments on trade.

59. Other proposed activities – In addition, there would be:

• Discussions and evaluations of the above information (except own market shares) in trade committees, including "forecasting"


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• An Independent Data Service (IDS) as institution carrying out information exchange

• Publication of certain data exchanged by carriers • Common formulae for surcharges and ancillary charges

60. Concerning information exchange, the question arises which information is already

available at the moment. Excellent data or estimates and often forecasts are currently available for:

• Demand – cargo volumes • Conference surcharges • Indices of charter rates and tenure • Characteristics of the container fleet, including capacity (supply) • Vessel Characteristics, including capacity • Investments, vessel orders, new-building, sales and scrapping • Some elements of operating costs (fuel, crew costs, insurance) • Published liner schedules, service capacity.

61. The available data is less complete, or largely unavailable, for:

• Freight rates actually charged • Surcharges and total charges actually applied • Carrier specific operating costs and profitability • Utilisation rates • Carrier market share by route • Service quality and reliability.

62. The proposed ELAA information exchange system will use sensitive information.

Bills of lading and business sensitive confidential documents are not usually available to anyone beyond the contracting parties, and manifests may not be released by carriers’ terminal operators or governments. A reason why the proposed ELAA information exchange system could generate additional useful information is that it uses otherwise confidential business-sensitive data from bills of lading.

63. The following aspects of information relevance and utility have been assessed:

a) Relevance for collusion: The assessment of the impact of information

availability on the risk of collusion will follow the concept set out above. b) Relevance for efficiency: The ELAA claims several efficiency effects of

information exchange that will be assessed. c) Level of detail: The precision or coarseness of the data (concerning regions

and other characteristics except timing), i.e. the degree of aggregation versus desegregations

d) Historic delay and frequency: How often is the information released (frequency) and does it refer to a recent or to a more distant time period, that is, historic delay?

e) Reliability and credibility: Information shall be said to be reliable if there are not many mistakes or errors in collecting and processing it. Information (or information source) shall be said to be credible if there are not many distortions (by intention) in collecting and processing.


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64. In general, the more relevant a piece of information is, the more useful it is for

improving efficiency or, respectively, to support collusion.

65. The benefits of the information exchange claimed by ELAA are reasonable in principle, and the decisions in question are quite important. However, the information on trade size and capacity utilisation, commodity developments, and capacity developments (including number of sailings) can significantly increase the danger of collusion – by helping colluders identify and retaliate against cheaters – particularly if the various pieces of information can be combined.

66. The level of detail or geographic and commodity aggregation must, therefore, be

chosen carefully, in particular on highly concentrated routes. The load of a few ships should not stand out clearly in the data, that is, knowing for certainty one carrier's part of the data should not be sufficient to permit them to compute or guess the rest.

67. Also the historic delay and frequency should be chosen carefully. A monthly issue of a

non-delayed figure is in general too dangerous with respect to collusion because it allows quick retaliation against a cheating carrier. Moreover, to get the "planning" benefits, monthly data is not needed. The norm for "historic data" in this context in the EU is one year, in any event. Quarterly or half-year data would probably be sufficient for many planning purposes.

68. The ELAA proposal asks for price indices that are too disaggregated and frequent to

rule out their use for collusion. However, this danger can be considerably reduced by lowering the level of detail and frequency only a bit; for example by broadening the markets covered and providing at most quarterly or half-year price indices.

69. Data on individual market shares by trade, region, or port which is provided by an

Independent Data Service can be more credible than carriers’ own calculations on market shares. Furthermore, it is difficult to guarantee that individualised data on market shares will not circulate between colluding carriers in order to monitor individual behaviour. This poses great dangers of collusion, since monitoring rests on credible data. There are also no beneficial effects of this data discernible. Therefore, provision of individual market shares by an Independent Data Service should not be part of an information exchange system.

70. On the other hand, we do not expect that information on other relevant

developments on trade (like notification of, e.g., shifts in production, terminal/port developments, war risks, stevedore strikes) would pose a danger for competition.

71. The joint discussions and evaluations of figures by the carriers that are organised

in a trade committee pose a threat for competition in the liner industry. Moreover, votes on a forecast report are in fact agreements on common business goals. On the other hand, the benefits that are claimed by the ELAA are questionable. Therefore, these elements of the ELAA proposal should not be allowed.

72. An information exchange system should be carried out by an institution with the

highest possible level of independence. Such an organisation should be independent of any conference-like liner organisations, or any carrier advocacy organisations.


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73. Publication of all data provided to carriers by the system of information exchange is helpful to avoid collusion. Additionally, it might provide valuable information for shippers and other interested parties. Therefore, publication of all data that is provided within the framework of the system of information exchange should be enforced.

74. Common formulae for surcharges and ancillary charges pose a considerable

danger for competition without contributing to efficiency. The danger is compounded if they are unilaterally created and imposed by carriers acting collectively. Therefore they should not be allowed, permitting other individual mechanisms to arise.

75. To sum up, the entire ELAA package should not be accepted "as is". As a

package, the set-up and procedures constitute an invitation to collude that would be hard for many in the industry to resist, at least on occasion, to the detriment of shippers (consumers). In particular, the trade committee concept would seem difficult to defend in competition terms in current circumstances.

76. Moreover, the concept of uniting of the proposed trade committees under a single

umbrella organisation would appear to enhance the capability of individual committees to coordinate the management of liner markets in an anti-competitive fashion. It appears to be a "super-conference" bringing together into one organisation both the existing conference members as well and the non-conference operators. It is hard to see how it might enhance competition.

77. On the other hand, the trade association concept for all European liners by itself would

seem to pose little risk of anti-competitive effect, particularly if it behaved like "any other trade association" and avoided all exchange of sensible business information and discussion of sensitive topics. After all, most industries have trade associations of one kind or another. They have legitimate common interests.


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II. INTRODUCTION

78. The Directorate General of Competition ("DG Comp") of the European Commission is leading a review1 of Regulation 4056/86 which provides the international maritime liner industry with a "block exemption" from Article 81 (formerly 85) of the European Union Treaty. If the block exemption is revoked, conferences would lose their current exemption from European competition regulations.

79. The European Liner Affairs Association (ELAA) has proposed as an alternative that a

detailed information exchange system be a critical element of a new regulatory structure for liner services2. The paper considers the impacts of two distinct options:

a) Replacing the currently existing block exemption with the ELAA information

exchange system; versus b) Abolishing the block exemption entirely, as proposed by the European

Shipper's Council (ESC) with no replacement block exemption

80. The purpose of this study is to both theoretically and empirically assess the competitive effects and the economic impact of the proposed information exchange system particularly as it relates to competition, investment decisions, reliability of services, trade and commodity flows, innovation with respect to transport services and infrastructure, employment of European Union (EU) seafarers, and other relevant factors such as port congestion. The current system of traditional liner conferences (its retention also being advocated by the ELAA) and a simple abolition of these conferences without any information exchange systems (as advocated by the European Shippers Council) will also be evaluated.

81. Quantitative and qualitative information is critical to the success of this study. Yet the

acquisition of pricing data is an elusive target. The Conferences and their members have on the whole been uncooperative in providing this information, even on an indexed basis. Part of this is of course due to the changing nature of the way freight rates are negotiated, with increasing numbers of confidential service contracts being signed. The terms of these remain confidential between the Carrier and the Shipper. However, the fundamental issues examined in this paper can be addressed without reference to confidential price data, and this investigation is designed to do so. The fundamental issues examined in this paper are addressed without reference to confidential price data, and this investigation is designed so that it is not necessary for the findings. The consultant’s own databases and other publicly available data sources have been used.

1 See the Consultation Paper by DG COMP at http:europa.eu.int/comm/competition/antitrust/legislation/maritime/en.pdf Responses to the Consultation Paper: http:europa.eu.int/comm/competition/antitrust/review/marine_transport_comments.html Discussion Paper issued by DG Comp. http:europa.eu.int/comm/competition/antitrust/others/maritime/review_4056.pdf White Paper on Liner Shipping: http:europa.eu.int/comm/competition/antitrust/others/maritime/review/en.pdf 2 See the ESC submission at www.hppt://europa.eu.int/comm/competition/antitrust/others/maritime/38345/en.pdf


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82. The containerised liner shipping industry is a vital factor for the European economy. Container transport by sea accounts for around 40% of EU-25 external in value terms.3 The worldwide largest three liner operators are European, and the routes connecting Asia and Europe, jointly with the routes connecting Asia and the USA, are by far the most important trade routes. Furthermore, since the yearly growth rates of trades from Asia to Europe amounted to more than 15% in 2003 and in 2004, the relevance of those routes increased significantly and can be expected to be growing in the future.

83. The market organisation of liner shipping features a variety of cooperative elements.

There is a long tradition of liner shipping conferences where carriers meet regularly and decide jointly upon cargo rates and shipping quotas for individual trading routes. However, besides conferences there are also independent carriers who offer shipping on their own terms. Nowadays, conference carriers’ market shares have dropped to about 40 to 60 percent on many important routes.4 For example, on the very large Far East to North Europe route, the Conference share is estimated to be near 60% and closer to 50% for Mediterranean destinations. Moreover, carriers increasingly offer long-run service contracts to customers. Especially in the US-European trades these contracts are usually confidential and therefore also undermine the role of conference price setting.

84. The phenomenon of consortia and alliances between carriers is also a significant factor

that must be considered. Consortia represent operational, technical or commercial agreements between different sea carriers to pool all or some of their activities on particular trade routes. Alliances are agreements between carriers to cooperate on space and capacity across trade routes, in some cases on a global basis. In addition to these forms of cooperation there has been an ongoing process of concentration in the liner shipping industry in recent decades.

85. While cartels are usually forbidden by competition laws, carriers enjoy a special status

almost throughout the world. In the EU the regulatory environment of liner shipping is characterised by two block exemption regulations pursuant to Article 81(3) of the EC Treaty, specifying the conditions under which certain types of agreements are exempted from the prohibition on restrictive agreements laid down in Article 81(1) of the EC Treaty. Regulation 823/2000 allows the establishment of consortia between carriers, and Regulation 4056/86 allows liner conferences to be held that fix prices and regulate capacity. Currently, however, the latter regulation is under review of the EU Commission so that traditional liner conferences may not be allowed in the future. Particularly the European Shippers Council (ESC), representing the interests of shippers, calls for the abolition of Regulation 4056/86.

86. As a response to the EU Commission’s review of Regulation 4056/86, the European

Carriers Affairs Association (ELAA) was established in May 2003 to represent the carriers’ position in this process. On 6 August 2004 the ELAA submitted a “Proposal for a new Regulatory Structure” accompanied by two market studies by Charles River Associates.5 In the Proposal the ELAA pursues a two-tier strategy. In a first line of

3 Combines import and exports. 4 Note that these are still high levels. Formally, in competition terms, 50% market share constitutes 'market dominance.' 5 These two studies are: Von Hinten-Reed, N., T. Chipty, E.S. Morton, 2004, Shipping Conferences: A Study on the Impact of FEFC in the North Europe-Asia Trade, Charles River Ass. Nitsche, R. and N. von Hinten-Reed, 2004, Competitive Impacts of Information Exchange, Charles River Ass.


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defence, it denies need for reform of Regulation 4056/86, arguing that conferences are effectively not used to push up prices above average costs (at least since about 1998). The ELAA, in a second proposal suggests that at least an information exchange system should be allowed in the future. The design of the system is sketched in their Proposal. The ELAA emphasises that, in contrast to Regulation 4056/86, the new Proposal makes no reference to ‘price fixing’ or the ‘regulation’ or ‘limitation’ of supply or capacity, and rightly points out that this represents a significant change in the position adopted by the industry. In March 2005 the ELAA came up with an extended version of its proposal.6

87. One of the key goals is to identify which elements of the ELAA proposal are anti-

competitive, "competition neutral" and which could be considered pro-competitive? The study uses evaluations based on both theoretical and empirical analysis, to develop the pros and cons of the ELAA proposal. This is described below:

Efficiency

• Potentially beneficial effects of the (elements of the) ELAA Proposal will be assessed

– Investments

– Management of existing capacity

– Reliability of Service

Collusion

• We assess to which extent

– specific features of the current liner industry could lead to successful collusion

– the elements of the ELAA proposal could lead to successful collusion

88. The theoretical analysis of the economic effects of the alternative regulatory regimes are achieved by means of a “game theory” model of the liner industry specifically developed for this paper, in response to the concern that existing theoretical market models do not adequately consider the effects of lumpy supply and market entry. Qualitative conclusions are derived from the model on the economic effects of the regulatory regimes under discussion. This model is informative about future levels of freight rates, reliability of services, instability, capacity, supply, etc., if the block exemption is abolished.

6 European Liner Affairs Association: The ELAA Proposal for a New Regulatory Framework for the Liner Shipping Industry – Article 81 EC Assessment, 10 March 2005.


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89. The EU Directorate General of Competition specified the following terms of reference7 for this study: “To assess (theoretically and empirically) the competitive effects and the economic impact of the information exchange system, i.e. the ELAA proposal.” The consultants are directed to compare the proposed ELAA system with the current system of liner conferences, and also with a system where the block exemption is abolished and there are no conferences and no information system. The consultants are further directed to examine the various components of the ELAA proposal. The DG COMP Terms of Reference goes on to specify the areas in which the comparison is to be made:

(a) Competition: The competitive situation on the liner shipping market in various

trade routes, the industrial organisation of the liner shipping industry, carriers’ profitability and strategies and service, freight rates, and incentives and benefits the exchange of information system.

(b) Investment decisions: Supply and demand balance, the deployment of vessels, investment, chartering market, and fleet ownership.

(c) Reliability of services. (d) Trade (e) Innovation (f) Employment (g) Other relevant factors.

90. The consultants are further directed to examine specified variations in the ELAA

proposal concerning information exchange, different arrangements for the processing and dissemination of information: (i) simply processed by an independent third party or (ii) processed by a third party and distributed to the participating lines without discussion or (iii) processed by a third party and discussed within a trade committee as described in the ELLA proposal and/or (iv) the information is subsequent to any of the above mentioned stages made public.”

91. To respond to the Terms of Reference, this study uses the following analyses and

methodologies: 1. Review of recent events and trends in the worldwide container industry 2. Analysis of increased concentration of ownership in the liner industry 3. Investigation of the roles of various cooperative agreements among carriers 4. Review of the regulatory arrangements in the United States, Australia, and other

trading partners 5. A review of previous empirical studies on the subject 6. An evaluation of the present market for liner services in Europe 7. A review and analysis of seven important or representative European trade routes

and the role played by conferences on those routes 8. Review of experience in other transportation modes that have undergone de-

regulation and that have had exemptions from competition rules withdrawn 9. The development of a tailor-made game-theoretic model incorporating an

economic structure based on the specifics of the liner industry; the game provides a "thought experiment" for exploring the effects of ending block exemptions based on economic theory

7 See Tender for “The Application of Competition Rules to Liner Shipping”, Issued by the European Commission, DG Competition, Section D Transport Unit, COMP/D2/2005/5 15-013484, Especially Annex A. Published in the Official Journal of the European Union, 21 January 2005.


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III. GLOBAL CONTEXT

A. Liner Industry Worldwide

Globalisation is Fundamental to the Liner Market

92. Globalisation of international production and the international division of labour has impacted container trade resulting in a massive growth in deep sea volumes primarily from Asia in the past five years. (Figure III-1). Annual growth rates of container trade were two to five times as high as the annual growth rates of the real world gross domestic product (see Figure III-2). During the last ten years container transport has more than doubled. In that time the average growth rate of world total container trade was close to 8%. However, significant variations in experienced annual growth rates exist. From 1997 to 2002 ups and downs of annual growth rates amounted to variations between 4 and 7 percent points. For instance, in 2001 the annual growth was close to 4% and jumped up to around 11% in 2002. Since then the growth rate remained above 10% in 2003 and 2004. The future prospect of the global liner industry is a slowdown of annual growth rates that are expected to fall below 8% in the long term after 2005 as import substitution reaches a balance.

Figure III-1 Total Container Trade in Millions of TEUs

0

20

40

60

80

100

120

140

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Global Insight. (Deep Sea Origin/Destination Flows Only)

93. Figure III-2 highlights the close relationship between international trade and economic

growth. In the past this relationship of liner trade growth to GDP was around 2-2.5:1 for the G7 countries and nearly 4:1 for most of the Asian countries. With the advent of globalisation and the massive foreign direct investment (FDI) in China there was a significant change, particularly in Europe. During the last three years of weak GDP growth in Euro-land countries, foreign trade, that is, non intra-EU trade, grew at double digit levels and well over 25% from China.


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Figure III-2 Annual Change of World Real Gross Domestic Product and World

Trade in TEUs

0%

2%

4%

6%

8%

10%

12%

1996 1997 1998 1999 2000 2001 2002 2003 2004

%Change in world total trade in TEUs

%Change in world real grossdomestic product

China effect

China effect

Source: Global Insight.

94. The driving forces behind the growth in the world gross domestic product and of container trades are the countries in the Far East, and in particular China. From 1995 until now container exports in TEUs from the Far East to the world tripled (including intra-Asian trades). The share of the world total container export in TEUs of Far Eastern countries was growing steadily during that time. Compared to 40% in 1995 it has reached around 55% in 2004 (Figure III-3). The respective shares of all other regions at the same time dropped proportionally. Notably, during the last ten years the shares of the North American countries and the EU-25 countries declined from around 18% to around 12%. The Far Eastern countries are projected to constantly gain a higher share in container exports in the following years, too.

95. With regard to container imports, the Far Eastern countries are also in a leading

position (Figure III-4). Their share of world total container imports was at a level between 35% and 37% for the last ten years. One exception was in 1998 where the import share reached only 33% because of the Asia financial crisis. The EU-25 countries have a share of around 15%. In contrast to this, the share of the North American countries increased by 7 percent during the last ten years and has now reached a share of one quarter of total world container import. On the other hand, the share of “Others” (e.g., South- and West Africa, Indian Subcontinent, South-America, etc.) has decreased proportionally to the increase of the North American share. It is expected that in the following years the “Others” countries will further lose share of the total world container imports as the Far East and North American countries gain additional shares.


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Figure III-3 Development of the Annual Share of World Total Container Exports of Regions in Millions of TEUs

0%

10%

20%

30%

40%

50%

60%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Far East

Others

North America

EU 25


Figure III-4 Development of the Annual Share of World Total Container Imports

of Regions in Millions of TEUs

10%

15%

20%

25%

30%

35%

40%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Far East

Others

North America

EU 25



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96. Since the Far Eastern countries are dominating world container exports and imports, the Asian trade routes have become the most important trade routes world wide. In 2004 world container deep-sea trade amounted to more than 78 Million TEUs (Figure III-1 above). Therefore, with more than 18 Million TEUs, the Intra-Asian container trade accounted for one quarter of the world total container trade in 2004 (Figure III-5). It is by far the most important trade region world wide. The second largest trade route, the Far East to North America accounts for just over 12 Million of TEUs. The third largest trade route, the Far East to the EU-25 accounts for 6 Million TEUs.

97. The largest share of North Americas’ container exports goes to the Far Eastern

countries. In contrast to that, most of the container exports from EU-25 countries are designated for North America.

Figure III-5 Container Trade Routes in Millions of TEUs in 2004

0

2

4

6

8

10

12

14

16

18

20

Far East NorthAmerica

EU 25 Others

Export Country:

Import Country: Far East

Import Country: North America

Import Country: EU 25

Import Country: Others


98. According to Figure III-6 we identify three big East-West trade routes that connect different world regions:

1. the Transpacific trade route connecting the Far Eastern and the North

American countries,

2. the Europe-Asia trade, with transhipments to the Indian Subcontinent trade route connecting the Far Eastern and the EU-25 countries, and

3. The Transatlantic trade route connecting the North American and the

EU-25 countries.


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99. Altogether the big three trade routes accounted for 37% of the total container trade in 2004. Another important observation is that trade imbalances, i.e. differences in container flow on a trade route with respect to the direction, on the big three trades rise dramatically (Figure III-6). In 1995 the Transatlantic route was more or less balanced with a relative imbalance of 3% of flows from the EU-25 to the North American countries compared to the opposite direction. At the same time imbalances on the other two routes were significantly higher. The relative imbalance of container flows from the Far Eastern countries to the North American countries was 17.5% and from the Far Eastern to the EU-25 countries 27% compared to the opposite directions. However, during the last ten years trade imbalances jumped up to 49% on the Transatlantic, 63% on the Europe-Far East route, and 66% on the Transpacific route. Managing the huge increase in trade imbalances represents a challenging task for carriers at present.

Figure III-6 Development of Trade Imbalances in Per Cent on the Big Three

Trades

0%

10%

20%

30%

40%

50%

60%

70%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

TranspacificEurope-Far East

Transatlantic


Liner Shipping Consolidation Process

100. A fundamental basis for the growth of total container trade is an adequate increase of capacities. To cope with growing demand, carriers have approximately tripled capacity during the last 10 years. This distribution of the additional capacity has also been mirrored by the significant consolidation in the liner industry as a result of company growth and mergers and acquisitions. The top 10 carriers currently have a market share (measured by share of total carrier capacity) of approximately 58% vs. 50% ten years ago. The top 30 carriers now reach a joint market share of 92% (Table III-2 below). The ELAA members constitute 24 carriers (with the acquisition of P&ONL and Delmas by Maersk and CMA-CGM respectively). This is a significant


III-22

market concentration, equivalent to 70% of the global capacity per the ELAA proposal document.

Figure III-7 Capacity and Market Share of Top 10 Carriers 1992-2005

012345678

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Mill.

TEU

44%46%48%50%52%54%56%58%60%

Source: ISL, based on MDS Transmodal

% S

hare

of T

OP 10

Car

riers

Rest of the world Top 10 Carriers Market Share of TOP 10 (right axis)

101. Consolidation within the Liner industry is also demonstrated in Table III-3 which

highlights the number of carriers, ranked by market share, that are needed to sum up to a joint market share of 50%. In 1995, 16 carriers were needed while currently only 7 carriers are needed. The table also shows that in particular European carriers press ahead with consolidation. Note that four of the seven top carriers are European carriers. The remaining three top carriers are Asian (Taiwanese, Chinese and Singaporean). The two largest carriers worldwide are European carriers. The growth of national fleets in Asia correspond to the nations with the strongest GDP and export trade growth such as South Korea, Taiwan and China.

102. There is no evidence that the UNCTAD Liner Code contributed to the growth of developing nations fleets. The Code itself was introduced in 1974 at the insistence of the developing countries as a means to increase national participation in the carriage of goods and to encourage the growth of national fleets which was seen as a method to reduce the deficit in trade in services.

103. The Liner Code premise is to allow two countries connected by a shipping route to reserve 80 percent of the freight between the two countries to the merchant fleet of the two nations on an equal basis, leaving 20 percent of the cargo for shipping companies from third countries (cross traders). Most of the develeped countries reached an understanding that the Liner Code would not be applied on trades between them. Nevertheless, several members of the EU did ratify the Code and it entered into force in 1983 with 78 countries having ratified the Code. At the time, there was little support for the code outside of Africa and Latin America where bilateralism and freight bureau were entrenched.


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104. The Liner Code calls for freight rates to be non discriminatory as between shippers and it supports commodity based rates as well as allowing surcharges. The Liner Code has all but disappeared as an influence on the trade of developing countries. All of the various national lines that were estalblished in Africa and Latin America as state owned institutions have either been privatised and acquired by foreign lines or have gone bankrupt and disappeared. The few remaining vestiges are slot charter agreements.

105. It is probably the case that the developing countries that were most in favour of the Liner Code did not have the funds or expertise to establish fully functional liner shipping companies and to trade them solely on the basis of one country to a number of destinations was not economically viable particularly when competing with established lines trading between multiple countries. To survive this would require heavy taxation or artificially inflated freight rates, neither of which is conducive to fostering the growth of trade, and particularly exports. When looking at the West Africa trade or the East Coast South America trade there are today no national lines trading that are wholly owned by national interests, private or public.

Market Concentration in the Liner Industry

106. The discussion to this point has covered the trend of the growing concentration of the liner market with the current fleet. However this did not take into consideration the expansion of the fleets based on the existing orderbook (as at September, 2005).

107. The top 15 liner carriers8 account for 86 percent of the global fleet of ships in service plus the current orderbook. This concentration is even more dramatic when considering that the top five carriers account for 50 percent of the total fleet and orderbook. Of these, four are European companies with 43 percent of the total and three are EU based companies (Maersk Line, CMA-CGM and Hapag Lloyd) with 33 percent of the total share. (Table III-1)

108. This concentration of market power is demonstrated by the very large disparity in size between the top two carriers and the rest and the rapid decline in relative size as one goes down the table.

109. Chinese carriers control 9.5 percent of the global fleet and orderbook while the three Japanese lines have just over 10 percent. Asian carriers as a whole control 39 percent of the top 15 carriers capacity.

110. The average size of the vessels of the top 15 is 3,301 TEU, including the orderbook. There is relatively little deviation in the average size for most of the carriers with the exception of the Hanjin, OOCL and China Shipping whose average size vessels all exceed 4,000 TEU. According to Clarkson’s Research, COSCO have eight vessels of 10,000 TEU on order while A.P. Moller (Maersk) has 37 vessels above 8,000 TEU on order, primarily in Denmark at their own shipyard. The various German asset owners

8 This takes into account the acquisition of P&ONL by Maersk; and that the acquisition of Delmas by CMA-CGM and CP Ships by TUI, owners of Hapag Lloyd are approved.


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are heavily represented in the Orderbook with vessels in excess of 8,000 TEU ships which will ultimately trade with most of the top 15 carriers, further increasing the market concentration.

Table III-1 Current Fleet & Orderbook

Ships TEU % of Total

1 Maersk/PONL 622 1,982,203 20.8% 2 MSC 303 1,002,902 10.5% 3 CMA-CGM 258 657,105 6.9% 4 Evergreen 178 605,994 6.4% 5 Hapag Lloyd/CP 147 497,178 5.2% 6 CHINA SHIPPING 102 462,989 4.9% 7 COSCO 150 446,075 4.7% 8 NYK 117 374,639 3.9% 9 HANJIN 82 353,804 3.7% 10 APL/NOL 92 314,475 3.3% 11 OOCL 77 313,283 3.3% 12 CSAV 99 312,625 3.3% 13 K-LINE 85 302,603 3.2% 14 MITSUI OSK 85 299,960 3.1% 15 YANGMING 84 263,408 2.8% Sub total 2,481 8,189,243 86.0% 16 ZIM 97 261,108 2.7% 17 HYUNDAI 50 212,051 2.2% 18 HAMBURG-SUD 83 174,903 1.8% 19 WAN HAI 83 170,282 1.8% 20 PIL 106 156,691 1.6%

Source: MDS Transmodal databank.

111. A number of the smaller carriers appear as owners of vessels on the orderbook over 5,000 TEU which is an interesting observance. These include Costamare with five vessels of 8,200 on order, United Arab Shipping (UASC) with eight vessels of 6,800 TEU on order and Iran Shipping with six 6,500 TEU ships on order.

112. This concentration of market power suggests that owners of 150 or more ships (Maersk will have 622 and MSC 303) can operate independently of alliances and consortia. Maersk certainly provided an excellent example of this when they resigned from the Grand Alliance immediately after acquiring P&ONL.

113. Conversely, this market concentration provides additional incentives for the smaller carriers to band together into alliances in order to compete against large carriers.

114. The economic benefit of participating in a conference must also be questioned for the very large lines. The withdrawal of the P&ONL interests from the Australia New Zealand Europe Liner Association was followed by CMA-CGM’s notice to withdraw as well. It is not clear how this conference will restructure itself.


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115. The future is likely to see a continued consolidation and concentration of the liner market. The main acquisitions have taken place in Europe but there remain a number of smaller owners in the market that may well decide to exit the competitive environment in which they find themselves.

116. The ability of at least five, possibly seven, of the top liner carriers to operate independently of alliances on a global basis suggests that they can also operate without conference membership Pricing and capacity management as well as ports of call, frequency of service and equipment supply are all within their own domain and interest to control on a sole basis. They will all be operating on a yield management basis to maximise their utilisation levels and cost controls. Contracting will be focused on major global shippers whose natural tendency to global supply chain management will encourage shipping contracts with two or at most, three global service providers. The ability of a company such as Wal-Mart to insist on a new port of call, (Houston with Maersk from Asia) has benefits for both sides.

117. The trend towards greater concentration is further encouraged by the price of newbuildings ranging from US$126 to US$133 Million for vessels in the 9,700 to 10,000 TEU size range and US$ 65-85 Million for vessels in the 4,000-5,500 TEU range.9 For any carrier to provide an independent service they would need a string of at least 5 vessels on the shorter routes and perhaps ten on the North Europe to China route. To find alliance candidates amongst the smaller carriers is difficult as the investment decision becomes more complex. The alternative, to enter the market with chartered tonnage is very difficult, in fact almost impossible at the larger size ranges, as virtually no vessels are available. They are all committed to existing carriers. Recent fixtures reported by Clarkson’s10 suggest that vessels in the 2,000 to 2,600 range are being fixed in the US$30,000 per day range. This equates to nearly US$11 million per annum. Assuming that a carrier can manage to get 4 main haul trips per container this brings the cost per container trip to nearly US$1,100 just to cover the charter cost, a price which is probably three to four times the average trip cost on an 8,000 TEU owned vessel depreciated over 15 years, with a remaining asset value at the end of the period.

118. The second hand market is also not an option with relatively little supply in the size ranges required for a long haul trade route. All of this points to the difficulty of a small to medium sized operator entering the market as a new competitor.

119. The main carriers' service strategy relies – with growing importance – on the supply of global logistics solutions. Correspondingly, concentration does not only take place on horizontal level (between carriers). Carriers also engage in vertical integration activities that cover almost all stages of the transport chain. To offer door to door services carriers operate companies for hinterland transport, port terminals and in-house agencies. Furthermore, some of the large liner shipping companies, e.g. Maersk Line and to some extent MSC, focused in recent years on own or quasi-own (dedicated) terminals. The reason is that direct access to handling capacities often allows faster and more efficient port operations as well as a strong revenue stream

9 Clarkson’s Research “Shipping Intelligence Network” September 2005 and “Lloyd’s Shipping Economist” September 2005, page 45. 10 Clarkson’s Research, “Container Intelligence Monthly” September 2005


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based on volume throughput and relatively high terminal handling charges levied by the industry.

Table III-2 Carriers Operated Fleets (owned and chartered) and Market Shares

in February 2005. Carriers Country TEU Share in %

1 Maersk Sealand/P&ONL Denmark 1.336.445 18.6

2 MSC Switzerland 639.404 8.9 3 Evergreen Taiwan 440.306 6,1 4 CMA-CGM France 388.755 5.4 5 NOL/APL Singapore 299.355 4.2 6 COSCO China 284.091 4.0 7 Hanjin Korea 282.304 3.9 8 NYK Japan 264.509 3.79 CSCL (China Shipping) China 231.101 3.210 K-LINE Japan 219.703 3.111 OOCL Hong Kong 215.555 3.012 Mitsui OSK Japan 196.360 2.713 ZIM Israel 195.108 2.714 CSAV Chile 191.161 2.715 CP Ships UK/Canada 188.421 2.616 Hapag-Lloyd Germany 181.217 2.517 Yangming Taiwan 163.508 2.318 Hamburg-Sud Germany 148.907 2.119 Hyundai Korea 145.551 2.020 PIL Singapore 118.291 1.621 Wan Hai Taiwan 92.472 1.322 UASC Kuwait 67.858 0.923 Delmas France 60.080 0.824 IRISL Iran 47.706 0.725 RCL Thailand 47.506 0.726 Grimaldi Naples Italy 40.440 0.627 MISC Malaysia 34.800 0.528 CCNI Chile 31.687 0.429 Costa Container Lines Italy 29.024 0.4 ∑ 6.581.625 ∑ 0.92

Source: MDS Transmodal.

120. Consolidation also takes place on the shippers’ side. As a response to the trend of integrated logistics solutions, freight forwarders and especially the big 3PL (Third Party Logistics) providers increasingly combine ocean freight activities with their other services in order to offer one-stop solutions for all logistics needs. This is fostering a concentration trend on the shippers’ side as well. Freight forwarders usually negotiate with several ocean carriers to carry out their customer’s orders.


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Table III-3 Carriers Making up 50% of Total Existing Capacity

1995 2000 2005

1 Maersk-Sealand 1 Maersk Sealand 1 Maersk Sealand* 2 Evergreen 2 Evergreen 2 MSC 3 Cosco 3 P&O Nedlloyd 3 Evergreen 4 Sea-Land 4 Hanjin 4 CMA-CGM 5 NYK 5 MSC 5 Hapag-Lloyd** 6 P&O Nedlloyd 6 Cosco 6 NOL/APL 7 Hanjin 7 NOL/APL 7 Cosco 8 P&O Containers 8 NYK 9 Mitsui OSK 9 CP Ships

10 K-Line 11 Zim 12 Hapag-Lloyd 13 NOL/APL 14 DSR Senator 15 MSC Bold = European Carriers 16 Yangming *After merger with P&O Nedlloyd. **After merger with CP Ships.

Global Insight Analysis.

Liner Operating Agreements

121. The traditional form of co-operation in the liner industry has been conferences. However, the number of conferences in the last decade has been in a continuous decline to a number of nowadays around 150. In the USA where conferences file with the Federal Maritime Commission, the number dropped from 99 in 1982 to only 19 in 2001. At present 30 liner conferences operate on routes from and to the European Union. The largest conference world-wide is the Far Eastern Freight Conference (FEFC) which covers the region of North Europe, the Mediterranean, and Asia from the Northern border of Myanmar to the north of Japan.

122. Table III-4 provides an overview on the membership of the top 25 carriers in important conferences that cover European routes. It shows that some big carriers are more actively involved in conferences than others. Maersk and P&O Nedlloyd, for instance, are very active in conference membership, while Evergreen is only involved in a few conferences. Furthermore, smaller carriers seem to be in general less involved in conference activities.

123. During the 1980s, independent carriers began to play a bigger role11 . In U.S. trade so-called ‘discussion agreements’ evolved as another form of cooperation between Carriers. In discussion agreements carriers manage the exchange of information on freight rates, costs, capacities, and conditions of service for particular routes between conference carriers and also independent carriers. In contrast to conferences, they do

11 FMC Review, 2001.


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not make binding agreements on freight rates and capacity that are outside of the prohibitions of the FMC rules.

Table III-4 Membership of Top 25 Carriers in Important

Conferences Covering European Routes (Q1 2005)

Rank Short Name ECSA

EMTA

ESA

ESPM

EWA

TA

FEFC

IPBC

C

TAC

A

USSEC

ECSA

JEFC

AW

RA

1 MAERSK SEALAND • • • • • • • • • • •2 MSC • •3 EVERGREEN • • •4 P&O NEDLLOYD • • • • • • • • • • • •5 CMA-CGM • • • • • • • •6 APL • • •7 COSCO • •8 HANJIN •19 NYK • • • • •

10 CSCL (CHINA SHIPPING)11 K-LINE • • • • • •12 OOCL • • •13 MITSUI OSK (MOL) • • • • •14 ZIM • •15 CSAV • • •2 • •2 •216 CP SHIPS •317 HAPAG-LLOYD • • • • • • •18 YANGMING • • • •19 HAMBURG-SUD • • • • •20 HYUNDAI • • •21 PIL 22 WAN HAI23 UASC •24 DELMAS •25 IRISL

ECSA - East Coast South America Forum 1 via Senator LinesEMTA - European Mediterranean Trade Agreement ² via NorasiaESA - Europe/Southern Africa Conference ³ via ContshipESPM - European/South Pacific & Magellan Freight ConferenceEWATA - Europe West Africa Trade AgreementFEFC - Far Eastern Freight ConferenceIPBCC - India-Pakistan-Bangladesh-Ceylon ConferencesTACA - Trans-Atlantic Conference AgreementUSSEC - United States South Europe ConferenceECSA - East Coast South America ForumJEFC - Japan Europe Freight ConferenceAWRA - Asia Westbound Rate Agreement source: ISL

Important Conferences on European Routes

124. Parallel to the downturn in the number of conferences, alliances and vessel sharing agreements (VSA) have become more predominant. Alliances represent operational, technical or commercial agreements between carriers to cooperate on a global scale. In contrast to that, VSAs focus on co-operation between two or more carriers on a particular route.

125. There are three primary varieties of operating agreements between carriers: alliances, consortia and a number of less formal ad hoc agreements such as slot swap/slot charters. The following information is sourced from, and discussed in greater detail in the World Trade Organisation document dated 4 October, 2001.12

12 World Trade Organisation, 4 October, 2001, S/CSS/W/106, Council for Trade in Services, Special Section.


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126. Strategic or global alliances, which became operational at the beginning of 1996, establish a framework for cooperation on a worldwide scale among the same group of companies. Such alliances typically embrace at least two of the major east/west trade routes (Europe/Asia, Asia/US, or US/Europe) served either by combined services on each route or round-the-world services. The parties agree, inter alia, on utilisation of vessels, including joint vessel route assignments, itineraries, sailing schedules, the type and size of vessels to be employed, additions and withdrawal of capacity, ports and port rotations on a global scale. The agreement typically covers charters, space charters, use of joint terminals and containers, pooling of containers, establishment of container stations, vessel feeder routes, co-ordination (where permitted) of inland services, information exchanges and relevant procedures. In other words, each participant's services are fully integrated into one operating system.13 Participants in alliances may include national and cross-traders, as well as conference and non-conference lines.

127. Alliances are a means for small and medium sized carriers to pool vessels to create sufficient capacity to provide strings to service trade route(s). It allows for entry into trades as well diversification, spreading resources (ships) across a trade or several trades. An example of this is the Malaysian carrier, MISC, participating in the Grand Alliance. The main obstacle for a small to medium sized carrier joining an alliance can be the requirement to provide sufficient capacity. This effectively will induce the smaller carriers to invest in the business to the extent required to join an alliance. However those carriers without sufficient resources have little to offer to an alliance and will either remain small niche operators or exit the business.

128. From a legal perspective, global alliances are no different from consortia or carrier agreements. Parties have thus far implemented their alliances by way of route-specific agreements taking into account the regulatory regimes or transport conditions on individual routes. Competition authorities have not challenged alliances, but are closely monitoring them. The US authorities seem to have developed a positive view of the effects of alliances in terms of rationalisation and customer benefits.14 On both the US and the EU sides, alliances are seen as a way to avoid mergers which could lead to increased concentration and oligopoly situations.15

129. Consortia are operating agreements between liner shipping companies aimed primarily at operating joint services by means of technical, operational or commercial coordination (e.g. joint use of vessels, port installations, marketing organisations, etc.). The regulatory treatment of consortia may vary from jurisdiction to jurisdiction. Under the laws of Australia, Canada, Japan, New Zealand and the US, they seem to

13 By contrast, strategic or global alliances do not cover: joint sales, marketing or joint maritime/multimodal pricing; joint ownership of vessels or maintenance or insurance; joint or common bill(s) of lading; common tariffs; joint management and executive functions; revenue pools or cargo pools; and sharing of profits/losses. 14 See, for instance, the statement of the Chairman of the Federal Maritime Commission before the Committee on the Judiciary of the House of Representatives on 22 March 2000 (http://www.fmc.gov/speeches/creel/creel.htm). 15 See http://www.fmc.gov, and "Liner shipping: Market Developments and Government Action – the EU Competition Policy Perspective" speech delivered by Jean François Pons, Deputy Director-General of the Competition Directorate of the European Commission at the 1st Lloyd List International Shipping Convention, 18-22 October 2000.


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quality for immunity from anti-trust law, without regulating whether ship operators apply uniform or common freight rates.16

130. In the European Union, consortia are not granted price fixing authority. Regulation 823/2000 allows group exemptions for consortia whose market share does not exceed 35 per cent if members are not part of a conference (30 per cent if members are part of a conference).17 The Consortia Block exemption has been renewed for five years by Reg. 611/2005.

131. Currently two major consortia are active: EUROSAL servicing the Europe-Caribbean/West Coast South America trade. CSAV recently joined the consortium. The other is SAECS serving the Europe – Southern Africa trade. A number of smaller consortia are operating on various trades. At present three carrier alliances exist: the Grand Alliance, the CHKY Alliance, and the New World Alliance (see Table III-5). Currently the members of the Grand Alliance have a combined operating fleet of more than one million TEU. However, after withdrawal of P&O Nedlloyd in February of 2006, capacity will be reduced to around 660,000 TEU which is similar to the capacity of the New World Alliance. Then, the largest Alliance will be the CHKY Alliance with a capacity close to one million TEU. Therefore, alliance carriers jointly operate with a capacity which is similar or well above the capacity of the second largest single carrier MSC.

132. These three alliances operate on different models. The Grand Alliance is a fully integrated vessel-sharing agreement. It has a main operations centre that makes all vessel deployment and operational decisions on behalf of the partners. The partners of the CHKY alliance usually operate their own strings; other partners may take slots if they choose. The New World Alliance operates on a mixture of these two models.

133. There are some carriers on the route that operate on a stand alone basis. CMA-CGM and Evergreen are not part of any formal alliance, but it does engage in agreements with other carriers on such issues as slot-charter and vessel sharing. PIL and Wan Hai, two privately-controlled Far East carriers, started a joint service in early 2004. The two true stand alone carriers on the route are Maersk and the Mediterranean Shipping Company, although the latter operate jointly with CMA-CGM on the Transpacific trade.

134. Slot chartering is a common means of carriers to offer additional services to their customers on certain routes or to meet demand increases without own investment in new buildings or long-term chartering. It enables the carriers especially to retain their flexibility regarding possible retreats from the market. Slot charter rates are individually agreed upon by the engaged carriers. They sometimes refer to the charter market conditions and may be reviewed on a regular basis. Others are fixed for a certain period. Slot charter rates can also be indexed upon operational costs developments, but the spot charter rates are most common as a reference point. The weakness of slot chartering is that in a period of high utilisation, it is virtually

16 Source: OECD DSTI/DOT/MTC(99)8, "Discussion Document on Regulatory Reform in International Maritime Transport". 17 Official Journal L89, 21 April 1995.


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impossible for the non vessel owning operator, or a small Carrier to find anyone willing to charter slots.

135. The current state of the liner industry is one of evolution that can be characterised in four distinct stages. The first stage is the pre 1969 period of conventional general cargo ships, relatively small, trading primarily as conference carriers with little non conference activities. The conferences set rates, managed capacity and to some extent also ports of call.

136. The second stage came with the introduction of container ships, which in the UK, a traditionally strong liner operating country caused the major liner companies to merge their container activities due to the high investment costs. This was a period of strong consortia such as ANZECS (1969), TRIO (1971), ScanDutch, ACE, SAECS, Franco-Belge, all of which worked on a pooling of revenue basis, joint decision making on capacity, rates and ports of call. Pricing was still in the domain of the conference organisation as was the division of market shares. Due to the nature of pooling, price competition was not prevalent.

137. The third stage started in the early, lasting in its basic format until the era of “yield management”. With the arrival of non conference lines, primarily from the export dominant Asian countries and the new fleets from countries such as Brazil, India, Pakistan, Ghana and Nigeria all which challenged the conference system either via pricing or by way of the UNCTAD Liner Code and national cargo reservation. In Europe this saw the advent of Maersk Line and MSC. The former initially tried to join the FEFC but was rejected based in its too high market share demand. This period continued to the early part of this decade and saw the weakening of the conference system. The integrated consortia were replaced (with the exception of SAECS) by Alliances and Vessel Sharing Agreements which provided joint tonnage to achieve the level of investment needed to service trades that wanted weekly services and to provide enough capacity to meet the cargo demand from Asia. Conference shares declined in the face of strong non conference competition and the growth of the privately traded companies such as Maersk, MSC, Evergreen and CMA and the state owned companies such as MISC, NOL and COSCO. Pricing strategy shifted away from the conferences to the Alliances and individual carriers, as did capacity planning. The conferences were left with collecting liftings data, calculating market shares and providing a framework for surcharges and general rate increases. Effectively, the conferences, particularly on the East-West trade routes lost control over carriers’ rate-setting and began to resemble trade associations which however aim at influencing carriers’ market behaviour. The smaller North-South trade routes, which also had smaller shipping companies active did maintain a stronger conference environment and the lines were (are) more often in disagreement with the larger carriers. It has been mentioned that Delmas rarely agreed with the policies of its larger French compatriot CMA-CGM. The conferences became an anachronism and their function was reduced to that of a trade association or discussion forum primarily aligning carriers’ market behaviour.

138. The fourth, and current stage of liner shipping evolution, began in the 1990’s, first with the formation of large alliances and then, around 2003, when the larger carriers began to adopt the airlines yield management strategy for pricing. This effectively


III-32

changed the profit/loss accounting system to shift from round voyage calculation to per container costing. This became possible due to the innovations achieved in the information technology industry that allowed for the collection of data on a highly granular basis which had not been possible before. This shift to yield management was a necessity due to the growing imbalance in trade and the mismatch between the import container locations and the location demand for exports at both ends of the trade. The shift to yield management was led by the more innovative carriers and it is these which are in the forefront of acquisition and capacity growth. The effect of this individualised pricing and capacity planning by a handful of very large, mostly privately owned companies has had a further detrimental effect on conferences. In this stage neither pricing, capacity nor ports of call are in the domain of the conferences. Most of the large carriers also do not need to operate in Alliances. They are global players in their own rights and negotiate with global trading companies such as Wal-Mart irrespective of the trade routes. The conference secretariats at best provide a common basis for distributing statistics on volume and market shares, but their role has diminished along with their own total market share.

Table III-5 Alliance Membership and Operated Fleets in February 2005

Alliance Members Capacity TEUP&O Nedlloyd*, NYK, OOCL, Hapag-Lloyd, MISC 1,084,916

Grand Alliance

Without P&O Nedlloyd 661,281CHKY Alliance Cosco, Hanjin, K-Line, Yangming 949,606New World Alliance NOL/APL, Mitsui OSK (MOL), Hyundai 641,266*Maersk announced that after February 2006 P&O Nedlloyd will withdraw from the Alliance.

Evolving Supply Conditions

139. Due to the high level of orders, new building prices for container vessels have reached record levels (Figure III-8). This is mirrored in the strong increase of charter rates that can be observed (Figure III-9). This indicates that due to the massive growth in demand carriers are currently short of supply although they undertook huge investments in the past. Note that 40% of all container ships are less then 5 years old and nearly 70% are less than 10 years old (Figure III-10).


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Figure III-8 Index Of New Building Prices for Container Ships

60

70

80

90

100

110

120

130

Dez 96

Apr 9

7

Aug

97

Dez 97

Apr 9

8

Aug

98

Dez 98

Apr 9

9

Aug

99

Dez 99

Apr 0

0

Aug

00

Dez 00

Apr 0

1

Aug

01

Dez 01

Apr 0

2

Aug

02

Dez 02

Apr 0

3

Aug

03

Dez 03

Apr 0

4

Aug

04

Dez 04

Apr 0

5

Inde

x De

c 19

96=1

00

Source: Clarkson Research Studies; ISL 2005

Figure III-9 Representative Charter Rates-Index for Container Ships (Howe-Robinson)

400500600700800900

100011001200130014001500160017001800190020002100

01.01

.199

8

01.01

.199

9

01.01

.200

0

01.01

.200

1

01.01

.200

2

01.01

.200

3

01.01

.200

4

01.01

.200

5

HRCI-I

ndex

(Jan

199

7=1.

000)

Source: How e Robinson , ISL 2005

Figure III-10 Age Profile of Fully Cellular Container Fleet in 2005

up to 5 years39,8%

11 to 15 years13,4%6 to 10 years

28,7%

16 to 20 years8,3%

21 to 25 years6,2%

more than 25 years3,6%

Source: ISL 2005 based on LR/Fairplay


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140. Carriers have tended to replace their containership fleet with larger vessels which are primarily suitable for the large East-West trades, but not, in the case of the 6,000 TEU plus range, for the North-South trades where insufficient volume exists to fully utilise the vessels. This will effectively reduce their flexibility in the future. The increase in the maximum vessel size for new fully cellular ships coming into operation is steadily increasing as is evidenced by the dramatic increase in capacity over the next two years. (Figure III-11). By 2008 capacity increases by 60% compared to 2004.

141. The trend towards larger ships is also confirmed by the development of the average ship size of the operated fleet and the ordered new buildings. For the top 10 carriers the average ship size of the ordered fleet amounts to 6,000 TEU in 2005 (Figure III-12). In comparison to that, the corresponding number for the operating fleet amounts to the half of it. Figure III-12 indicates that similar relations also held for the past years.

Figure III-11 Total Vessel Capacity Cellular Ships Coming into Operation18

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008

TEU

MIL

LIO

N

+60%

+50%

+175%

Source: Howe Robinson.

18 Howe Robinson analysis.


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Figure III-12 Average Capacity of Ships Operated and on Order of Top 10 Carriers 1999-2005

0

1000

2000

3000

4000

5000

6000

7000

1999 2000 2001 2002 2003 2004 2005

Source: ISL, based on MDS Transmodal

Aver

age T

EU C

apac

ity o

f Shi

ps

Operated Fleet Ordered Ships

142. Several studies have concluded that doubling the vessel size can reduce the average cost per TEU by up to 18%. This reduction is basically due to savings in operating costs such as crew and fuel.19 Current new building orders confirm this trend for the future. Note, that the share of vessels of post-Panamax size (above 4,500 TEU) of the full container fleet rises from 25% in 2004 to 34% in 2008 (Figure III-13).

Figure III-13 Size Distribution of the Full Containership Fleet in TEU

28%

29%

25%

18%

<2000 2000-4000 Panamax Post Panamax

2004 2008

22%

25%

19%

34%28%

29%

18%

25%

Source: Howe Robinson (2005).

19 ISL,Kraus/Lemper (1997) and Lloyd´s List (2000).


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143. To benefit from economies of scale, ships must be used intensively. To guarantee high load factors and optimal operation times large ships are preferably deployed on high demand and long distance routes. In 2005 nearly 70% of all ships with a minimum size of 6,000 TEU are deployed on routes between the Far East and North Europe. Furthermore, with around 25%, most of the remaining ships are deployed to the Transpacific route. To achieve the maximum utilisation of these vessels, Carriers have employed yield management pricing strategies borrowed from the airline industry. (See Pricing Policy Strategies discussion below)

144. Carriers implemented hub-and-spoke networks, replacing the fully connected network types in order to increase load factors while at the same time reducing the number of ships needed per service string. In a fully connected network, ports are serviced with direct links. In contrast, in a hub-and-spoke network, feeder ships allow for the concentration of container loads at hub ports to generate high load factors for large ships on long distance routes. Therefore, many connections are only served by indirect links over hub ports. Whilst this reduces the number of direct ports of call, it does ensure a broader, more frequent coverage for the smaller ports.

145. The conferences do not play a role in carrier decision making with regard to point to point versus transhipment ports of call. This is fully in the jurisdiction of the carriers and the alliances. The use of hub ports certainly does not prejudice the smaller ports as they are still served by the feeder vessels, which are steadily increasing in size. As trade grows to outlying regions such as the Baltic states, some carriers are beginning to consider direct calls by the main line ships in order to reduce the high cost of using feeder vessels which entails expensive double and treble handling of containers, which is expensive.

Figure III-14 Fully Connected and Hub-and-Spoke Networks

Port A Port B Port C

Port D Port E Port F

Port A Hub Port B Port C

Port D Hub Port E Port F

Fully connected network Hub-and-spoke network

Feeder traffic Feeder traffic

Feeder traffic Feeder traffic

Source: TU-Berlin WIP.


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146. See Figure III-14 for an example of a fully connected network and a hub-and-spoke network. In this example there are six ports. Three of them are located on one side of the ocean and the other three on the other side of the ocean. Then, in a fully connected network 25 links are needed to serve all connections. On the other hand, with a hub-and-spoke network container flows can concentrate on only five vessel strings. This demonstrates the power of hub-and-spoke network to effectively raise the load factor of ships. However, under a fully connected network, container transport goes directly from port A to port F, say, where under the hub-and-spoke network it stops at hub ports B and E. Hence, higher load factors often come at the cost of additional transport time and handling.

Pricing Strategies

147. Shippers pay a price to carriers for the transportation of goods or merchandise by sea from one place to another. This price normally consists of several elements: a freight charge, ancillary charges, and surcharges. Some shippers, particularly the larger ones, get so-called "all in" rates, i.e. inclusive of surcharges and other charges. The freight charge depends, e.g., on the container type (20 ft. or 40 ft.) and/or on the type of commodity. Commodity based tariffs were common in the past. Over the last 20 years, however, there has been a steady trend towards "freight all kind" (FAK) rates. At present the Transpacific trade still has a fair amount of commodity based rates. The pricing structure is further confused by the availability of “door-to-door” pricing, mainly for larger shippers, which include all five segments of the transportation chain: factory to port haulage, terminal charges, sea freight and surcharges, terminal charges and port to warehouse.

148. Furthermore, carriers increasingly implement yield management strategies which are common in the airline industry. Together with a variable pricing strategy, yield management is the science of maximising the revenue generated per voyage by the assets before they become worthless, i.e. after the ship has sailed. Therefore, the key issue of yield management is to optimise the contribution of every slot, vessel, trade and network to revenue. Basically it covers decisions about the allocation of the right type of capacity to the right kind of customer at the right price. This can include discounting to sell space that would otherwise remain empty. For instance, discounting can encourage the use of available empty return leg containers from an inland location and shipped to an inland destination where there is a full return load.

149. Ancillary charges cover the price for additional services that the shipper has requested. These are, e.g., detention charges, portside container demurrage charges, and inland haulage charges. Surcharges are applied to "general ocean freight rates" in general in many contracts for service. They do not relate to particular services, but are adjustments (additions) to freight rates. The most important types of surcharge are the bunker adjustment factor (BAF), currency adjustment factor (CAF), and the terminal handling charge (THC). These three conference-set surcharges apply to almost all contracts which set just the ocean freight rate, rather than a single "all-in" rate. Often other surcharges apply including peak season surcharge, port congestion surcharge, Panama Canal fee, and the war risk surcharge. The BAF and CAF reflect current cost of bunker and currency fluctuations, respectively, and are often set by the conferences with reference to a formula, although the specifics of the calculation may not be very transparent. A peak season surcharge is seen to be applied on the Asian trades. The port congestion surcharge is applied if ship waiting time is too long and can be


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projected as a risk of the service. Not many of these apply in liner shipping except in Africa and some parts of South America, e.g. in Brazil. Moreover, there is also a Panama Canal fee. Total surcharges can account for up to 20% to 30% of total freight rates depending on the trade route. Conference surcharges are also applied by non-conference carriers in many or most instances, often reviewed monthly and updated "as required", by long-standing tradition. The perception that these industry-wide common tariff components are set unilaterally by conferences in a non-transparent manner has caused some discontent among shippers, and generated controversy20. Surcharges are discussed in more detail in Chapter IV as they vary by Conference and trade route. (Chapter IV-D)

Figure III-15 Freight Rates Development for the Main Routes 1994 – 2005

200

700

1,200

1,700

2,200

2,700

I. 199

4

I. 199

5

I. 199

6

I. 199

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8

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9

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0

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1

I. 200

2

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3

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5

US

$ / T

EU

Average Asia-North America Average Asia-EuropeAsia/ USA (EB) Europe/ Asia (EB)USA/ Asia (WB) Asia/ Europe (WB)USA/ Europe (EB) Europe/ USA (WB)

Source: ISL based on Containerisation International 2005

150. Conferences are not usually willing to provide their freight rates, nor an index of actual freight rates21 This is not that critical today as carriers and shippers often agree on confidential service contracts, which are not reported to the conference. Therefore it is difficult to have detailed information on the prevailing price structure. In a confidential service contract a shipper commits to provide a certain minimum quantity of cargo or freight revenue over a fixed time period. On the other hand, the carrier commits to a certain rate or rate schedule as well as a defined service level (such as assured space, transit time, port rotation or similar service features). It can also specify provisions in the event of non-performance on the part of either party. Contracts cover a time period, generally of up to one year for large shippers. For smaller shippers three to six months are more standard. On the US trades, the share of confidential service contracts is currently very high, over 90, percent according to the

20 See the section entitled Conference Surcharges in Chapter III, for further details. See also "Shippers Cry Foul Over Surcharges" and "Shippers Refuse to be Fooled by Fuel Surcharges", ESC Press Releases, July 2005 on the ESC website at: http://www.europeanshippers.com/docs/press/050713pr.jsp. 21 Note that the conferences have provided their rate indices for this study; see the sections of trade routes below. Note that "rate announcements" and indeed the conference indices are price guidance—they are what conferences wish member carriers to charge; they are not based on actual rates charged.


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FMC. The share of confidential service contracts on other routes is unknown since neither the ELAA nor any carrier has been willing to provide such data to Global Insight. In general, ELAA has been uncooperative as regards the provision of confidential pricing data. Yet it is interesting to note that the ELAA has been willing to provide confidential proprietary data from carriers to their own consultants from Charles River Associates which has not been made available to Global Insight.

151. Figure III-15 shows estimations for the development of freight rates in US $ per TEU during the last ten years based on data from Containerisation International. This data is far from perfect but it is one of the few sources available. This indicates that prices are generally higher on the transpacific route than on the Asian-Europe route. Furthermore, they show that prices are volatile. For instance, in the beginning of 1998 the freight rate per TEU on the Asian-US trade was around US$1,300 and during a little more than one year it went up to US$2,200. This amounts to an increase in price of nearly 70%.

Carriers' Profitability Analysis

152. Although there are several publications, which deal with revenues, income, profits and related ratios of carriers, none of these are sufficient for statistical analysis on the segment of container shipping. The problem is the poor quality of the samples used so far. Data available mix up liner activities with other activities and/or combine different profitability indicators and/or different base figures.22 We have corrected that (as far as possible with accessible data) for a representative sample of 30 carriers comprising container business and some related activities only or to a very high portion. Thus we obtain a sufficient large amount for statistical analysis of deep sea ocean carriers on the one hand and feeder operators on the other hand, all with consistently defined figures for the time period of 2000-2004.

153. First we compute revenue margins from operating income as uniformly defined before interest and other financial income and expenses, extraordinary items, non-container investment income, tax, investment income and after ordinary depreciations. This is divided by revenues that derive only or mainly from container liner activities. The second ratio is return on investment. We use operating income as defined above divided by gross assets of the container segment. Third we compute the ratio of revenues per TEU carried with an index with the base year 2000.

154. The first ratio provides essential information on business risks, which occur in light of fluctuating freight rates and cost developments. This sheds some light on the financial vulnerability of liner industry of which one has to be aware when considering issues around enhanced competition, such as the existence of conferences. The return on investment ratio can give some insight to the long disputed question of whether the liner industry is a relatively more or less profitable business than other transport industry sectors. The third ratio - revenues per TEU carried - provides little evidence

22 Most databases are built up directly from the companies' statements. They fail to scrutinise comparability of definitions and business activities. Container activities are mixed with bulk, tanker and other shipping activities, logistics, rail, road, air and other transport activities and so on. Profitability measures sometimes refer to profit before depreciation, amortisation, interests, extraordinary items (or some of these) and sometimes after depreciation and so on, sometimes with income from investment activities and sometimes not. And what is much worse, return on investment figures do not always correspond (for example profit without investment income, but assets with investments).


III-40

in absolute terms, because average transport distances vary significantly between the carriers. But it is a good reflection of fluctuations in profitability and the trend of technological progress as a time series (with the base year 2000 set equal to 100). Also of interest are differences between single carriers, as they show the variance in cost and asset structure. This is exemplified for the year 2004. We consider also the relation between deep sea ocean carriers and feeder operators, since it can be that feeder operators will suffer from ongoing liner industry concentration.

155. We use local currencies to exclude effects of fluctuations in currency exchange ratios against the US dollar within firms accounting. Only suitable companies (respectively figures) are laid down for each ratio. Thus the size of the sample may vary for different ratios and even for different years of a single ratio, but it is always a reliable data sample for calculated averages. The averages are built as unweighted means.

156. Our statistical analysis with a representative sample of 30 carriers (comprising

container business and some related activities) provides useful insight in profitability of liner industry. However, a comparison with other industries remains unclear. This is partly due to the relative short time series of five years and partly to deviating (and rarely specified) definitions in financial sector comparisons. Only for the return on investment we can say, that an average of 7.2% on first sight is not significantly lower than that for other transport industries. The years 2000 until 2004 provide a good reference over time because they contain very bad years for the carriers (2001 and 2002) as well as years with good fortune (2003 and 2004).

Figure III-16 Return on investment of (deep-sea) ocean carriers and feeder

operators on average over the years 2000-2004

0%

5%

10%

15%

2000 2001 2002 2003 2004

Retu

rn o

n In

vest

men

t

Ocean Carrier Feeder Operator AverageISL 2005

157. The Figure III-17 show clearly more stable developments regarding all ratios for the feeder operators as against the (deep sea) ocean carriers. Their revenues per TEU carried have almost steadily increased since the year 2000, whereas the same has been dramatically fluctuating for ocean carriers, on average on a downward trendline. In the last two years ocean carriers have recovered far more impressively than feeder operators.


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Figure III-17 Revenues per TEU carried as an index for (deep-sea) ocean carriers and feeder operators

on average over the years 2000-2004

80

85

90

95

100

105

110

2000 2001 2002 2003 2004

Inde

x of R

even

ue p

er T

EU (

2000

= 10

0)


Figure III-18 Revenue margins of (deep-sea) ocean carriers and feeder operators on average over the years 2000-2004

0%

2%

4%

6%

8%

10%

12%

2000 2001 2002 2003 2004

Reve

nue M

argi

n


158. The return on investment of ocean carriers is between three and 14 percent as an

average in the years 2000 until 2004. It corresponds with some time delay to the supply demand balance of the market on the one hand and with investment cycles on the other hand (see Figure III-19 below). The deterioration of the supply demand index in 2001 was a result of a moderate demand increase against a stronger new ship capacity increase investment by the carriers, which affected the market, as typical, with some delay. Profitability correspondingly suffered under high depreciation and further declining freight rates going into 2002 (see Figures III-18 and 19). Freight rates depend more on expectations of the participants in the market rather than on the effective utilisation rates, as indicated by the supply demand curve.


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Figure III-19 Returns on investment, supply demand balance

and investments of (deep-sea) ocean carriers on average over the years 2000-2004

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004

Retu

rn o

n In

vest

men

t

0

5

10

15

20

25

billio

n US

$

Investment in Indermediate and Deap Sea Container Ships (right axis)Ocean Carrier Return on Investment (left axis)Supply Demand Index (scaled)

101,3

93,7

101,1102,3

104,5

ISL 2005

159. For an evaluation of liner business' profitability the ratio 'revenue margin' is preferred although this is not as common for use in comparisons across sectors. The often used 'return on investment' (ROI) figure depends on financial data, which are affected by depreciation policy and unstable investment flows. Thus a physically unchanged capital stock and profit can show up in increased/decreased ROI if only less or more depreciation is accounted for. Sale and leaseback arrangements can influence the ratio as well.

160. The revenue margins (in figure III-18) progressed almost in line with return on investments with the exception of 2001. The volatility lay between one and 11 percent for the average of ocean carriers and shows the enormous fluctuations in profitability. At the same time this explains the vulnerability of carriers to variations in capacity utilisation, which can lead to disproportionate gains or losses. Note that while we used averages here, the band of fluctuations for single carriers varied even more, from -14 to 23 percent. Moreover the 'operating income' is a relatively stable figure, which is usually higher than after-tax income.

161. As depicted for the year 2004 in Figure III-20 there are significant differences between individual carriers in profitability, exemplified for the year 2004. Carriers with even return on investment-ratios differ significantly in revenue margins and even a very high return on investment of one carrier can correspond with relatively low revenue margins of the same carrier (see for example CSAV). This indicates significant differences in asset structure on the one hand and in the effective use of assets on the other hand. We can also see that a lasting deterioration of revenue margins - say of about five percent as it occurred between the years 2000 and 2002 - would very likely drive some carriers out of the market since they could only cover their interest costs. The years 2000-2002 however were exceptionally difficult years for the liner shipping business.


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Figure III-20 Returns on investment and revenue margins of (deep-sea) ocean carriers for the year 2004

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 25%Revenue Margin

Retu

rn o

n In

vest

men

t

Ø RM 10,7 %

Ø ROI 14,0 %

CP SHIPS

CSAV

P&O YANGMINGMAERSK

CMA-CGMEVERGREEN

COSCON

NYK

HAPAG-LLOYD CSCL

ISL 2005

The Container Charter Market

162. Liner companies increasingly rely on chartering and leasing a significant portion of their operated fleet. Although the complete volume of the charter market is not documented in statistics it is possible to assess the importance of this market for the liner industry based on figures for the top 30 operators available from MDS Transmodal.

163. The top 30 carriers (including their affiliated companies) operate over 2,700 vessels with a current container capacity of nearly seven million TEU. This includes fully cellular tonnage as well as other vessel types with container capacity. Figure III-21 depicts the development of the charter capacity and the share of the total capacity operated by the top 30 carriers from 1992 through 2005.

164. About 49 percent of the capacity is chartered in. The absolute amount of chartered capacity is steadily increasing. However, its share of the total fleet has been stable during the past two years. Over the last two years lines have ordered new capacity on their own accounts, particularly in the very large post-panamax range.

165. For carriers two important advantages arise from the chartering option as against own investment. First is flexibility. Chartered tonnage in general is available for operation more quickly than new or second hand tonnage. With rapid growth and structural changes in liner industry, the advantages lie within the growing risk management orientation.


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Figure III-21 Share of Chartered Capacity of Top Liner Operators (1992-2005)

0

500

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1.500

2.000

2.500

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3.500

4.000

1992

1993

1994

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2002

2003

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0 TE

U

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50%

Shar

e of

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rter-c

apac

ity

Chartered Capcity (1,000 TEU)

%-share chartered capacity

Source: MDS Transmodal, ISL 2005

166. The second advantage derives from the aspect of restricted capital availability. As

shipping lines have at times been limited in financial resources they made decisions on capital allocation and accounting procedures that shifted from assets to charter or lease arrangements. The ongoing trend to vertical integration directs more and more capital flows in other parts of the door-to-door container transport chain. With the availability of a flexible, growing and relatively reasonable charter market in the past, carriers could rely increasingly on charter tonnage and invest money in vertical and diagonal concentration targets (best example is Maersk Sealand).

167. The German KG system provides the largest share of the tonnage available for the charter market. They funded 10.5 billion euro of total investment in ships in the year 2004 of which approximately 8.87 billion € were paid for the building or acquisition of the ships only. The private equity capital raised by funds from private owners only amounted to 3.85 billion €, so that the additional borrowing made up around 70% and 75% for large container ships of 4,900 TEU and above.23

168. The share of container tonnage amounted to around two thirds in 2004. This includes multipurpose container vessels. Special importance must be attributed to the post-panamax container vessels, which were only 11% by number but more than 50% by volume. Around 6.2 billion € total investment for fully cellular container ships thus was funded and additional 600 million for multipurpose container vessels. This was a value of US$8.4 billion and accounted for more than a third of total investment in

23 Comp. Dobert (2005) p. 2.


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containerships, when the feeder vessels are left aside. The table below provides an overview on total ship financing by German private beneficial owners.24

Table III-6 Ship funds financing (by owners) in Millions of US$

1997 165 1.717,4 4.351,7 3.2 Mio rd. 3,6 b US$1998 180 1.602,3 4.334,0 4.1 Mio rd. 3,8 b US$ 1999 128 1.286,3 3.287,5 3.2 Mio rd. 2,7 b US$2000 165 1.336,7 3.659,5 3.3 Mio rd. 3,1 b US$2001 141 1.273,3 4.153,4 4.6 Mio rd. 3,6 b US$2002 159 1.342,9 4.846,5 5.8 Mio rd. 4,3 b US$ 2003 273 2.570,1 9.870,9 12.6 Mio rd. 8,7 b US$ 2004 346 4.780,9 13.042,6 15.6 Mio. rd. 11 b US$

SHIP FUNDS FINANCING (by owners) in Mio US$Shipbuilding Costs & Net

Purchase Price

Source: Dobert, Jürgen (several articles in HANSA - Schiffart-Schiffbau-Hafen)

Year Ships Emission Capital Total Investment Tonnage tdw

169. The financial benefits of ordering vessels through chartering owners based in Germany are impressive. Ocean carriers usually have to pay between 1% and 1.5% above official bank lending rate, but when obtaining financing from the private equity and funding market it can be reduced significantly, thus compensating for the relatively poor image of the sector for banks and other lending institutions, who are usually concerned with the unstable market conditions. Only between 20% and 30% of the value of the asset needs to be collected this way (that is, via equity), with the rest being obtained through bank financing/mortgaging. The beneficial role the German funding market plays for investment in liner shipping can of course alter with the foreseeable change in the German tax regime. The consequences however are uncertain.25

170. Currently the market is very narrow with respect to available capacity. In the years 2004 and 2005, it has already been observed, that the bottleneck for further expansion of liner services, planned by carriers who wanted to enter new routes or expand on existing routes, was a shortage of capacity. Even the slot exchange agreements between carriers were affected. The result was that carriers with capacity reserves, a relative low share of chartered vessels or a high share of long term chartered vessels could improve their relative market shares for reason of capacity availability.

171. For some years now carriers increasingly sold some of their owned tonnage to banks and leased they back, a form of bookkeeping to alter the asset impact on the accounts. They also have used the option to enter into long term leases with and the asset companies such as the German KGs, again in order to reduce the need for cash up front.

172. During the past year charter periods were extended far beyond what was observed before as the lines wanted to secure the limited available tonnage for themselves. Most common in the past have been contracts for twelve months. Especially for the larger ships the contracts tend to have a much larger tenure now up to several years (see figure below), so that carriers have to pay the currently very high charter rates for many years in advance. Rather than going for the usual 12-month contract, the owners

24 Comp. Dobert (2005) p. 2. 25 Comp. also ci-online library (1st May 2004a).


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demand charter tenures of four years and above, which the carriers are compelled to accept in the absence of alternatives.

173. Although supply is very limited, average charter periods were reduced recently for two reasons. On the one hand the market expects rates to fall in coming years due to delivery of high volumes of new tonnage. On the other hand the effect of realised (Maersk-P&O) and announced (Hapag-CP) mergers on the charter markets is not yet clear. Both arguments lead to cautious and different chartering strategies of carriers with effects on rates but also on charter periods.

174. Chartering is a useful option to carriers as long as there is available charter capacity on the market and willingness of financiers to invest in charter tonnage remains high. Investments in the own vessel fleet prove beneficial, when tight market conditions evoke scarce capacity on the charter and second hand market. Carriers with a high portion of charter tonnage then suffer competitive disadvantages regarding cost structure and the possibilities of expansion. At the end of the day, it is a matter of supply and demand of cargo as well as vessel capacity which drives the charter rates.

B. Position of the EU Liner Industry

175. The development of the share of container imports and exports from total trade (all in tonnes) demonstrates the growing importance of container trade for EU countries. For both imports and exports this share rose by one percent point during the last ten years. The difference of two percent points between the share of exports and imports is basically due to differences in the average container weight of import and export containers. The average container weight for exports was 9 tonnes in 2004 while the weight for import containers was 7.7 tonnes per TEU.

176. The exports of the EU-25 in 2004 by destination are depicted in Figure III-23. More than 60% of EU-25 container exports were dedicated for North America and the Far East in 2004. With a share of 11% the Arabian Gulf was the third largest import country for EU-25 container exports. Western Africa, the Indian Subcontinent, The East Coast of South America, India/Pakistan, and Australia/New Zealand had a share between 4 and 6%. The Caribbean Basin, the West Coast of South America, and Central together had an aggregated share of 3%.

177. Figure III-23 also depicts 2004 container imports in thousand TEU of the EU-25 countries in 2004 by origin. With 57%, far more than half of imports from the EU-25 came from Far Eastern countries. China’s share of those imports rose dramatically during the last ten years (see Figure III-24). It reached 54% in 2004 and, thus, has the biggest share from all Far Eastern countries. North America has a share of 13% of EU-25 container imports and the countries at the East Coast of South America 10%. The remaining countries come up with an aggregated share of 20%. China's share reached 54% in 2004, the largest share of all Far Eastern countries. North America's share is 13% of EU-25 container imports and the countries on the East Coast of South America have 10%. The remaining countries aggregate to a share of 20%.


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Figure III-22 Development of the Share of Container Exports and Imports in Tonnes on Total Exports and Imports for EU 25

2%

3%

3%

4%

4%

5%

5%

6%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Share of container exportsfrom total exports

Share of container imports fromtotal imports


Figure III-23 EU 25 Exports and Imports in Thousand TEU in 2004

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merica

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t

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ealan

d

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Caribb

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asin

Exports Imports



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Figure III-24 EU 25 Imports from Far Eastern Countries in Thousand TEU in 2004

0

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7.000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Other Asian countries

China + Other Asian countries


178. Turning to the supply side, the European carriers are faring well. Firstly, they have successfully managed to increase market share (measured by share of total carrier capacity) from 40% in 2000 to 46% in 2005 (Figure III-24). Secondly, according to Figure III-26 their operating profit margins (operating profit as percent share of revenues) were competitive during the last years when compared to Asian and other carriers.

Figure III-25 Market Share of Top 30 Carriers Grouped by Region

Market share by total TEU in 2005

11%

36%

5%

10%

10%

3%

25%

China EU Far and Middle East Japan other Europe South America

South and South East Asia


10%

34%

6%11%

6%

2%

31%


11%

36%

5%10%

10%

3%

25%

*The share for other Europe is equal to the market share of MSC based in Switzerland.

Source: ISL, based on MDS Transmodal.


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Figure III-26 Development of Top 24 Carriers' Operating Profit Margins Grouped by Region*

0%

2%

4%

6%

8%

10%

12%

14%

2000 2001 2002 2003 2004

EU carriers

Far East carriers

Other carriers

*Based on preliminary figures.

Source: ISL.


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C. International Regulations Review United States

179. Historically the U.S. government has played a more active role in regulating carriers in the U.S. liner shipping markets than its European counterparts, although the trend has been one towards deregulation. In the early part of the 20th century, during an era of monopoly busting in other industries, the U.S. followed the lead of the British government and granted the ocean shipping industry limited protection from antitrust regulations in the U.S. by allowing companies servicing the liner shipping markets in the U.S. to form conferences and benefit from a system of price-fixing. This limited immunity to antitrust regulations was put forth in the Shipping Act of 1916. The following describes the expressed views of the 1916 Act’s authors:26

1. prior to this time, there had been no legal control of these agreements;

2. prohibiting such agreements would disturb existing conditions and would deprive American exporters and importers advantages claimed to result from agreements;

3. shippers had agreed that these advantages could only be secured, and disadvantages and abuses only prevented, by Government supervision and control of such agreements;

4. such agreements are universally used in the non-U.S. trades, an to prohibit them would place American exporters at a disadvantage relative to their foreign competitors, and

5. terminating existing agreements would bring about either rate wars (which would mean the elimination of the weak and survival of the strong) or consolidation through common ownership, and that neither of these results could be prevented by legislation and would mean monopolisation of the industry.

180. Following enactment of the 1916 Act, conferences began making extensive use of ''dual rate'' contracts to bind shippers to the conferences and prevent non-conference carrier competition. These dual-rate contracts, often referred to as ''loyalty contracts,'' offered discounted rates to shippers who agreed to use only conference carriers. The U.S. Supreme Court ruled in 1958 that dual rate contracts violated the Act.

181. In the wake of the decision, Congress amended the 1916 Act in 1961 to permit dual-rate contracts, though limiting the permissible discount to 15 percent. At the same time, Congress also amended the Act to require the filing of tariffs, transferred the Federal Maritime Board's authority to an independent Federal Maritime Commission (FMC), and gave the FMC the power to disapprove agreements between and among carriers that were ''contrary to the public interest.''

182. Continued pressure from shippers to make the liner industry more competitive, along with the advent of containerisation and intermodalism, led to the more market oriented provisions of the U.S. Shipping Act of 1984. The pro-competitive shipper provisions in the Act included: mandatory independent action, the legal acceptance of service

26 H. Rep. No. 659, Granting A Shipping Board, a Naval Auxiliary, a merchant Marine and Regulating Carriers by Water Engaged in the Foreign and Interstate Commerce of the United States (To Accompany H.R. 15455), 64th Congress, 1st Sess., May 9, 1916 at 26-28, 43.


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contracts under certain conditions and the right to form shippers' associations.27 Although some provisions in the 1984 act were anti-liner they were not as deregulatory as legislation affecting aviation, railroads and trucking at the time and they did not eliminate the antitrust immunity, therefore the carriers did not attempt to fight the provisions of the act.

183. One reason that carriers accepted the provisions of the Shipping Act of 1984 was that it actually broadened the antitrust exemption for carrier agreements and streamlined the regulatory process for those carrier agreements. The exemption from the antitrust laws was expanded to cover not only agreements that had gone into effect under the Act, but also activities whether permitted under or prohibited by the Act, if they were undertaken ''with a reasonable basis to conclude'' that they were part of an effective agreement. The antitrust exemption was also expanded to cover intermodal transportation through rates incorporating rail, truck, and ocean legs. The 1984 Act also abolished the FMC's public interest standard for reviewing carrier agreements. A carrier agreement would no longer require FMC approval, and took effect—and thereby became immunised from the antitrust laws—45 days after filing or submission of any additional information requested by the FMC. As a result of the 1984 Act, once an agreement has been filed, the only way it could be challenged as anticompetitive, is if the FMC sought to have a court enjoin the activities of an agreement on grounds that it was ''likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost.'' The 1984 Act otherwise retained the common carrier provisions of the 1916 Act, as amended in 1961, under which the conferences were required to file public tariffs with the Commission.

The Ocean Shipping Reform Act of 1998

184. Renewed pressure from shippers to alter the status quo of the liner industry gained momentum when Republicans and their pro-market ideologies gained control of Congress in 1994. Achieving further reform faced several obstacles and it took four years to reach a compromise within the industry and in Congress that resulted in the Ocean Shipping Reform Act of 1998 (OSRA). OSRA did not totally deregulate the liner industry servicing the U.S. and it did not revoke the antitrust immunity for carrier agreements however, it did make some market-oriented adjustments to the U.S. Shipping Act of 1984. OSRA changed the dynamics of the liner industry from the dominance of liner shipping conferences that enjoyed overt price fixing to non-binding discussion agreements, global alliances and confidential contracting. OSRA went into effect on May 1, 1999. Listed below are key components of the liner industry that were impacted by OSRA.

Tariff Filing

185. Under previous regulations, carriers were required to file their tariffs with the FMC. OSRA no longer requires carriers to file tariffs with the FMC, however they are still required to publish them electronically. The FMC's now sets guidelines for the accessibility and accuracy of these systems of filings. The published electronic filings require that rates, terms and charges be included and made available to the public for a reasonable fee.

27 The Shipping Act 1984, Pub. L. No. 98-237, 98 Stat. 67, 46 U.S.C. app. 1701 et seq.


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Intermodal Transportation Negotiations

186. Prior to OSRA, section 10(c)(4) of the Shipping Act of 1984 prohibited a conference or group up of two or more common carriers from negotiating with a truck, rail or air operator on any matter relating to rates or services provided to ocean common carriers within the United States by those truck, rail or air carriers. OSRA qualified that absolute prohibition by adding, “unless such negotiations and any resulting agreements are not in violation of the antitrust laws and are consistent with the purposes of this Act.”

Ocean Transportation Intermediaries (OTI)

187. Previously non-vessel operating common carriers (NVOCCs) were not required to be licensed in the U.S. Under OSRA, intermediaries including freight forwarders and NVOCCs are grouped under the umbrella term OTI. OSRA requires all OTI to be licensed. Furthermore, OTI need to guarantee a certain level of financial responsibility. The amounts are set by FMC regulation: $50,000 for freight forwarders, $75,000 for NVOCCs in the U.S. and $150,000 for non-licensed foreign NVOCCs. This is usually obtained in the form of a surety bond, but the FMC’s rules allow for other forms of guaranty to be used.

Commodity Exemption

188. Previously the FMC had the authority to exempt any “class of agreements between persons subject to [the] Act of any specified activity of those persons from any requirement” of the 1984 Act if it met the four criteria. This includes the authority to exempt a commodity from the tariff and publication requirements of the 1984 Act. OSRA decreases the number of criteria required to two.

Service Contracts

189. The provision in the OSRA concerning service contracts is the most pro-competitive inclusion in the Act. The thrust of the pro-competition tenor of OSRA is evident in two aspects regarding service contracts. First, conferences and consortia can no longer restrict their members from negotiating contracts directly with shippers. Second, although these contracts must still be filed with the FMC, they are filed confidentially. This allows the strategic details of the carriers' operations to remain proprietary, while still allowing the FMC to have access to the information it needs to properly access the implications for the industry. No longer are the terms of these contracts required to be filed in tariff format for public review. Key components of the contacts such as inland intermodal points, freight rates and service commitments can now remain confidential. This allows shippers a degree of differentiation between them and their competitors and serves as a way to market their services. These two new developments in the regulatory framework greatly reduce the importance of the long-established conferences.

190. The Act also addresses needs on the demand side of the market. Although shippers no longer have "me-too" rights to obtain similar rates and conditions of service as similarly located shippers, they are allowed to band together with other unrelated shippers in shippers associations to collectively enter into service contracts. This option helps strengthen shippers' bargaining power.


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191. These provisions and other less significant ones contained in OSRA were designed with the intention to improve the performance of the liner industry serving U.S. shipping routes. The evidence of its success to this end is mixed.

Impact of OSRA

192. While the evidence seems to point to the influence of conferences waning, it also indicates that the industry may not be any less concentrated than it was prior to OSRA. The number of conferences registered dropped dramatically in the period following the passage of OSRA. There were 32 conferences on file with the FMC in 1997 as of May 2000, one year after the passage of OSRA the number was down to 22.28 According to a FMC report published in 2001, the conference that once dominated the Transatlantic Trade Route, the Trans-Atlantic Conference Agreement (TACA)29, has seen its influence dwindle in the aftermath of OSRA. From its initial formation in 1992 to late 2001, the conference has seen its market share drop from close to 80% to roughly 50%, and in terms of membership the conference went from a high of 17 members to a low of 7.30 The number of individual member service contracts has risen dramatically over the same period. Of over 1,000 service contracts entered into by TACA members in 1999 only 30 were conference service contracts, by the following year the number was 3.31

193. These statistics support the argument that OSRA was able to bring more competition

to the industry, but under closer inspection the evidence is not so compelling. OSRA allowed individual carriers to negotiate with shippers on their own, but did not specifically outlaw price fixing through conferences on U.S. trade routes. The ability of individual carriers to negotiate with shippers directly also allows larger carriers to exploit their economies of scale and realign the market structure from one large conference dominating a particular route to a handful of large carriers dominating the route.

194. Carriers, while not maintaining their memberships in conferences, are still co-

operating with each other. Of the 260 carrier agreements filed between the passage of OSRA and May 2000, 140 include vessel-sharing arrangements. The FMC contends that the use of these agreements "…indicates that carriers are still making use of antitrust immunity to rationalise service and lower their costs."32

195. The size of large firms and their ability to pool resources through alliances and

agreements has replaced the dominance of conferences, but the result appears to be the same: a small number of large firms continuing to dominate the U.S. trade routes.

28 Federal Maritime Commission, The Ocean Shipping Reform Act: An Interim Status Report, Washington: Federal Maritime Commission, June 2000, p.28. 29 The current member lines of TACA are: Atlantic Container Line A.B.; Nippon Yusen Kaisha (NYK) Line; Hapag-Lloyd Container Linie GmbH; Orient Overseas Container Line; Mediterranean Shipping Co.; P&O Nedlloyd Limited and A.P. Moller Maersk Sealand. 30 Federal Maritime Commission, "The Impact of the Ocean Shipping Reform Act of 1998," Washington, DC, September 2001, p.11. 31 Ibid. p.11. 32 Federal Maritime Commission, The Ocean Shipping Reform Act: An Interim Status Report, Washington: Federal Maritime Commission, June 2000, p.29.


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The NVOCC Service Arrangement Rule (NSA Rule)

196. OSRA currently discriminates NVOCCs. (Non Vessel Owning Common Carrier – a term that refers to companies that offer liner services but who do not have their own vessels, instead buying or chartering slots from the asset carriers.) Under OSRA, NVOCCs such as UPS, FedEx, BAX Global and DHL are not allowed to enter into confidential service contracts with shippers. They are required to publish a tariff rate for the ocean portion of all international shipments they handled. The NVOCCs argue that these requirements to publicly post tariff rates with the FMC, unlike the VOCCs, gives competitors an opportunity to ascertain their rates and services, besides being administratively costly.

197. Beginning in mid-2003 the large NVOCCs petitioned the FMC to grant them the

ability to enter into confidential service contracts with shippers. The traditional VOCCs, through their industry group the World Shipping Council (WSC), opposed these petitions, fearful that it would create more competition for them, and reduce their competitive advantage. The VOCCs argued that it was unfair to grant NVOCCs confidential contracting rights because they did not actually own or operate their own vessels, thus making them not true carriers.

198. The FMC could have employed a variety of responses to the petitions, ranging from

no response at all to granting NVOCCs service contract authority. In August of 2004, the large NVOCCs with petitions before the FMC submitted comments jointly with the Transportation Intermediaries Association and the National Industrial Transportation League. They proposed that the FMC should grant NVOCCs a 'conditional exemption' from tariff publication, adherence and enforcement requirements of the Shipping Act and FMC regulations and that NVOCCs be allowed to enter into agreements with shippers, thus providing a form of 'contract authority' parity with common carriers.33 Surprisingly the WSC did not strongly oppose the proposal and the FMC was green-lighted to decide how best to allow service contracting authority for NVOCCs.

199. In December 2004 the FMC voted in favour of exempting (under Section 16 of the

Shipping Act) NVOCCs from tariff publication, adherence and enforcement requirements of the Shipping Act, subject to certain filing and publication requirements placed on NVOCC service arrangements (NSA).34 Two key restrictions of the NSA Rule are: 1) shippers' associations with NVOCCs as members are precluded from being part of a NSA and 2) there can be no NVOCC to NVOCC NSAs, where one NVOCC acts as the shipper and the other as the carrier. Because of the recent enactment of the NSA Rule there is little evidence yet as to its effect on the U.S. liner shipping industry. These two restrictions will be removed effective October 28, 2005.35

200. It is clear that the growth of the integrated transportation carriers such as FedEx, UPS

and DHL acting as NVOCCs has the potential to affect market competition in ocean

33 Bank, Richard K., Craig, Ashley W. and Sheppard, Edward J., "Shifting Seas: A Survey of U.S. and European Liner Shipping Regulatory Developments Affecting the Trans-Atlantic Trades," Maritime Economics and Logistics, No. 7, 2005, p.63. 34 Ibid. p. 64. 35 Docket No. 05-05, Non-Vessel-Operating Common Carrier Service Arrangements, Final Rule (September 23, 2005), available at http://www.fmc.gov/reading/activity_logs.asp?DOCKET_ID=235.


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shipping, just as they have affected the single-mode air cargo and trucking companies who compete with them. These integrated carriers have invested significant resources in owning and operating land-side transportation networks, which allow them to offer high service door-to-door service to shippers across all modes of transport, with only the ocean portion of shipments not directly under their control. Their extensive customer networks give them some market advantages compared with single mode operators who have to partner with others to offer door-to-door service. There is speculation that these firms could affect the development of differentiated liner service offerings following the patterns used in other modes of transportation, especially for higher value and/or time sensitive products, even while still operating only as NVOCCs. Among the possible outcomes is a smaller role for the liner operators as retailers of ocean transportation and less market power in setting rates. This would be a role more comparable to North American freight railroads or passenger airlines selling belly cargo space that operate as efficient providers of wholesale line haul intermodal transportation but have little direct interaction with shippers.

Australia 201. Australia has undertaken a fundamental review of its policy towards liner conferences

and competition in maritime transport. The capstone document was first published draft and issued for public comment in October 2004 by the independent Productivity Commission of the Australian Government, a 257 page report entitled "Review of Part X of the Trade Practices Act of 1974: International Liner Cargo Shipping". Upon official request, the Productivity Commission undertook a complete review of the Australian block exemption giving immunity to registered liner conferences from competition and anti-trust legislation. The final report was delivered to the Australian Government on 23 February and released by the Government on 5 October. It incorporates public comments, additional material, edits, and some minor changes. The Australian Government has indicated it is considering each of the Commission's recommendations and will provide a considered response in the future.

202. In the report, the commission noted that maritime trade is vital to the Australian

economy, and that in both European and United States, which had moved to more pro-competitive arrangements, the immunities enjoyed by liner conferences were less permissive than those in Australia. The Productivity Commission found that liner economics are not unique, and that relevant experience on other modes indicated benefits to increased competition. The various characteristics of the liner trade are not unique from other industries, and do not warrant a blanket exemption from normal anti-trust and pro-competition legislation. The report found that "Agreements which fix prices and control the supply of shipping to a trade route pose the gravest anticompetitive risk36." It further pointed out that overseas experience shows that such agreements are not necessary for the efficient supply of services. The document goes on to recommend that the legislation permitting exemptions be reviewed, and replaced by either case-by-case consideration of exemptions, or, an outright repeal of such exemptions. It concludes that with appropriate transitional agreements in place, repeal of the Australian block exemption would not cause disruption of liner service.

203. The report cites uniform Australian shipper disenchantment with block exemptions as

a primary motivation for its findings, noting that formerly many shippers had once

36 Page XXII, "Key points", Productivity Commission 2004, Review of Part X of the Trade Practices Act of 1974: International Liner Cargo Shipping, Draft Report, Productivity Commission, 2004.


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supported the special treatment enjoyed by the liner industry. It found that in current circumstances, no exemptions for carriers were warranted, and looked at options including abolishment and changes. It noted that carrier "discussion agreements" had arisen on many routes, and that together with the decline in truly independent carriers and increased mergers, they had decreased competition. It distinguished between conference-like discussion groups and operating arrangements like consortia and alliances. It found that the requirement that carriers negotiate with shippers organisations provided no countervailing effect. Under current arrangement all carriers do is inform shipper bodies of their intended capacity commitments. The shippers then simply accept whatever the carriers are prepared to offer with the proviso that it should not fall below 80% of that commitment (which it often does). However, there is no requirement to successfully conclude a negotiation.

204. A period was opened up for formal review, currently and public comment was invited

starting in December 2004. Reform is clearly underway in the liner industry serving Australia, which is taking a lead. The Productivity Commission continues to push maritime liner reform. There are very clear parallels between the review process of liner conferences and shipping undertaken by the European Union lead by DG Comp, and the review undertaken by Australia lead by the Productivity Commission. Since then, like many other conferences elsewhere, some conferences serving Australia have re-labeled themselves "associations."

205. Similar to other developed countries, Australia exempts liner shipping services from

antitrust regulation. Specifically, shipper lines are exempt from Part X of the Trade Practice Act, 1974 (TPA) which prevents anti-competitive behaviour in all of Australia's industries. The reasons for exempting the industry are the same as in other countries, to ensure the stability of rates and supply. The government body with oversight of the liner shipping industry, the Australian Competition and Consumer Commission (ACCC), has sent mixed signals as to its view on the usefulness of these exemptions. In a speech given in March of 2001, then ACCC Chairman Allan Fels stated, "The Commission does not consider that the arrangements permitted under Part X are appropriate for the liner shipping industry or indeed other sectors of the economy."37 In September of 2001, current ACCC Chairman, Graeme Samuel, echoed these sentiments in a statement to a reporter, "The potential for poor outcomes for Australian exporters and importers using the services provided by the liner agreements – lower quality, reduced services and higher prices – is apparent. What is not so clear is whether the collusive liner agreements provide benefits which outweigh those detriments."38 These statements seem to portend an abolishment of the antitrust exemptions for Australian shipper conferences.

206. Accordingly, in October 2003, the ACCC commenced an investigation into the market

conduct of the Asia-Australian Discussion Agreement (AADA), a registered agreement consisting of 16 lines that participate in the North East Asia – Australia southbound (import) trade. The ACCC was prompted to begin the investigation in response to numerous complaints by freight forwarders and importers of unreasonable rate increases, both in magnitude and the speed of introduction. The cumulative increase in freight rates during the period July 2003 to October 2003 totalled $US750 per TEU in addition to a $US200 per TEU Peak Season Surcharge. This represents a

37 Fels, Allan, "Australian Liner Shipping Regulation," Australian Shipper 2001, Melbourne, March, 1991, p. 4. 38 Ibid.


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100 percent increase in freight rates.39 These rate increases have also appeared to slow the growth in containerised import volume from North East Asia over this period, from 33 percent in the financial year 2002-03 to an annualised rate of 22 percent for the financial year 2003-04.40

207. The ACCC also believed that the AADA used its antitrust exemption to lessen

competition on the trade route and that the AADA might have been slower than competitors to invest in new capacity during a scarcity of cargo ships in order to further exploit the increasing demand for imports from China. However, given that the carriers hold all the information on, e.g., rates of return it had difficulties to proof anti-competitive detriment. Yet this is a reflection of a fundamental problem with the Part X. The onus is on the ACCC to proof anti-competitive detriment.

208. The ACCC wants to revoke the antitrust exemptions for cargo shipping carriers, but

wants to do so using a social cost-benefit analysis. The Commissioner wants to set up a framework where each agreement is put to this social accounting test and if the agreement's actions appear to inflict more harm than good, its exemption from the antitrust provisions of Part X of the TPA would be revoked. This would allow the government to avoid a making sweeping change in the industry and go on a case-by-case basis.

209. The final October 2005 version of the document calls for reform, and for transitional

arrangements. The Australian Productivity Commission highlights the current considerations of the EU Commission and DG Comp in the EU maritime liner block exemption review. It’s “…strongly preferred option is to repeal Part X“(the Australian liner block exemption). If it is to be retained, the Commission recommends that it be modified, and presents three options. The first two would screen applications for exemptions rather than granting them virtually automatically, that is, there would be an application process with meaningful review, and the second would impose contract confidentiality.41 The third is to introduce the liberalisations introduced in US and Europe, that is contract confidentiality.

“The Commission considers that Part X could be modified in one of three ways:

o Option 1: select agreements by key characteristics; o Option 2: exclude discussion agreements together with the introduction of

confidential individual service contracts; or o Option 3: introduce confidential individual service contracts”

Japan 210. Japan's Marine Transportation Law of 1949 granted immunity from the Act

Concerning Prohibition of Private Monopolisation and Maintenance of Fair Trade. This earlier exemption was so broad as to exempt every agreement or act between carriers regarding freight rates, fares and fees and conditions of transport. The only caveat is the exemption would be rescinded where acts substantially restrict competition as to cause unjust raising of rates, fares or fees. Similar to early

39 "Part X Investigation: Asia-Australia Discussion Agreement for Australian Southbound Liner Trades from North East Asia Report to the Australian Government Minister for Transport & regional Services," July 2004, p. viii. 40 Ibid. p. ix. 41 See Page XL of the October 2005 version of Overview of the Australia PC „Review of Part X...“.


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legislation in the U.S., all agreements entered into by carriers must be filed with the Minister of Transport, before the agreements will be recognised. All carriers, regardless of conference membership, must make tariffs for all cargo public and any falsifications of said tariffs are prohibited under the Law. In addition, carriers are not allowed to unfairly discriminate between shippers with respect to cargo space and loading or unloading of cargo or between Japanese exporters and foreign exporters.

211. In 1999, the Law was amended as a result of the passage of the Law for the

Adjustment of the Immunity System from the Anti-Monopoly Law. The block exemption from the Anti-monopoly Law was maintained, but the Law was amended to allow the Ministry of Transport to apply specific criteria to each carrier agreement to determine if it was unduly anti-competitive. The criteria are as follows:

1. Users' interests must not be unduly impaired 2. No undue discrimination must arise as a result of the agreement 3. Participation in or withdrawal from the agreement must not be unduly

restricted 4. Contents of the agreement are at the minimum level judging from the

purpose of the agreement.

212. Along with the specific criteria to be met for each agreement, the amendments increased the penalties that could be applied for violations of the Marine Transportation Law. Because the amendments serve more as a clarification of the requirements under the law, they are not expected to materially influence the actions of the parties involved in the Japanese liner industry.

213. The Japanese liner industry is uniquely structured and very different from its European

counterparts with the possible exception of Maersk Line, part of the A. P. Moeller conglomerate). The three carriers, NYK, Mitusi OSK Lines and K-Line are all part of much larger organisations that encompass shipping interests in the dry and liquid bulk market as well as in other horizontal enterprises such as trading houses, shipbuilding, steel works and general manufacturing. Effectively many of their domestic customers are in-house businesses. The companies are also closely linked with other institutions such as the banking system through a web of shareholdings.

214.

Thailand 215. Initially competition in all industries in the Thai economy was regulated by the Act on

Prescription of Prices and Goods and Anti-Monopoly 1979. The Act had legislation that applied to both commodities and services and in theory could be used to regulate the liner shipping industry. The Act grants power to the "Central Committee" to proscribe the prices of goods, however it only applies to industries or businesses that have been declared. The Maritime Transport Services were not declared as a sector under the Act, therefore liner conferences were not required to follow its guidelines.

216. Since the liner industry was not subject to antitrust regulations, the preferred method

to prevent it from acting in an anti-competitive nature was to strengthen the demand side of the industry, through the Thai Shippers' Council (TSC). The United Nations Commission on Maritime Transportation in Geneva in 1967 first sparked the idea for the TSC. The Ministry of Commerce put the formal proposal for the formation of the TSC to the government. The government made a resolution to go ahead with the


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formation of the TSC and put the Ministry of Transport and Communication and the Ministry of Commerce in charge of the details.

217. Twenty-five years passed before a formal bill to establish the TSC was drafted. The

Thai National Shippers' Council Act passed in 1994 was the culmination of this long process. Some of the TSC duties, among others, are to represent shippers in negotiations with liner carriers and government bodies with regard to freight charges, surcharges, expenses and terms and conditions of maritime transport. They also act as a clearinghouse for data and information on the industry and to be in general as the shippers' advisor on any issues that may arise. Membership is open to a number of different entities, but membership is required for juristic persons that control exports exceeding the value set by Ministerial regulation. The TSC is given specific rights under the Act to negotiate directly with carriers or government bodies when it feels that surcharges, expenses or terms and conditions set forth by these entities are unjustified.

218. In the late nineties, Thailand was in the midst of a privatisation campaign and felt that

stronger antitrust measures were needed to ensure an economic system with robust competition in all industries. The old Price Fixing and Anti-Monopoly Act was deemed too weak to guarantee this result. The two new pieces of legislation that were passed to help create a more free-market atmosphere were the Prices of Goods and Services Act and the Trade Competition Act, both passed in 1999. The Acts contain a long laundry list of outlawed anti-competitive acts by Thai businesses. The acts exempt certain entities, such as farmers' cooperatives and government enterprises, from the anti-monopoly regulations, but liner shipping conferences are not included in these exemptions, or is there any blanket immunity for them in the Carriage of Goods by Sea Act, which deals with issues pertaining to liability and responsibilities of shippers and ship owners. Despite this lack of legislative immunity for liner carriers, the historical actions of the shipping conferences have not been prosecuted under the law and discussions continue as to whether specific immunity should be granted to them.

219. The TSC's reaction to the new legislation has been to view it as a means to seek

specific sanctions against carriers if the need arises. Prior to these acts' passage, the TSC could only hope that negotiations and consultations would be enough to keep a fair balance in the industry. It sees the acts as a possible means to more strongly hold the carriers in check if needed.


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D. Importance of the Liner Industry for Developing Countries

220. Developing countries trade has grown more rapidly in recent years than the average growth rate of world trade, as high as 11 percent in 2003.42 Developing countries are now playing a larger role in international trade then they did thirty years ago. These countries accounted for one-third of international trade in 2001, compared to about one-quarter of trade in 1970. Trade between developing countries has also increased, as 40 percent of their exports are being sent to other developing countries.43 For many of these countries, sea-borne trade is especially significant as they need access to world markets to enhance their export led growth which is often commodity based, particularly for the African nations.

221. The relationship between trade and growth is a positive dynamic relationship. The

ability to engage in trade with other countries and to exploit comparative advantages is paramount if a country's economy is to grow and the standard of living of its citizens is to rise. Frankel and Romer state that "…trade has a quantitatively large, significant and robust positive effect on income."44 This is true for all countries, but is more acutely necessary for developing countries. Developing countries need to export commodities such as ores, agricultural crops and animal products as well as any manufacturing that their fledgling economies produce.

222. Poverty is, of course, a widespread problem in many developing countries. The IMF

stated in 2001 that "no country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world."45 During the mid 1990s, developing countries that opened their borders to trade reduced the number of their citizens living in absolute poverty by fourteen percent. Conversely, developing countries that did not open up to trade had a four percent increase in poverty. Trade not only creates jobs for people working exporting-good industries, but it also allows the very poor to buy the "basics of life in more cheaply."46 It is therefore critical that these countries benefit from the lowest transportation costs economically possible.

223. Transport costs represent about five percent of trade value around the world according

to the Inter-American Development Bank. Shipping costs are of the utmost importance to developing countries, which depend on trade for economic growth. Because liner shipping is so vital to developing countries, any increase or decrease in transport costs will have a profound effect on these countries' economies. Steven Radelet and Jeffrey Sachs (1998) specifically note that over the last 30 years any country with lower shipping costs relative to countries with higher costs have benefited from more rapid manufactured export growth as well as overall economic growth. Firms located within developing countries with high shipping costs are unable to play a competitive role in international markets. Specifically, countries that have little impact on world prices have to pay more for imported intermediate goods and receive less in return for their exports. Radelet and Sachs note that "if a country faces a perfectly elastic supply of imports or a perfectly elastic demand for its exports (approximately the case for most

42 World Bank. 43 International Monetary Fund. 44 J.A. Frankel and D. Romer, "Does Trade Cause Growth?," American Economic Review, 89(3): 379-99. 45 "Global Trade Liberalization and the Developing Countries." International Monetary Fund, November 2001. 46 Australian Department of Foreign Affairs and Trade.


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developing-country manufactured exports), changes in shipping costs will be translated one-for-one into changes in domestic prices."47 Some domestic firms will also be required to offset high shipping costs by reducing labour’s wages.

224. Radelet and Sachs find that doubling shipping costs in developing countries results in

a one-half of one percentage point reduction in annual GDP growth. Likewise, Limao and Venables (2000) demonstrate that a ten percent increase in transport costs results in a more than 20 percent decrease in trade volume.48 Additionally, when production processes require a large import content and result in small profit margins, (such as in the case of electronics), developing countries can be eliminated from international competition by high shipping costs. Analysts believe that "transport costs are the most important determinant of income gaps between countries worldwide."49

225. Analysis of bilateral trade data confirms the importance of infrastructure. Limao and

Venables estimate the elasticity of trade flows with regard to transport costs to be high at about -2.5. Essentially this means that the halving of transport costs increases trade five fold. Their analysis also concluded that poor infrastructure was a major factor in low levels of trade of developing countries, and for Africa accounted for most of the reasons for low levels of trade historically.

226. The implication of the various studies referenced above is that an efficient

transportation infrastructure is critical to the development of international trade which itself can induce an accelerated growth in GDP to the net benefit of the country. The provision of regular liner services at competitive market rates, without interference from national flag restrictions or freight bureau, are a benefit to national growth.

227. In recent work undertaken for the World Bank in both Guyana and Guatemala by

Global Insight, it was very evident that an efficient inland transportation and port infrastructure was paramount to the development of trade in the liner sector. Poor port productivity combined with high costs and corruption caused Carriers to search for alternative ports, which as a result will increase the total cost of transportation due to longer journeys. In addition, high insurance claims and poor road infrastructure also causes many carriers to only offer services to the port and not to final destination/origin. This creates inefficiencies in both cargo handling and care, neither of which is conducive to increasing trade.

228. The advent of containerisation has generated economic development and ultimately

growth for the developing countries but many of the countries suffer from higher shipping costs than the more developed trades. In Guyana, for example, the following freight rates to varying destinations were applicable in mid 2005:

47 Radelet, Steven and Sachs, Jeffrey. "Shipping Costs, Manufactured Exports, and Economic Growth." American Economic Association, January 1998. 48 Limao, N., and Venables, A.J. "Infrastructure, Geographical Disadvantage, Transport Costs and Trade" World Bank Economic Review, 2001, 451-479. 49 Latin American Development Bank.


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Table III-7 Guyana: Sample of Average Freight Rates

Freight rates 20' Container 40' Container

Miami - Georgetown $2,650 $3,950Georgetown - Miami $1,435 $2,210Rotterdam - Georgetown $2,280 $3,250Georgetown-Rotterdam $1,400 $1,750Far East -Georgetown $3,305 $4,675Georgetown - Far East $1,650 $2,300Port of Spain - Georgetown $800 $1,390Georgetown-Port of Spain $750 $1,300

Source: Global Insight Market Survey.

229. The differential between import and export freight rates should be noted, they are most likely linked to the value of the goods transported. The relatively high freight rates are primarily a function of the port costs, volume of trade and the relatively small vessels being used which do not benefit from economies of scale.

230. Developing countries depend upon international trade for growth, exporting mainly

primary products used for manufacturing or foodstuffs. Liner shipping is the least expensive way to transport goods over long distances and is thus vital to the economic growth of developing countries. The costs associated with transportation are higher than for manufactured goods and consumer products and are generally passed back to the producer in order to absorb the international competitive pricing. These costs cut directly into GDP growth which in turn affects the standard of living in the country. This study shows that a repeal of the block exemption would have a positive effect on developing countries as the transportation costs are expected to decline, which would have an immediate benefit for commodity exporters as the savings would be to their advantage.

231. In the past, countries in South America and Africa were strong supporters of cargo

reservations for fledgling national lines and supporters of the UNCTAD Liner Code which was effectively a cargo reservation system allocating 40 percent to national lines at each end of the trade and 20% to “cross traders, those lines not nationally associated with either end of the trade. The intent of the Liner Code was to provide the developing countries with the opportunity to develop their own national fleets in order to help reduce the trade deficit in services as well as to induce international trade. As noted earlier in this chapter this has not been successful. For example, the West African countries are primarily dependent upon the export of agricultural products and are in some cases mono product dependent. Ghana is an example of this with cocoa which is exported partly in bulk ships in parcel lots as well as in containers. The practice is for a Government body to buy virtually all the cocoa from the farmers and then to negotiate a common price with bulk operators and the EWATA lines, which we believe is also applied to carriers not members of EWATA. Effectively this means that the existence of the conference is neutral with regard to price setting and the ability to transport the commodities to their end markets. The West African trade for cocoa and coffee appears to be going against the trend in containerisation as increasing volumes are shipped in bulk in vessels in the 15,000 to 20,000 DWT size range. It is probable that they are the price setters in the carriage of cocoa and coffee. A review of the carriers serving the West African trade indicates that two of the Global carriers, Maersk and CMA-CGM (as a result of their proposed


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acquisition of Delmas) are members of EWATA, and a third, MSC, is not. The Government has recently applied an export tax on cocoa.

232. In theory the Liner Code had the effect of weakening the conferences as their internal

allocation of market shares became irrelevant. Cargo was often booked via Freight Bureau which removed most elements of commercial transactions and invariably forced freight rates to increase to the extent that they were often detrimental to both importers and exporters ability to pay for them. Over time the application of the rules of the UNCTAD Liner Code has not been carried through and in many cases the protected national lines have disappeared. This is certainly evident in Brazil and West Africa. The reasons for this are not hard to identify. Firstly the established liner shipping industry was hard to compete with as a major investment was required to provide shipping services. Some West African countries succeeded in developing national lines, for example Ghana and Nigeria. Other countries entered as slot charterers, often letting the established shipping lines organise their trade and paying a fee to the “national shipping “ company (Botswana).

233. Contrary to the situation in West Africa, the South African trade indicates that there

has been a perceptible switch from bulk reefer to reefer containers, particularly since the deregulation of the fruit market and cessation of the fruit marketing boards.50 The largest volume of container carryings is by the Conference, ESAC, which for all intents and purposes is virtually identical to SAECS. MSC provide only a small number of reefer slots, whereas Maersk has the largest global reefer capacity in the industry, including the bulk operators.

234. In South America, Brazil actively entered the trade on the back of the Liner Code. It

established Lloyd Brasileiro together with Freight booking offices which allocated cargo to shipping lines. Repeated attempts of third party carriers to enter the trade, particularly between the U.S. and Brazil (Sealand for example), failed due to the role of the Freight Bureau and Government controls. The net result was that freight rates were excessively high and detrimental to the Brazil trade. Very few services called in Brazil. This changed when the Brazilian Government conceded that the administration of the code was detrimental. It closed the Freight Bureau and Lloyd Brasileiro was privatised and foreign carriers were allowed to service the trade both with direct services and via transhipment. This effectively induced a reduction in freight rates and a consequent rise in trade.51 The results of the capacity on the route can be seen in Chapter IV East Coast South America trade.

235. The modern transportation options and the frequencies of liner shipping provide

developing countries with a relatively efficient system, from their ports, to participate in global trade on a potentially competitive basis. One sees this with the significant increase in trade between Africa and China, Europe and North America.

50 Case No COMP/M.3829-Maersk/PONL, Regulation (EC) No 139/2004 Merger Procedure, Article 6(2) Non-Opposition, 29/07/2005, page 25. 51 United Nations Economic Commission for Latin America and the Caribbean (ECLAC), “Concentration in Liner Shipping Its Causes and Impacts for Ports and Shipping Services in Developing Regions“ 20 May, 1998.


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E. Review of recent empirical studies

236. This Section reviews a number of empirical studies of the maritime shipping industry, some focusing on freight rates, but also other relevant topics such as profit/loss of liner shipping companies, and components of total ocean transport including ancillary charges as well as surcharges. Because of the controversial discussion on the role of conference on price levels from the point of view of shippers, liner companies, political institutions and economists, first of all a brief review on earlier studies containing empirical tests is presented. The most relevant of them will then be used subsequently as a background for empirical model estimates done for this study effort.

237. The sequence of analysis starts with very early attempts, 1974 - 1985, followed by the

increasing relevance of terminal handling charges (THC) and other surcharges. Then we move on to more recent attempts during the period 1990 - 2002 and finally most recent approaches regarding the period 2000 - 2005. This section also presents an outlook on how freight rates in liner shipping might develop in future.

Earlier Approaches for Empirical Tests

238. Out of a number of earlier – some quite old – studies, only the most important ones will be reviewed briefly in order to illustrate the wide variety of different results of empirical tests found in the literature. Some of the variation is due to different approaches and data. Some variation appears to be due to the fact that different regulatory regimes give rise to different statistical processes and relationships, as do market conditions which have fluctuated over the years.

239. HEAVER - Because of its fundamental relevance for understanding the analysis of

liner conference rates in the literature, a contribution given by HEAVER (1978) and reprinted in 2001 is the starting point.52 Based upon data for early 1970s, regression analysis found statistically significant coefficients for stowage factor or load factor (capacity utilisation rates), value of cargo and on some routes also the relevance of refrigerated cargo. The author concludes that the overwhelming importance of the stowage or load factor is attributable to its positive relationship with cargo loading and discharging costs and its importance to the utilisation of vessel weight and cubic capacities. “Conference rates, therefore, rather than being set on the basis of ‘what the traffic will bear’, accident and chance, are set in a system in which the cost (load) factor is a fundamental part of the rationale.”

240. ZACHCIAL (1981) came to the result that liner rates, based upon the period 1974-

1978, are a function of bunker prices, general price level, and the demand/supply ratio in dry cargo markets.53 Note that the demand-supply ratio is another measure of the average load factor, or capacity utilisation rate.

241. CLYDE and REITZES (1995) examined how far liner freight rates may be explained

by cost-based factors and by market power of both conferences and independent 52 HEAVER, T.D.: The Structure of Liner Conference Rates, University of British Columbia 2001. 53 ZACHCIAL, M.: Pricing Theory and Policy in Maritime Transport, University of Bonn 1981 (in Bremen), p. 188.


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companies. The authors draw the conclusion that price fixing by liner conferences would be much more difficult for conferences to achieve under different regulatory market conditions. Once again, cargo value, load factors were significant explanatory variables on US routes, along with GDP as a demand driver, and CPI. For empirical tests the following implicit function was tested based upon a large sample from US routes:

FR = f (commodity value, capacity ratio, GDP, price level)

242. Their results may be summarised as follows:

a) Low statistical fit on the model overall, and particularly with no significant correlation between freight rates and market shares of conferences;

b) Lower freight rates on routes, where conference members were free to negotiate service contracts directly with shippers;

c) Correlation between freight rates and market concentration;

d) Correlation between market concentration and market share of conferences whenever excess demand exists;

e) No correlation between higher freight rates and higher service quality.54

Port Efficiency, Terminal Handling Charges, Surcharges

243. Increasingly, port efficiency considerations, and especially terminal handling charges (THC) as well as ancillary charges and surcharges such as BAF, CAF etc. gain importance.

244. CLARK, DOLLAR and MICCO (2002) investigated the determinants of the costs of

shipping to the US from different ports around the world. They found that distance and containerisation matter. Moreover, the efficiency of ports plays a substantial role. Improving the efficiency of a port from the 25th to the 75th percentile reduces shipping costs by 12%. Inefficient ports also increase handling costs which are part of shipping costs. These results are robust to different definition of port efficiency as well as to different years.55 Port efficiency matters.

245. SANCHEZ et al. (2002) examined the determinants of waterborne transport cost, with particular emphasis on port efficiency by using Principal Component Analysis (PCA). Among other goals of the paper, a model of waterborne transport cost was estimated for a range of Latin American ports. The authors found that more efficient seaports are clearly associated with lower freight costs after controlling for distance type of product, owner service availability, and insurance costs. Port efficiency and the other factors mentioned are statistically significant and with the expected sign. On the contrary, containerisation rate and praxis for the existence of agreement of liner companies do not show significance, with the only exception of cooperative working agreements (CWA).

54 CLYDE, P.S., REITZES, J.D.: The Effectiveness of Collusion Under Antitrust Immunity, FTC, Washington DC 1995. 55 CLARK, X. DOLLAR, D. MICCO, A.: Maritime Transport Costs and Port Efficiency. The World Bank, Policy Research Working Paper 2781, Washington D.C., February 2002.


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246. FUNG, CHENG and QIU carried out an empirical study to estimate the extent to which terminal handling charges (THC) contribute to freight rates, especially in extra profits on top of freight rates. The study came to the conclusion that the separation of ocean freight rates from terminal charges has increased the overall shipping charges.56

Recent Attempts of Empirical Tests

247. A number of studies have been conducted of the roles of conferences in liner shipping:

248. ERASMUS STUDY - In the context of the first study assigned by the EU Commission investigating the effects of a possible deregulation in liner shipping, a research group around HARALAMBIDES of Erasmus University (2003) tried to identify the effects of the existence of liner conferences on freight rates level, freight rates stability etc. Related to major routes (EU – US, US – Far East, EU – Far East) with satisfactory data availability, a few significant results could be achieved.

249. The approach taken in the Erasmus Report was to estimate liner tariffs and their

stability according to demand/supply interactions and industry concentration. The rate data was quarterly average conference rates, not market rates, a study weakness. The Erasmus Report finds declining liner tariffs in real terms despite substantial increases in container shipments. (This appears to be due to load factors; supply in fact rose to meet demand).

250. The study’s very low ‘R squared coefficient’ results were not interpreted as

quantitative modelling imperfections, but rather as evidence that conferences do not have a significant influence, or that they lower prices and increase or improve competition; and that they increase market stability.

251. ICF STUDY - Recently, ICF prepared a study for DG TREN, analysing the probable

effects on the market and the potential for any significant impacts on liner shipping from the abolition of the Conference System.57 Among other topics such as market structure, services, EU competitiveness and trade also the effects on transport prices (short-, medium-, and longer-term) had to be simulated. The ICF Study came to the following results:

a) Significant impacts on competition, market concentration, or provision of

capacities in the largest trades could not be found. That is, on large trades, abolishing conferences would not matter at all.

b) However, on smaller trades greater impacts from the abolishment of the block exemption are seen. On small trades, there might be some small impacts.

c) They found that the decline in freight rates in the past was not due just to market liberalisation, but market and technical factors, including greater fleet capacity, and larger and more cost- effective ships.

56 FUNG, M.K., CHENK, L.K., QIU, L.D. : The Impact of Terminal Handling charges on overall Shipping

Charges: An empirical Study, in: Transportation Research Part A (2003), p. 703-716. 57 ICF Consulting Economic Assistance Study on Liner Shipping, (DG TREN), May 2005.


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d) Considerable volatility of freight rates was identified, that suggests that

existing individual conferences are not actually effectively maintaining rate stability.

e) Average general freight rate levels in broad markets, may be relatively stable; while the rates for individual commodities and/or on specific trades may be fairly volatile. ("Localised instability")

f) Ancillary charges and surcharges set by conferences represent an additional

element of rate instability.

252. FUSILLO STUDIES - In mid 2005, FUSILLO published a paper on the competitive behaviour in liner shipping after OSRA.58 The study aims to measure the stability in service supply by examining the market share variability of the carriers. The author comes to the conclusion that OSRA of 1998 significantly shifted the industrial structure of liner markets from one dominated by price fixing liner shipping conferences to one dominated by non-binding discussion agreements, global alliances and long-term confidential contracting. The latter is a key provision of the OSRA legislation.59

253. VON HINTEN-REED, N., et. al. (2004) analysed the impact of FEFC activities on prices in the North Europe-Asia Trade.60 Empirical tests were carried out to explain freight rate levels as function of conference membership, share of conference members of total capacity and freight volume, fuel price, availability of capacities and exchange rates.

254. Their results concerning freight rates based upon 60 port pairs, may be summarised as follows:

a) Conference members had higher revenues per TEU;

b) Suggested reason: different service quality; (alternate explanation: conferences help carriers get higher prices at shippers expense)

c) They were unable to estimate statistically the effect on freight rates due to the market share of the conference members;

d) They were also unable to determine the effect of the conference activities on freight rate volatility.

255. FINK et. al. (2001) analysed the effects of trade liberalisation and in particular of an abolishment of private agreements between carriers on transport prices.61 They used an econometric model with assumed constant price elasticity and estimated parameters

58 FUSILLO, M.: Competitive Behaviour in the Liner Shipping Industry and the Impact of OSRA: A Variability of Market Shares Approach; Conference Speech on the DAME Annual Conference, Cyprus 2005, 23.-25. June 2005. 59 That would require detailed information on the amount of cargo moving under service contracts by markets, and may be a topic for further research. 60 VON HINTEN-REED, N., CHIPTY, T., MORTON, E.S.: Shipping Conferences: A Study on the Impact of FEFC in the North Europe-Asia Trade, Charles River Ass., 4.6.2004. 61 FINK, C., MATTOO, A., NEAGU, C.: Trade in International Maritime Services: How Much Does Policy Matter? The World Bank, Policy Research Working Paper 2522,Washington D.C., January 2001.


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concerning the existence of price-fixing agreements (conferences) and cooperative working agreements. The results are summarised as follows:

a) Both public and private restrictions have a significant influence on the maritime transport freight rates;

b) In particular, restrictions on the private supply of port services also increase freight rates.

Global Insight’s Scope of Empirical Testing

256. It has been shown that there are so far four main phases of conference systems in liner shipping, namely (1) traditional conference system pre containerisation (prior to 1969), (2) traditional conference system (70-80ies), (3) excess supply (1990-2001), (4) excess demand (2003-2005). These phases are characterised by very different functional relationships between freight rates and their determinants.

257. After a slow-down of liner freight rates from a temporary peak phase during 1999 on the routes from Asia to USA and Europe, respectively, to a bottom phase in IV/2001 and I/2002 from US$1,600-2,000 per TEU to US$1,050-1,500 per TEU, since II/2002 liner rates have increased significantly to US$1,700-2,000 per TEU as at end of 2003. Until mid 2004, freight rates stagnated on a slightly lower level and then partly increased again.

258. The main underlying trend and cause of the surge in freight rates is the surge in demand leading to a shortage of vessel capacity and containers. Given the relatively inelastic demand and supply in the short term – this shortage directly leads to the higher rates, albeit often with a time delay due to the periodicity of contracts, sometimes accompanied by the reduction of the number of vessels employed within a service because of the lack of vessels and/or the very high costs for charter tonnage.

259. There are additional reasons for the surge in freight rates besides the cost of charter in tonnage, i.e.

1. bunker price;

2. increase of Panama Canal tolls (only for a few routes);

3. additional cost for security requirements;

4. growing trade imbalance and necessary positioning of empty containers of up to 40% of total transport costs;

5. profit margins for liner companies and conferences/alliances (to be tested);

260. Generally, determinants of transport costs on individual routes and for individual shipments do not only depend on the global freight level and trade imbalances, but also on the type and value of the commodities, the volume of the individual shipment, the level of competition on a given route, alternative modes of transport, distance, geographic location, and, not at least, on ports costs and productivity. In the following, the attempt is undertaken to find statistical evidence for the relationship between liner


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freight rates including THC and surcharges and their determinants including the role of conferences and alliances.

Table III-8 Freight Rates on the Three Major Liner Trade Routes, 2000-2004 (US$ per TEU)

Data Base

261. In order to analyse the relationships between freight rates and their determinants on both the aspects to be defined (transport cost = freight + THC –BAF + CAF + analogue charges + war risk surcharge etc.) and the financial dimension (cost factors, demand/supply ratio, and surcharges as well as market power of conferences), a number of variables have been defined.

262. Before testing the influence of conferences on maritime transport costs the global interaction between freight rates and market conditions and strength will be tested.

Regression Analysis: Conference Freight Rates and Utilisation

263. As part of this study effort, the study team performed a quantitative econometric analysis of supply, demand, and freight rates. The study period chosen was 2000-2004, a recent era much like currently prevailing conditions, the period after OSRA and the liberalising of shipping in Europe. The team used quarterly data on three major routes. The results are presented in detail in Annex D. The estimates are reasonable and informative. They compare favourably to many of the studies reviewed earlier in terms of quality.

264. The results are summarised here, interested readers are referred to Annex D. Total costs were computed for trade routes, based on conference ocean rates, plus

Asia/ US (EB)

US/ Asia (WB)

Europe/ Asia (EB)

Asia/ Europe (WB)

US/ Europe (EB)

Europe/ US (WB)

I / 2000 2,125 751 664 1,594 939 1,148II / 2000 1,953 852 829 1,597 1,008 1,148III / 2000 2,028 936 785 1,667 1,017 1,237IV / 2000 1,832 967 720 1,558 987 1,225

I / 2001 1,869 846 797 1,566 951 1,321II / 2001 1,765 869 869 1,468 943 1,236

III / 2001 1,624 801 688 1,296 890 1,253IV / 2001 1,605 720 663 1,154 899 1,223

I / 2002 1,541 751 601 1,073 866 1,181II / 2002 1,463 749 646 1,105 805 1,154III / 2002 1,476 757 694 1,208 815 1,181IV / 2002 1,529 817 712 1,304 843 1,215I / 2003 1,529 826 704 1,432 899 1,269II / 2003 1,717 861 762 1,571 924 1,401III/ 2003 1,968 834 777 1,629 817 1,426

IV / 2003 1,892 810 754 1,662 834 1,469I / 2004 1,851 802 733 1,686 778 1,437

II / 2004 1,871 822 728 1,739 794 1,422III / 2004 1,946 838 735 1,826 810 1,436IV / 2004 1,923 806 769 1,838 829 1,471

quarter


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surcharges (CAF, BAF, etc.). Then a ratio of demand with respect to supply was used, container cargo flows divided by container fleet capacity on the route, which is also a measure of the aggregate average utilisation rate. The analysts concentrate on “head-hauls”, the nearly full rather than the slack direction of a trade route. Descriptively, they show that the supply/demand ratio and conference rates tend to move together. Indeed, the demand/supply ratio alone “significantly explains” a good bit of freight rate variation on some routes (as one might expect).

265. The analysts go on to look at other conference-related variables. On the Transpacific and the Europe-Far East Asia route, where demand was strong and the conferences played a role, conference shipping costs were predicted by demand/supply. High utilisation rates ‘caused’ high freight rates (i.e. the T-ratios were significant), with the expected sign (negative). When conference freight rate announcements and in one model conference surcharges were added to the regression, they were significant and the overall “fit” of the model increased.

266. The analysis uses traditional classic “ordinary least squares”. It is interesting that for the Asian routes, the conference rates are modelled as a function of demand and supply, that is, the Asian conferences are essentially modelled as price-takers, reacting to the dramatic changes in demand, downwards in 2001 and sharply upwards in 2003. Although it can be argued that they were price-takers as GRIs had an influence on rates, or at least gave a signal to the market. In this framework, conference general rate announcements and surcharges had influence on rates, indicating that they did have impact as a “signal”. The impact of the container imbalance, with the high ratio of empties moving back to Asia, was to reduce the freight rates in 2004 to nearly 50% of the 1995 levels.


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IV. EU Liner Trade Routes

A. Overview of the Global Economy

267. Doubts about the world economy's short-term outlook have once again increased, mainly as a result of renewed inflation worries, high global energy prices, and signs of weakness in some G-7 economies. Global Insight's latest bottom-up forecast of the global economy projects world economic growth to slow from 4.1% in 2004 to 3.1% in 2005. This less-robust economic outlook is reflected in recent financial market volatility and lower yields on long-term government bonds. While the downside risks have increased, one should not exaggerate them.

268. The dollar's depreciation does act as a headwind for economies with floating currencies against the greenback, such as Euro zone members. High oil prices have an impact on energy-intensive sectors, such as transportation and some industrial material processing industries. Oil price and exchange rate volatility has refocused attention on fuel and exchange rate surcharges: if conferences are abolished, how will the BAF and CAF be set?

United States

269. GDP growth of 3.4% is expected in 2005, before slowing to 2.9% in 2006 as consumer spending and the housing market lose steam. The biggest disappointment was growth in business fixed investment, which slowed sharply, perhaps reflecting renewed business caution in the face of high oil prices. Export growth remains unimpressive, with economic growth in both Europe and Japan anaemic. However, many of the fundamentals of the US economy are still quite strong.

Euro zone

270. While Euro zone economic activity showed signs of limited improvement at the end of 2004 and beginning of 2005, the latest data and survey evidence have been largely disappointing. Furthermore, the latest seasonally adjusted Eurostat trade data indicate that Euro zone exports have weakened modestly (early 2005) after showing some signs of improvement in late 2004.

Asia-Pacific

271. Regional growth in Asia is cooling off. This trend is set to entrench in 2005. Fortunately, momentum in both consumer and investment demand has remained strong. This should provide some cushion to export deceleration, which may be caused by the revised yuan exchange rate adjustment scheme. Despite its devastating human tolls, the tsunami that hit South and Southeast Asia at the end of 2004 is unlikely to have any significant economic impact, as destruction is limited to coastal regions, and key industrial, agricultural, and metropolitan centres remain unaffected.


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Latin America and Caribbean

272. The outlook for the Latin American region will remain positive for the next couple of years, especially if commodity and petroleum prices remain strong. Furthermore, the region is benefiting from a strong fiscal sector as a result of reforms passed during the 1990s. These will continue to support strong participation in government policies that tend to redistribute income across households. Inflation has started to accelerate, however, and could become a problem in the future, especially if the fiscal situation begins to deteriorate. If oil and commodity prices deteriorate, one can expect a deteriorating fiscal sector and attempts to use other mechanisms to collect needed taxes.

Central Europe and the Balkans

273. Economic growth in Central Europe and the Balkans surged at 6.1% in 2004, up from 4.6% the previous year, and the fastest regional growth rate since 1995. The acceleration of growth during 2004 was driven by an impressive performance from the region’s two largest economies: Turkey and Poland. GDP growth throughout the region was boosted by the May 1, 2004, accession of eight Central and East European countries to the European Union, a development that contributed to strengthening exports and investment in the new member states.

Trade Outlook

274. In 2004, the world economy and world trade both reached their highest rates of growth since the global "recession" of 2001. Consequently, in 2005, world economic and trade growth are expected to decelerate. The sustained high price of oil has contributed the most to the slowing of growth. High energy prices have pushed up producer costs and raised households’ energy expenditures, resulting in consumers having less income left for everything else. The force of consumer demand behind the continued expansion is constrained, restraining production.

Figure IV-1 World Economy and Trade Growth

275. In 2005, the growth of world private consumption expenditures, fixed capital formation, and GDP will slow to 3.0%, 4.7%, and 3.4%, respectively, and world trade

World Economy and Trade Growth

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growth will be lower than 8.0%, all in real terms. Although down from the rapid 11.2% rate of growth last year, growth in trade is still strong compared to world economic growth. This is because economic globalisation continues. Retailers and industrial suppliers continue to seek lower cost imports, and firms continue to move their production to lower-cost countries. The outsourcing activities have created additional flows of international trade.

B. Economic and Trade Review

Total World Cargo Trade

276. Total world (international) trade will climb by an estimated 4.1% in 2005, which is slower than last year's 5.0% and even slower than the "record" growth of 6.2% in 2003. Total tonnage will hit more than 8.7 billion metric tonnes. Historically, world international trade fell by 5.1% in 2002, and most of this was overland cargo moves that collapsed by more than 15.0%. Seaborne trade still increased, but only by 1.6% in 2002. Container trade accounts for approximately 12 percent of the total seaborne trade in 2005.

Containerised Traffic

277. World container trade in Twenty Foot Equivalent Units (TEUs) has been growing at double-digit rates over the 2002-04 period, reaching 11.2% in 2004. The expected economic slowdown this year worldwide will cause container shipping to ease somewhat, averaging 8.6% this year at the world level. While this is still a substantial growth rate overall, it is important to note that it is a slowing of growth and that 2005 will not represent a recession, simply a slowdown in the rate of growth.

Table IV-1 Five Largest Container Exporting Nations

(Thousands of TEUs) Export Country 2004 2005 2006 2007

CAGR 2004-24

China 18,270 21,435 24,192 27,131 9.0% United States 7,331 7,646 8,019 8,287 3.3% Japan 5,034 5,367 5,716 6,063 4.4% Taiwan 4,351 4,672 4,953 5,261 5.2% South Korea 4,278 4,670 5,116 5,567 6.0%

278. Regionally, container exports will be dominated by China, even under the assumption of slower economic growth in China over time. Indeed, China is expected to dominate container exports by a substantial margin. By 2006, China will export three times as many TEUs as the United States. The other striking aspect of the forecast is that, of the top 5 exports in the world, the United States' share of the total is falling rapidly, from 23% last year (2004) to 18.8% in 2007. This trend is forecast to continue.


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Figure IV-2 Top Five Container Exporters Over Time

Thousands of TEUs

0

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Figure IV-3 Top Five Container Exporters’ Shares

United States9%

Japan6%

South Korea5%

Rest of World50%

Taiwan5%

China25%

2005

279. While the United States appears to hold its own on a world scale, within the top 5, it will lose ground to the Asian exports that comprise the remaining 4 of the list.

United States9%

Japan6%South Korea

6%

Rest of World48%

Taiwan5%

China26%

2006


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Table IV-2 Containerised Trade by Route (Thousands of TEUs)

Annual Avg. Growth Rate

Export Country Import Country 2004 2005 2006 2007 2008 2005 2006 2007 2008

North America Eastern Europe 173 187 196 204 212 8.3% 4.4% 4.4% 4.0%

North America Med 459 471 482 489 499 2.7% 2.2% 1.6% 2.0%

North America North Europe 1,056 1,074 1,107 1,140 1,170 1.8% 3.0% 3.0% 2.6%

North Europe Indian Subcontinent 352 387 421 454 487 10.1% 8.7% 7.8% 7.2%

North Europe Latin America (Incl. Mex/CRB) 547 580 599 624 653 6.0% 3.3% 4.2% 4.6%

North Europe Med 522 553 577 600 627 6.1% 4.3% 3.9% 4.5%

North Europe NE Asia 1,416 1,508 1,621 1,726 1,846 6.5% 7.5% 6.4% 6.9%

North Europe North America 1,817 1,901 1,940 1,977 2,022 4.6% 2.0% 1.9% 2.2%

North Europe SE Asia 552 589 625 651 679 6.7% 6.0% 4.2% 4.4%

NE Asia Eastern Europe 677 809 912 1,019 1,122 19.6% 12.6% 11.8% 10.1%

NE Asia Med 1,379 1,559 1,749 1,951 2,132 13.1% 12.2% 11.6% 9.3%

NE Asia North Europe 3,730 4,225 4,670 5,201 5,676 13.3% 10.5% 11.4% 9.1%

NE Asia SE Asia 3,088 3,424 3,754 4,043 4,333 10.9% 9.6% 7.7% 7.2%

SE Asia Eastern Europe 118 125 131 137 145 5.8% 5.1% 4.5% 6.1%

SE Asia Med 424 463 496 527 550 9.2% 7.0% 6.4% 4.3%

SE Asia North Europe 1,059 1,113 1,159 1,226 1,279 5.0% 4.1% 5.8% 4.3%

Indian Subcontinent Eastern Europe 58 67 75 83 90 15.8% 12.7% 9.5% 8.5%

Indian Subcontinent Indian Subcontinent 50 58 66 73 80 15.8% 12.9% 11.3% 9.6%

Indian Subcontinent Med 227 260 291 325 357 14.9% 11.7% 11.6% 9.8%

Indian Subcontinent North Europe 460 517 571 629 678 12.3% 10.5% 10.1% 7.8%

Latin America (Incl. Mex/CRB) Med 522 536 561 586 604 2.8% 4.6% 4.5% 3.0%

Latin America (Incl. Mex/CRB) North Europe 1,237 1,265 1,311 1,369 1,409 2.3% 3.6% 4.4% 2.9%

Med Indian Subcontinent 74 81 87 93 99 9.5% 7.6% 6.6% 6.9%

Med Latin America (Incl. Mex/CRB) 361 390 405 423 444 7.8% 3.9% 4.6% 5.0%

Med NE Asia 322 344 368 391 416 7.1% 7.0% 6.0% 6.5%

Med North America 849 875 894 910 928 3.0% 2.2% 1.8% 2.1%

Med North Europe 361 369 379 395 406 2.2% 2.9% 4.0% 2.9%

Med SE Asia 125 132 139 144 150 6.1% 5.2% 3.7% 4.2%

Source: Glob al Insight World Trade Service.


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Figure IV-4 Growth Rates of Containerised Exports by Region -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

NE Asia

Indian Sub.

Latin Am.

Med

SE Asia

N. Europe

N. America

Mid. East

2004

2005

2006

Source: Global Insight World Trade Service.

280. Container shipments from Asia to Europe are expected to slow down this year and next, but the rates of growth are still predicted to be substantial. This year, the ratio of westbound to eastbound TEUs will be 2.4. This ratio will increase to 4.1 by the end of the forecast (2024) in view of the continued consumption of fair-priced goods from Asia, and despite the slowing of Europe's consumer sector. Indeed, the economic outlook for Europe is not strong at all, so the westbound growth in container trade will come at the expense of other trades to Europe.

Table IV-3 Asia-Europe Trade

(Annual Growth Rates)

2004 2005 2006 2007 2008Asia to Europe 17.7% 12.4% 10.0% 10.5% 8.4%Europe to Asia 5.4% 6.5% 7.1% 5.9% 6.2%


281. North America's trade with Northern Europe has shown considerable weakness, due mainly to the rather feeble growth of the major European economies and, therefore, slow growth in eastbound container traffic. The outlook calls for rather weak growth in both directions. In 2004, for every TEU shipped to Europe, approximately 1.8 TEUs were imported from Europe to North America. By the end of the forecast (2024) this ratio will actually decline to 1.6. In total, the transatlantic trade will grow from 3.0 million TEUs in 2006 to just 4.7 million in 2024. This represents an average annual growth rate of just 2.5%, well below the average growth at the world level for containers (5.6%).

Table IV-4 Growth Rates of TEUs – Transatlantic

2004 2005 2006 2007 2008N. Europe to N. America 5.1% 4.6% 2.0% 1.9% 2.2%N. America to N. Europe 6.2% 1.8% 3.0% 3.0% 2.6%



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C. Analysis of European Trade Routes

282. In this section we review the major container trade routes of the European Community. The analysis covers trade volume, commodities traded, carriers offering service on the route, the service patterns, and a review of the conference on the route, freight rates, and the impact of the conference on shippers.

283. The analysis uses quantitative data provided by conferences for many routes, information which is usually unavailable. This section examines trade volume trends, lines active on each route, conference activity and performance, market stability, liner services on offer, conference rates, and comments on the impacts of conferences on shippers. Confidential pricing data has not been provided by carriers.

284. Table IV-5 summarises trade route shares of imports and exports, the trade imbalance, and a distance estimate for the route. Our sample of seven routes covers two-thirds of European container exports, and well of half of imports, so the sample’s coverage of European container trade is fairly good. Directional imbalances are prevalent; volumes in one direction generally exceed those in the other by a significant percent, and few of these ratios are close to unity.

Table IV-5: Summary of 2004 Route Trade Shares, Directional Balance, and Distance

European Trade Route With

Share of E.U. Trade (% of 2005 Total)

Directional Imbalance (Westbound/ Eastbound)

Length of Route (Amsterdam to

major port) Exports Imports Ratio (Nautical Miles) Far East 17.13 22.34 1.68 5,770 Trans Atlantic 19.75 8.36 1.79 3,912 West Africa 5.03 1.96 2.25 ** 3,178 Southern Africa 2.47 3.35 0.83 ** 6,026 Sub-Continent 4.27 5.13 1.65 4,268 East Coast S. America 3.15 7.48 0.58 ** 6,630 Mediterranean 14.03 6.71 1.92 ** 2,048 ** Southbound/Northbound

285. Table IV-5 provides indicators of service levels for the routes: the number of carriers serving the route, and the number of regular scheduled dedicated container liner sailings per week. Also listed are conference capacity shares and recent conference ocean transport rates. More than a dozen carriers serve even the smaller routes. The two largest routes have a couple of sailing per day on average, the medium sized routes have an average of over one per day on average. These seven routes alone account for nearly twenty sailings per day into and out of Europe. Conferences typically command half to two-thirds of capacity, a share that has declined in recent years on most routes. There is surprisingly little difference in posted cost between the very long Far East route and the shorter trans-Atlantic route. Ocean transport rates are not a simple linear function of distance.


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Table IV-6 Carriers, Sailings, Conference Share & Rates

European Trade Route With

Number of

carriers on

route

Number of weekly container sailings

Conference share of capacity

(northbound/ southbound)

Freight Rate $US (eastbound-northbound/ westbound-southbound)

Far East 22 32 54 $US 769 / 1,838 Transatlantic 23 55 51 $ US 829 / 1,471 West Africa 17 28 70 EUR 950 / 1,875 Southern Africa 13 3 54 $ US 900 / 1,350 Sub-Continent 19 8 65 / 59 $ US 1,000 / 900 East Coast So America 17 8 NA $ US 2,000 / EUR 375 Mediterranean 13 - - * See Note * This route is broken down into five distinctive sectors. The southbound rates range from € 625 in the Greece Turkey sector to € 1030 in the Israel sector. The northbound rates range from € 210 in the Cyprus sector to € 562 in the Southern Italy sector.

Far East Geographic Definition

286. The North Europe/Far East route stretches from the U.K, Sweden, Denmark, Germany, Netherlands, Belgium and France in the west to Malaysia, Singapore, Indonesia, China, Myanmar, North Korea, Taiwan, South Korea and Japan in the east. The largest Far East port in Europe is Hamburg, with Rotterdam a close second. Germany accounted for 29% of EU exports to Asia in 2004, and Germany and the U.K. each accounted for 20% of total imports from Asia. The largest European trading partner in the Far East is now China.

287. One distinguishing characteristic of this trade route is that it is very long, stretching half way around the globe. Many tonne-miles of transportation service are provided by carriers for every container shipped along the route. Another characteristic is that it is now dominated by a new partner, China, with whom Europe's trade is growing rapidly.

Trade Volumes

288. Figure IV-5 depicts eastbound and westbound TEUs, flowing over the trade route, based on statistics of imports and exports. The figure provides historical data since 2000, estimates of current volume, and projections through the year 2010, of container traffic between the EU-25 and Asia. The growth of trade between Asia and Europe has been impressive; between 2001 and 2004 overall trade grew 37%. But the trade pattern between Asia and Europe and the Mediterranean is heavily skewed toward the westbound portion of the trade. As Figure IV-5 evidences, imports from Asia swamp European exports to Asia. Between 2001 and 2004 the westbound trade grew over 44%, and the disparity will continue to grow in the future. The level of imports from Asia is expected to increase by over 50% in the next five years. The driver of this impressive growth in imports from Asia is China's booming economy.


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Figure IV-5 Europe – Far East Trade Volumes

Europe - Far East Trade Volumes

02,000,0004,000,0006,000,0008,000,000

10,000,00012,000,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

TEU

s Eastbound

Westbound


289. By splitting the trade to and from Europe into Asia (less China) and China alone, China's dominant position becomes clearer. In Figure IV-6, European exports to other nations in East Asia excluding China versus exports to China are split out. Exports to both regions are trending upwards, with Asia (less China) receiving a larger share than China. The upward trend is encouraging, but the real story is on the import side of the trade to Europe.

Figure IV-6 EU Exports to "Other Asia" versus China

E.U. Exports to Far East & China

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000

2002

2004

2006

2008

2010

Year

TEU

s Far East (Less China)

China


290. Figure IV-7 depicts the strong trend in imports from "other East Asia" and China. Up until 2003 Europe imported more from the countries of Asia (less China) than China. But in 2003 China caught up and exported as much as the rest of Asia combined to Europe in container volume terms. In the future, containerised imports from China will drastically outpace the rest of East Asia. Imports to Europe from China are


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expected to increase over 70% between 2005 and 2010. Higher oil prices and China's decision to let its currency float are both potential threats to the continued pace of its economy, but China has been aggressively meeting both challenges.

Figure IV-7 EU Imports from "Other East Asia" versus China

E.U. Imports from Far East & China

01,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,000

2000

2002

2004

2006

2008

2010

Year

TEU

s Far East (Less China)

China


291. China’s state-owned oil companies have been actively seeking foreign companies with proven reserves and offering competitive bids for them. After CNOCC's failed attempt to acquire Unocal, the largest state-owned oil company, CNPC, made a $4.18 billion bid to acquire PetroKazakhstan. The merger will provide China with much needed oil reserves close to its western border to fuel its continued growth. The government has also been prudent in its design of its currency floating mechanism. Bowing to pressure from the U.S., China agreed to let its currency float against a basket of currencies. But China will only allow the yuan to float daily within a very narrow band, therefore mitigating volatility and permitting a "managed float." Chinese policy makers are well aware that export-driven growth cannot be maintained if the currency appreciates too much. Both these energy and currency policy initiatives by China should help ensure continued export-lead economic growth for the foreseeable future.

Commodities

292. The westbound portion of the trade representing imports to the EU from Asia is dominated by manufactured goods. Figure IV-8 and 9 show the share of imports by commodity-type from Asia (less China) and China for 2004. The largest share of exports from Asia (less China) and China to EU in 2004, 41% and 57%, respectively are manufactured goods.


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Figure IV-8 EU Imports by Commodity-Type from Asia (less China)

2004 E.U. Imports from Far East (Less China)

8% 8% 0%

13%

5%

2%

4%

41%

3%10% 6%

Ag. Products

Apparel

Beverages

Chemicals

Electronics

Energy Products

Machinery

Manufactured Products

Raw Materials

Transportation Equp.

Wood & Paper Products


293. China's lower labour costs and favourable exchange rate will continue to drive strong exports of manufactured goods, as industrialisation continues. China is also doing well in an area traditionally controlled by countries such as Japan and South Korea, electronic equipment. In 2004, 5% of the volume of imports from "Other East Asia" (less China) was electronic equipment, representing approximately 140,540 TEUs. In the same year, 12% of imports from China were electronic equipment, representing approximately 401,514 TEUs. In 2000 China exported approximately 50% more electronic equipment (in TEUs) to the EU than the rest of Asia. By 2010 it is expected to export five times the volume of electronic equipment to the EU as the rest of Asia combined.

Figure IV-9 EU Imports by Commodity-Type from China

2004 E.U. Imports from China

5% 12% 0%

4%

12%

1%

3%

57%

2% 3% 2%

Ag. Products

Apparel

Beverages

Chemicals

Electronics

Energy Products

Machinery


Raw Materials




294. China is also strong in the manufacturing of lower cost apparel, compared to the rest of Asia. In 2000, the rest of Asia exported more apparel to the EU-25 than China. By 2005, China had caught and surpassed the rest of Asia, exporting more than twice the amount of apparel to the EU-25 compared to the rest of Asia. By 2010 China is expected to export over three times as much clothing to Europe as the rest of Asia. Clearly China is on an economic path unlike any of its neighbours. The activity,


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volume, rates and capacity of container shipping on the Europe/Far East route will continue to be dictated by the performance of China's economy.

Lines Active on Trade Routes

295. Container operations on this trade route are dominated by the round-trip full container services of three major east-west alliances, Grand Alliance, CHKY Alliance and New World Alliance. The total share of these three east-west alliances is only 26% of the world cellular fleet, but they have a strong position in the Europe-Far East route as evidenced by Table IV-5.

Table IV-7 Alliance Presence in Europe – Far East Trade

Alliance Trade share

Weekly services

Number of ships

Average TEU per ship

Shipboard capacity

Total trade capacity

Grand Alliance 22% 6 49 6,300 308,000 1,457,000CHKY Alliance 21% 7 60 5,300 316,000 1,405,000New World Alliance 12% 4 31 5,600 174,000 833,000Total Alliances 55% 17 140 5,600 798,000 3,695,000Other Carriers 45% 15 132 5,700 760,000 3,069,000Total Europe - Far East Trade 100% 32 272 5,700 1,558,000 6,764,000

Global Insight Analysis.

296. Grand Alliance partners include: Hapag-Lloyd, MISC (Europe-Far East), NYK, OOCL and P&O Nedlloyd (now owned by Maersk). CHKY Alliance partners include: Cosco, Hanjin/Senator, "K" Line and Yang Ming. New World Alliance partners include: NOL/APL, Hyundai and MOL.

297. These three alliances operate on different models. The Grand Alliance is a fully integrated vessel-sharing agreement. It has a main operations centre that makes all vessel deployment and operational decisions on behalf of the partners. The partners of the CHKY Alliance usually operate their own slings; other partners make take slots if they choose. The smallest alliance, the New World Alliance, operates on a mixture of these two models.

298. There are some lines on the route that operate on a stand alone basis. CMA-CGM is not part of any formal alliance, but it does engage in agreements with other carriers on such issues as slot-charter and vessel sharing. PIL and Wan Hai, two privately-controlled Far East carriers started a joint service in early 2004. The two true stand alone carriers on the route are Maersk Sealand and Mediterranean Shipping Company.

299. There are a handful of one-way services on the route as well. Contship, Gold Star Line and Marfret are capitalising on the westbound boom and operate westbound only services. Hamburg Sued operates westbound service also, but just from Singapore to Europe.

300. Maersk, which recently acquired P&O Nedlloyd and now owns and runs the largest container fleet in the world, will fully integrate the Maersk fleet and the P&O Nedlloyd fleet. Maersk has announced unilaterally that it will pull out of the Grand Alliance. Presumably Maersk intends to upgrade and increase its existing stand-alone full service on the Europe/East Asia route in the very near future.


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Service Patterns

301. The CHKY Alliance offers seven loops of container service on a weekly basis. Six of the routes are serviced on by an average of seven to nine ships in the 5,400 – 5,600 TEU range. All the ships on these routes are post-Panamax. The seventh route is the PS Pendulum Service serviced by twelve ships in the 4,000 – 4,600 TEU range.

302. The Grand Alliance offers also offers seven loops of service on a weekly basis with 7-9 ships on each loop. The average capacity is 5,900-6,500 TEU, with one route averaging 8,300 TEU. A majority of the ships used on these routes are post-Panamax. It is not clear at this moment what the nature of the future service will be that replaces the Grand Alliance, how Maersk/P&O Nedlloyd will deploy vessels over the route, or what the other alliance members will do without Maersk.

303. The New World Alliance offers four loops weekly with an average of eight ships on each route ranging from 5,000 – 6,400 TEU each. These ships are all post-Panamax.

304. The largest lone operator on the route, Maersk Sealand, offers three weekly loops. One route has nine ships averaging 8,500 TEU. The second route has nine ships averaging 7,700 TEU. The third route has 8 ships averaging 6,300 TEU. Maersk Sealand uses larger ships and has fewer strings. Maersk may move into trade formerly operated by the Grand Alliance.

305. The other lone operator, Mediterranean Shipping Company, offers two loops of service. One loop has eight ships averaging 5,500 TEU and the other loop uses nine ships averaging 7,300 TEU.

306. All in all, there are at least 23 dedicated regular scheduled sailings a week in each direction on this trade route, relatively large container ships served by 34 two-way loops (20 by the Conference lines, 13 by non conference and one by a Conference/non conference joint operation). In June there were 270 ships in the trade, up from 256 the previous year with a probable 284 by the end of 2005.62 This is a well-served booming market.

The Far East Freight Conference (FEFC)

307. The long-established London-based Far Eastern Freight Conference (FEFC) was for many years the rate setting body in the trade between North Europe and ports in the Far East. Consolidation in the industry has decreased the number of members from 28, from 18 countries in the mid-1970s, to the current 15 members. Its members include the carriers of the three main alliances on the route, and Maersk Sealand and CMA-CGM. As of June 2005 these 15 conference carriers represented 61.7% of the total shipboard TEU capacity on the North Europe route according to FEFC statistics.

308. If the conference is treated as a single entity, the aggregated capacity portion of the member carriers results in a HHI (market concentration index) of 7132 and thus indicates a highly concentrated market. If the conference was abolished, a market

62 Lloyd’s Shipping Economist, September 2005, page 10.


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concentration index of 1402 would result, still indicated a concentrated market based on capacity.63 (Carriers argue that this index ignores the competitive pressure of potential entrants; ships on another trade route can redeploy on any other trade route with relatively short notice. The index assumes that physical capital is fixed, which is untrue of ship capacity deployed on any given trade route.)

309. Table IV-8 shows TEUs carried by the conference, and by all vessels, by direction and total, for 2002 to 2004. Overall volume on the route has increased by 25% on the eastbound portion and 36% on the westbound portion. Despite these dramatic increases in the market, FEFC has not recently increased or decreased its market share on either leg of the trade route. Its share on the North Europe eastbound leg has remained stable at around 65% and similarly its share on the westbound leg is around 68%. The market share in the Mediterranean trade is lower.

Table IV-8 FEFC and Total TEU by Direction, 2002 -2004

FEFC Cargoes (TEUs)

Total Cargoes (TEUs)

FEFC share

FEFC Cargoes (TEUs)

Total Cargoes (TEUs)

FEFC share

Year Eastbound Westbound 2002 1,922,000 2,824,359 68% 2,858,493 4,218,196 68% 2003 2,043,166 3,150,887 65% 3,405,620 4,826,073 71% 2004 2,335,380 3,557,687 66% 3,930,914 5,755,185 68%

Source: Far Eastern Freight Conference.

310. The reason for FEFC share being flat despite the rapid increase in cargo, especially on the westbound trade, is that conference carriers did not expand capacity as quickly as the non-conference carriers during late 2003 and early 2004. The main reason for this was the large expansion of the stand alone operator, Mediterranean Shipping Company, and the entrance of Zim Israel, Wan Hai and PIL into the northern European trade. Over the year, mid-2003 to mid-2004, non-conference share of westbound capacity of from Asia to northern Europe rose from 36% to 46%.64 The share of capacity held by non-conference carriers on the Mediterranean trade rose to 50% over the same period.65

Capacity Utilisation

311. Faced with high and growing demand, especially westbound, the conference carriers achieved very close to full practical capacity utilisation westbound, with some slack eastbound in the period from mid 2003 to the latter part of 2004. Table IV-9 shows historical capacity data for the FEFC. FEFC has increased its capacity on the eastbound trade by 33% over the last two years and 38% on the westbound route. Capacity utilisation has dropped slightly on the eastbound trade because FEFC trade volume growth, 13%, has lagged behind capacity growth. The increasing imbalance of westbound over eastbound trade volume tends to ensure that efforts to meet westbound demand results in unused capacity eastbound. Utilisation has remained

63 Comp. Discussion Paper on the Review of Regulation 4056/86 Applying Competition Rules to Maritime Transport, Ad-HocAdvisory Committee Meeting -13 July 2005, draft 19 May 2005. 64 Beddow, Matthew, "Taking the Strain," Containerisation International, June 2004, p. 44. 65 Ibid., p. 44.


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even on the westbound trade where trade volume growth, 31%, has been more in line with capacity growth.

Table IV-9 FEFC Capacity Utilisation 2003 – 2005

Quarter

Capacity Eastbound

(TEUs)

Trade volume (TEUs)

Utilisation Factor

Capacity Westbound

(TEUs)

Trade volume (TEUs)

Utilisation Factor

2003:1 871,417 611,692 70% 1,076,705 1,016,600 94% 2003:2 918,671 576,110 63% 1,138,271 1,095,520 96% 2003:3 986,800 583,789 59% 1,227,701 1,199,687 98% 2003:4 1,025,787 678,991 66% 1,272,030 1,157,817 91% 2004:1 1,048,906 693,679 66% 1,318,528 1,208,840 92% 2004:2 1,077,161 707,612 66% 1,362,630 1,301,089 95% 2004:3 1,166,172 672,657 58% 1,471,851 1,371,074 93% 2004:4 1,224,068 720,970 59% 1,549,380 1,324,672 85% 2005:1 1,158,840 690,774 60% 1,483,326 1,336,290 90% 2005:2 1,227,735 474,965 N/A 1,557,974 946,872 N/A 2005:3 1,317,036 - - 1,664,335 - - 2005:4 1,356,799 - - 1,754,592 - -

Source: Far Eastern Freight Conference.

312. The FEFC's utilisation rate has been nearly consistently above 90% on the westbound trade. This reliable matching of capacity with volume on the westbound trade has allowed FEFC to take advantage of the dramatic increase in cargo coming from China. The lower utilisation rate on the eastbound trade is due to fact that the westbound trade is twice as large as the eastbound. Carriers are willing to return to Asia with partially empty vessels in order to maximise their share of the burgeoning westbound trade. The overall capacity utilisation rates are high enough to ensure a healthy market, and indicate further expansion of the fleet and service in the foreseeable future.

Pricing

313. The trade route has benefited from the surge in traffic from China and the temporary shortage of capacity. The differential on westbound versus eastbound freight rates on the Europe – Far East route have diverged dramatically over the last decade. There has always been a premium on the westbound trade, but the magnitude has increased, especially in the last three years. Figure IV-10 plots the average container freight rates (“fees”) per TEU for both the eastbound and westbound trades for the last ten years, on a quarterly basis. The reason for the directional disparity is that westbound trade volumes are larger than eastbound, and, they are growing more rapidly.


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Figure IV-10 Freight Rates by Trade Direction

Fees for the Europe/Far East Route

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1994:1

1994:4

1995:3

1996:2

1997:1

1997:4

1998:3

1999:2

2000:1

2000:4

2001:3

2002:2

2003:1

2003:4

2004:3

Quarter

$ pe

r T

EU

Eastbound

Westbound

Source: ISL.

314. The eastbound trade has experienced a steady decline in freight rates from a high in 1995. The reason is the intrinsic excess capacity that exists on the eastbound trade because of the directional imbalance in volume. The westbound trade is the exact opposite. The onslaught of cargo coming from China has been a bonanza for carriers. The FEFC figures showed a 19% increase in westbound cargo from the first quarter of 2003 to the first quarter of 2004. The flow of cargo has been so great that carriers in some instance have been forced to institute a cargo priority system with some shippers. This phenomenon has allowed to fees to rise above previous highs set in late 2000. The freight rate rose over 30% in 2003 alone reaching U.S. $1,662/TEU 'all-in' in the fourth quarter.66

315. Sometimes carriers can deal with directional volume imbalances by ingenious routing schemes that better match supply and demand. For this route it does not seem practical to institute round-the-world westbound services on a scale large enough to redress the imbalance, under current or foreseeable circumstances67 . The directional disparity in freight rates and capacity utilisation is destined to remain.

316. The general freight rate does not include various surcharges, such as those for fuel, currency fluctuations, and port-specific fees. (See below). In the past year, two of the adjustments generally applicable to all container cargoes regardless of port of origin or destination, for fuel and for currency fluctuations, have been quite high. These two surcharges alone have constituted an additional 20% to 30% premium over the general freight rate, depending upon direction. As fuel costs escalate and the Chinese

66 Ibid., p. 47. 67 An around the world westbound scheme might entail empty vessels crossing the Pacific, a huge expanse of water.


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currency fluctuates, it seems likely that these surcharges will increase in significance in future.

Table IV-10 FEFC BAF and CAF Surcharges

Month CAF BAF Jun-05 8.6% FCL USD 205 per TEU for the month of June LCL USD 10.25 per revenue ton for the month of June Jul-05 8.1% FCL USD 199 per TEU for the month of July LCL USD 9.95 per revenue ton for the month of July Aug-05 6.4% FCL USD 199 per TEU for the month of August LCL USD 9.95 per revenue ton for the month of August Sept-05 5.4% FCL USD 219 per TEU for the month of September LCL USD 10.95 per revenue ton for the month of September

Source: Far Eastern Freight Conference Website.

The Conference and Shippers on the Europe-Far East Route

317. FEFC conference carriers as a group potentially exercise considerable influence over the container trade route between Europe and Asia; it is one of the oldest and longest entrenched of conferences. The conference includes the three major alliances and the biggest stand-alone player (Maersk Sealand). The major players outside its membership are Evergreen, CSCL and MSC, which have expanded capacity on the route quickly, favouring newer larger ships.

318. The recent boom in cargo from China has given all the players in the route the opportunity to raise fees on shippers for westbound cargo. The accompanying overcapacity on the eastbound route has led carriers to drop rates there the last couple of years.

319. In theory the conference sets rate increases by announcing general rate increases (GRI) as well as rate restoration announcements.68 But in practice confidentially (the right not to disclose contract particulars) serves to permit shippers and carriers to discretely negotiate rates and service arrangements individually, and they do so. The conference mainly “coordinate” and “recommend” rates, but the various carriers charge their various customers different rates under various terms.

320. The nominal westbound freight rates in US dollars in 2004 (about $1800) were not much above the 1994 level ($1630), or virtually identical once inflation and exchange rates are taken into account. Eastbound average nominal dollar freight rates have actually dropped somewhat over the last ten years. In short, supply of service seems to be rising to meet booming demand at a market-clearing price sufficient to ensure continued expansion of capacity to move cargoes.

68 FEFC Press Release 01-06-2005, “In April 2005, in the face of unprecedented cost increase in almost all areas of their business, Member Lines of the FEFC implemented a Conference rate restoration. Although this Conference rate increase has made some contribution, higher operating costs being experienced by Lines are still not being recovered. In order to meet this prevailing trend of increasing cost factors and to ensure continued quality of service levels, freight rates must continue to be restored. Therefore, as announced in their 2005 Business Plan, Member Lines of the FEFC intend to implement the next stage of the Conference rate restoration programme with a Conference rate restoration for the Asia (excluding Japan) to North Europe and Mediterranean trades of USD 250 per TEU on 1st July 2005.”


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321. Capital has mobilised rapidly to provide a big increase in capacity on this route. This route is big enough to greatly influence the world supply-demand balance in global container shipping. The shortage of capacity has buoyed westbound rates via natural market forces. When the boom moderates, it is not clear that the conference will be able to discipline its members and prevent competition among them. Note that recently, entry by non-conference players has driven down the conference market share. This may imply that profits on the route looked good to outsiders; and that non-conference carriers are viewed by shippers as a viable alternative to conference carriers.

322. As currencies fluctuate in future, particularly the Chinese currency, and as fuel costs gyrate, the role of the bunker and currency adjustment factors seems likely to become more important. They may facilitate long run contracting, and the formation of shipper-carrier relationships. They may also provide an indirect way for carriers to alter rates charged under existing contracts. The role of the conference in setting the adjustment factors is an important matter, especially on such a long trade route. This has been the greatest bone of contention between the Conference and the individual shippers as well as the European Shippers Council. This is discussed in detail in the “Trade Route Summary” section below as it is a common issue for all trade routes.

323. This route has experienced boom growth that is forecast to continue. The strong growing demand for container liner service and the strong competition to supply service has ensured frequent sailings by numerous lines, both conference and non conference carriers. That is, service has been stable and seems certain to remain so in future. There is little to indicate that the presence or absence of the conference on this route would affect service stability significantly, either for better or for worse.

Transatlantic Geographic Definition

324. The main cargo flow on this route is North Europe to North America. This Route covers eastbound and westbound shipping routes between (i) ports in the forty-eight contiguous states of the United States and the District of Columbia, and interior and coastal points in the U.S. via said ports and (ii) east coast ports in Canada (iii) ports in Europe situated in latitudes from Bayonne, France to the North Cape, Norway (excluding ports in Russia, Ukraine, Mediterranean ports and ports in Spain and Portugal) and points in Europe via said non-excluded European ports other than points in Russia, Ukraine, Spain or Portugal.

Trade Volumes

325. Figure IV-11 depicts eastbound and westbound TEUs, flowing over the trade route, based on statistics of imports and exports. The figure provides historical data since 2000, estimates of current volume, and projections through the year 2010, of container traffic between Europe and North America. In 2000, there was about 1.2 million TEU moving eastbound over the trade route, and 1.7 million moving westbound. Westbound traffic is expected to continue growing faster than eastbound, increasing


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the imbalance in east-west volume. In 2000, westbound volume was 43% larger than eastbound. By 2010, westbound traffic is expected to be 80% higher.

Figure IV-11 North Europe-East Coast North America Trade Volumes

North Europe - East Coast North America Trade Volumes

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

TE

Us Eastbound

Westbound


Commodities

326. Figure IV-12 shows the distribution of TEUs of North American containerised imports from Europe, by top ten import commodities, for the year 2004. Manufactured goods are the number one commodity coming across the Atlantic from Europe with a share of 24%. Chemical goods are second with 16% followed by wood and paper products, agricultural products, beverages and machinery.

Figure IV-12 2004 Trade Volume by Commodity Westbound

2004 Trade Volume by Commodity WB

11% 1%10%

16%

3%

0%

10%24%

5%

8%13%

Ag. Products

Apparel

Beverages

Chemicals

Electronincs

Energy Products

Machinery

Manufacturing

Raw Materials

Transportation



327. Figure IV-13 shows the distribution by TEU volume of European containerised imports from North America, by top ten export commodities, for the year 2004. Chemicals dominate the eastbound trade with over a quarter (28%) of all commodities shipped. Beverages and manufactured products are second and third respectively with 21% and 19%.


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Figure IV-13 2004 Trade Volume by Commodity Eastbound

2004 Trade Volume by Commodity EB

16% 0%

1%

28%

2%

0%

5%19%

4%

4%

21%

Ag. Products

Apparel

Beverages

Chemicals

Electronincs

Energy Products

Machinery

Manufacturing

Raw Materials

Transportation



Lines Active on the Route

328. Container operations on this trade route are dominated by the round-trip full container services of two large partnerships between alliances and individual carriers. The Grand Alliance/CP Ships partnership and the New World Alliance/Maersk Sealand partnership offer Transatlantic, Pacific and Gulf service from Europe. The Mediterranean Shipping Company operates two services, a North Atlantic and South Atlantic. Three other partnerships, Cosco/Hanjin/"K" Line/Yangming, Norasia/Gold Star-Zim/CSCL and CMA-CGM/P&O Nedlloyd/Contship Container Lines/Marfret/Hamburg Sud/Hapag-Lloyd offer Transatlantic and Pacific services. The main range is further serviced by Evergreen, Atlantic Container Line (ACL), Independent Container Line (ICL), Atlanticargo and Star Shipping. The St. Lawrence range is serviced by SLCS, Cast and a partnership between Maersk Sealand/P&O Nedlloyd/MSC. The route is well-served by numerous big carriers.

Service Patterns

329. The service patterns below are as of July 2005. These are dedicated regularly scheduled liner container services. Some lines may have disbanded certain routes since.

1. The Grand Alliance/CP Ships partnership offers five weekly loops on the main range. One loop includes stops on the West Coast of the U.S. and a side route to the Far East. This loop is serviced by thirteen vessels with capacity between 4,600 – 5,000 TEUs. The partnership has one loop dedicated to the U.S. Northern Atlantic ports and one dedicated to the U.S. Southern Atlantic ports serviced by eight ships with capacity between 2,700 and3, 100 TEUs. The last two loops the partnership offers service trade to and from the U.S. Gulf ports with ships between 2,800 and 3,300 TEUs.


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2. The Maersk Sealand/New World Alliance partnership offers three weekly loops. One loop services east and west coast and Far East ports, a "round the world" loop. This loop uses 12 vessels with capacities between 3,600 and 4,900 TEUs. The two other loops offered by the partnership are strictly U.S. east coast and gulf ports. The first one is a roundtrip loop with five ships having capacities between 3,600 and 4,200 TEUs. The second loop is westbound only and uses 7 vessels with capacities between 2,500 and 3,000 TEUs.

3. The Mediterranean Shipping Company offers a weekly roundtrip loop to the U.S. North Atlantic ports with 4 vessels ranging in capacities from 2,800 to 3,400 TEUs. It offers a second loop servicing the South Atlantic and Gulf ports of the U.S. using six ships with capacities between 3,000 and 5,000 TEUs.

4. CMA-CGM/P&O, Nedlloyd/Contship Container Lines/Marfret/Hamburg Sud/Hapag-Lloyd offers two weekly loops. One loop is eastbound only, starting in Philadelphia and is serviced by 10 vessels with average capacity of 4,100 TEUs. The second loop is westbound only, originating in Tilbury and is serviced by 12 vessels with capacities between 2,200 and 2,600 TEUs.

5. Evergreen offers an "around the world loop" from Europe to the U.S. east coast through the Panama Canal to the west coast and the Far East. This route is serviced by 12 vessels with capacities between 2,800 and 4,200 TEUs.

6. Cosco/Hanjin/"K" Line/Yangming offer a weekly loop with four vessels ranging in capacity from 2.800 to 3,300 TEUs.

7. Norasia/Gold Star-Zim/CSCL offers a weekly "round the world" loop westbound only originating in Felixstowe and ending in Long Beach. The route is serviced by 13 ships with capacities between 2,600 and 3,000 TEUs.

8. Atlantic Container Line offers a roundtrip weekly multipurpose loop using five ro-ro/container vessels with average capacity of 1,850 TEU.

9. Independent Container Line offers a limited weekly loop only stopping in Chester, PA and Richmond, VA in the U.S. and Antwerp and Liverpool in Europe. It is serviced by four smaller vessels with capacities between 1,200 and 1,500 TEUs.

10. Two lines offer conbulk service.

11. Star Shipping offers service to the U.S. west coast with conbulker ships with average capacity of 400 TEU.


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12. Atlanticargo offers service to Charleston and Gulf ports with five conbulkers averaging 1,000 EUS of capacity.

13. The St. Lawrence range is serviced by four loops offered by SLCS (2), Cast and Maersk Sealand/P&O Nedlloyd/MSC using ships ranging from 1,600 to 3,500 TEUs.

330. There are twenty or more weekly direct dedicated services offered on the route. Westbound capacity exceeds eastbound due to west-bound round-the-world services.

The TACA Conference

331. The Trans Atlantic Conference Agreement (TACA) evolved in 1994 from the Trans Atlantic Agreement ("TAA") which was formed in 1992, and operates in the United States under the Federal Maritime Commission (FMC) Agreement 202-011375. TACA currently includes three of the four largest lines on both trade directions, Maersk Sealand/P&O Nedlloyd, Hapag Lloyd and Mediterranean Shipping Company (MSC). Since the Ocean Shipping Reform Act of 1998, US policy no longer permits conferences to set rates, making this route a matter of special interest for this study.

332. Table IV-11 shows TEUs carried by the top 15 carriers operating in the westbound Transatlantic trade, for 2003-2005. The recently merged Maersk Sealand/P&O Nedlloyd line controls one-fifth of the more lucrative westbound trade. The next largest liner company is Hapag Lloyd with 10% of the westbound trade. The third largest liner in the westbound trade is MSC with 9% of the market, but it is increasing its presence with a year-to-year growth of over 22%. MSC is a member of TACA, but has been a lone operator in most of the other routes where it competes. The westbound portion of the route is highly concentrated, with a four-firm ratio of 47.6%.

333. Market Shares - Conference and Non-Conference Carriers - Excellent data is available on market shares on all carriers from the US Piers data set, based on cargo manifests.


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Table IV-11 Market Shares for Top 15 Carriers in Westbound Trade

Rank Ocean Carrier Market Share 2004-2005 2003-2004

Percent Change

1 Maersk Sealand/P&O Nedlloyd * 20.1% 343,392 313,904 9.4% 2 Hapag Lloyd * 10.0% 169,620 166,354 2.0% 3 Mediterranean Shipping Company * 9.0% 153,040 125,011 22.4% 4 CP Ships 8.5% 145,050 156,257 -7.2% 5 Evergreen 6.4% 108,437 116,422 -6.9% 6 APL 5.4% 92,471 90,992 1.6% 7 OOCL * 4.5% 76,077 81,558 -6.7% 8 ACL * 3.9% 66,128 67,901 -2.6% 9 Independent Container Line 3.6% 60,870 62,013 -1.8%

10 Norasia 3.6% 60,831 11,834 414.0% 11 NYK Line * 3.5% 59,037 58,022 1.7% 12 Cosco 2.5% 41,826 43,862 -4.6% 13 "K" Line 2.4% 41,685 43,997 -5.3% 14 Atlanticargo/Star Shipping 2.4% 41,617 45,333 -8.2% 15 MOL 2.4% 41,522 40,447 2.7%

Total Top 15 Carriers 88.1% 1,501,603 1,423,907 5.5% Total All Ocean Carriers 100.0% 1,704,576 1,605,846 6.1% * TACA Member

Source: PIERS, the Port Import/Export Reporting Service.

334. Table IV-12 shows TEUs carried by the top 15 carriers operating in the eastbound Transatlantic trade, for 2003-2005. Maersk Sealand/P&O Nedlloyd again has the largest market share, but the top three are more closely bunched with Hapag Lloyd and CP ships controlling 12.5% and 10.1% of the trade respectively. Despite this parity in market shares between the top lines in the trade it is still highly concentrated with a four-firm ration of 46.2%. MOL has made the biggest move on the route, increasing its TEUs by over 70%

Table IV-12 Market Shares for Top 15 Carriers in Eastbound Trade

Rank Ocean Carrier Market Share 2004-2005 2003-2004

Percent Change

1 Maersk Sealand/P&O Nedlloyd * 14.7% 179,791 177,991 1.0% 2 Hapag Lloyd * 12.5% 152,152 139,985 8.7% 3 CP Ships 10.1% 122,795 138,675 -11.5% 4 Mediterranean Shipping Company * 9.0% 110,108 121,531 -9.4% 5 Evergreen 7.5% 91,610 79,370 15.4% 6 APL 7.4% 89,930 65,040 38.3% 7 OOCL * 6.0% 72,937 71,822 1.6% 8 ACL * 4.7% 57,757 54,252 6.5% 9 NYK Line * 4.0% 49,115 41,845 17.4%

10 Independent Container Line 3.6% 44,125 41,963 5.2% 11 Cosco 3.2% 39,430 33,677 17.1% 12 "K" Line 3.2% 38,914 46,329 -16.0% 13 MOL 2.8% 34,103 19,634 73.7% 14 Atlanticargo/Star Shipping 2.6% 31,640 30,262 4.6% 15 Hanjin 2.4% 29,102 27,401 6.2%

Total Top 15 Carriers 93.6% 1,143,509 1,089,777 4.9% Total All Ocean Carriers 100.0% 1,221,384 1,159,085 5.4%

* TACA M bSource: PIERS, the Port Import/Export Reporting Service.


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335. Figure IV-14/Table IV-11 shows TACA's market share from 1995 to 2005 both eastbound and westbound. It is interesting to look at the market shares pre and post OSRA which went into effect in May of 1999.

Figure IV-14 Conference Market Share 1995-2005

TACA Market Share Eastbound and Westbound

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year

Mar

ket S

hare

Eastbound

Westbound


336. The eastbound and westbound trades' market shares follow an almost identical path. In 1995, prior to OSRA, TACA controlled about one-third of the market in both the eastbound and westbound trade. The trend was slightly downward in the ensuing years, but TACA always controlled over half the market. The biggest drops in market share came between 1998 and 1999, the years immediately preceding and following OSRA. In 1999 for the first time TACA controlled less than half the market in both the westbound and eastbound trade. Since 1999, the split between conference and non-conference market share has hovered around a 50/50 split.


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Table IV-13 Conference Market Share 1995-2005

TRADE-WIDE VOLUME (EXCL. CANADIAN GATEWAY & CROSS BORDER TRAFFIC)

Year Total TACA Cargoes Carried (TEU)

Market Share TACA Total (%)

Market Share Non TACA (%)

East West East West East West 1995 664,073 694,908 67.97 67.75 32.03 32.25 1996 666,940 676,243 67.16 68.25 32.84 31.75 1997 710,907 717,326 63.52 64.64 36.48 35.36 1998 645,107 771,240 58.29 60.53 41.71 39.47 1999 521,944 683,489 49.87 48.42 50.13 51.58 2000 514,124 751,861 49.26 48.00 50.74 52.00 2001 502,442 715,171 48.59 46.90 51.41 53.10 2002 502,5658 749,267 49.05 47.48 50.95 52.25 2003 540,745 767,018 51.31 49.41 48.69 50.59 2004 575,765 749,524 49.89 48.90 50.11 51.10 2005

lf315,905 413,191 50.71 50.01 49.29 49.99

Source: Trans Atlantic Conference Agreement.


337. After the dip in westbound rates in 2002, the carriers in the Transatlantic trade reduced capacity. In 2003 overall slot supply on the main range fell by 7.4% eastbound and 6.8% westbound.69 In 2004, only the eastbound trade reduced capacity, by 5.2%. The westbound trade increased capacity by 4.2%, but this was offset by an almost 5% increase in volume. The St. Lawrence trade has seen a reduction in capacity of about 17% due to CP Ships replacing three of its larger vessels with smaller ones and CMA-CGM/Lloyd Triestino/Zim Integrated Shipping closed down its ECX operation. Carriers have been adding capacity in the main range, but not enough to overcome the decrease in Canada so capacity has dropped overall by about 4 percent in the first half of 2005. This reduction in capacity has pushed utilisation rates westbound trade in the main range at 95% to 97%.

Pricing

338. Figure IV-15 depicts the tariffs for the eastbound and westbound trade on the Transatlantic route. Up until mid 1999 the eastbound route was charging a premium compared to the westbound leg. After 1999 the opposite is true. The westbound trade now is at a premium. The eastbound trade fees have been declining since 1998 and only recently showed slight signs of recovery. The eastbound trade suffers from over capacity. Some carriers only offer westbound routes; the majority are roundtrip, and the ships on the return trip to Europe are returning partially empty.

69 Gardiner, Paul, "A Golden Year," Lloyd's Shipping Economist, July 2005, p. 10.


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Figure IV-15 Transatlantic Freight Rates 1993-2005

TransAtlantic Fees 1993-2005

0200400

600800

10001200

140016001800

1993

:4

1994

:3

1995

:2

1996

:1

1996

:4

1997

:3

1998

:2

1999

:1

1999

:4

2000

:3

2001

:2

2002

:1

2002

:4

2003

:3

2004

:2

2005

:1

Quarter

$USD

/TE

U

Eastbound

Westbound

Source: ci-online.

339. Regardless of OSRA, rates on the westbound trade rose right through 2001. Overcapacity problems on the trade caused a slight dip in 2001 and 2002, but this was quickly remedied and currently fees on the westbound trade are at an all-time high. Some liner operators believe that rates are not rising fast enough to earn a decent margin on the trades because operating costs in Europe and North America are some of the highest in the world.

340. The average freight rate on the dominant westbound trade lane increased by 2% in the first quarter of 2005 compared to the previous quarter and 5% compared to the previous year. Increased surcharges account for most of this rate increase. This is a low increase considering much vessel capacity is being removed, to restore the supply-and-demand equilibrium, and to put capacity to better use on the booming Asia trade. Carriers hope that the capacity reductions will start to payoff, TACA reported westbound volumes increasing more than 10% year-on-year in the first quarter of 2005 and the forecast is for more of the same. The carriers may have to wait until new yearly contracts are negotiated to realise the rate increases they feel are appropriate.

The Conference and Shippers on the Trans-Atlantic Route

341. After OSRA, conference members were allowed to negotiate service contracts on their own. TACA still posts tariff guidelines for rate increases; members negotiate their own rates within the guidelines. Results have been mixed with estimates putting average revenue per TEU up 2% to 5% in the first quarter 2005. The market share for the conference, as seen earlier, dropped dramatically to around 50% on both eastbound and westbound trades from nearly 70% previously.

342. Supply has risen to meet demand on this route. Previously the conference market share allowed conference carriers the opportunity to influence rate increases, but now


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more power is given to shippers through the ability to negotiate individual service contracts. The conference, having lost the ability to directly set rates is apparently focusing more on the issue of capacity deployed on the route.

343. One main impact of OSRA might be in directional freight rate differentials. Looking at the freight rate series (Figure IV-15) we observe that until 1999, westbound rates and eastbound rates moved together, with a very small differential between eastbound and westbound rates, and eastbound rates were somewhat higher. After 1999, the premium switched, and they moved apart, diverging steadily. By 2005, westbound rates were almost twice eastbound rates, a pattern observed on several other routes with a large directional volume imbalance.

344. It appears that the conference may have been successful in suppressing the directional rate differential before 1999. Greater competition after 1999 combined with an increasing directional volume disparity has apparently driven down rates on the direction with excess capacity, eastbound; and driven up rates on the direction where the capacity constraint tend to be binding, westbound. Westbound rates have increased several hundred dollars per TEU since OSRA, while eastbound rates have decreased a few hundred dollars. The rate differential may be due to the changing and increasing discrepancy in volumes by direction, but some may be due to increased competition. Simply put, shippers from North American seem to have benefited. Shippers from Europe appear to be paying higher prices OSRA may have ended cross-subsidisation of rates by direction, to some degree.

345. Nominal freight rates in the mid 1990s seem to have been almost as high as current nominal westbound rates, and higher than current eastbound rates. Once adjustments are made for inflation, it appears that in dollar terms at least, shippers and presumably consumers are currently benefiting from lower real freight rates on average, compared with the mid 1990s. While carriers may complain, there seems to be no trouble mobilising investment to increase capacity on the route and modernise shipping.

346. There is certainly no evidence that shippers or consumers have been harmed by OSRA, and there are indications that they may have benefited. Service quality and reliability did not appear to be adversely affected. There was no noticeable increase in market volatility. The industry has moved to bilaterally negotiated, confidential service contracts, however many of the service contracts remain linked to various surcharges. No shipper alleged that they could not get contracts. The main pressure appears to be that the larger shippers ideally would like longer term contracts extending beyond one year, something that the Carriers have not yet acceded to.

347. The conference carriers as a group lost share after OSRA. This might be an indication that non-conference carriers as a group are typically more aggressive about market share than conference carriers. Another explanation may be that perhaps non-conference carriers offer either better service or better prices. In any event, stability of service on the route has not been affected at all by the reduction of the conferences capacity share on the route.


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South America East Coast

Geographic Definition

348. The “East Coast of South America“ (ECSA) refers to the coasts of Argentina, Uruguay, and Brazil. The hinterland of this region includes these economies as well as landlocked Bolivia, and Paraguay (which does not itself have direct maritime container service). In addition the Amazonian port of Iquitos in Peru can be reached by transhipment from Manaus. Brazil dominates trade in the region, and Argentina is also of major importance. Here we have extended the analysis to include the Mediterranean and South Europe, particularly important for this route.

349. Ports on the east coast of South America with direct regular container sailing links to Europe include Belem, Fortaleza, Pecem, and Suape in Brazil Amazone and Brazil North; Salvador, Vitoria, Rio de Janeiro, Sepetioba, Santos, Paranagua, Sao Francisco do Sul, Itajai, and Rio Grande in Mid and South Brazil; Montevideo in Uruguay; and Buenos Aires in Argentina. These ports in turn are linked to scores of minor ports along the coast and up major rivers. Algeciras is an important transhipment port for containers moving on this route. Rotterdam is the busiest European port for ECSA/EU-25 trade.

350. With over 1.1 million total TEU handled in 2004 (full, empty, and transhipped containers on all trade routes), Buenos Aires is by far the most active container port in Argentina, conducting some 95% of Argentina’s container handling operations. Santos is the largest container port in Brazil, handling nearly 1.9 million of Brazil’s five million TEU in 2004. Major Brazilian container ports include: Rio Grande (588,000 TEU), Itaji (564,000 TEU), Rio de Janeiro (343,000 TEU) Fransisco do Sul (276,000 TEU), Salvador (199,000), and Vitoria (188,000). Montevideo in Uruguay handled 423,000 total TEU in 2004. The entire ECSA handled 6.7 million TEU of full and empty and transhipped containers in 2004, 19% more than in 2003. Much of the region’s population and economic activity is located near the coast.

351. In 2004, Germany provided 30% of the containerised EU export volume sent east over the trade route to the ECSA; Spain was second with 15%, followed by Italy (14%) and France (12%). Westbound, Germany imported most of the containerised trade volume sent from ESCA to the EU (18%), followed by Italy (13%), Britain (12%), Belgium and France and Spain (11%) and the Netherlands (10%).

352. Until the end of the 1980s, governments in South America attempted to reserve cargo flows to their own national carriers, which not only hampered trade but also lead to very high freight rates. Cargo handling was, and is, expensive as well. Trade was liberalised by the 1990s, which led to the disappearance of several inefficient national lines.

353. Port congestion is a big issue, and delays are common. Port and landside infrastructure is notoriously bad in the region, and many years of development and much investment will be required to rectify the situation, which acts as a brake on export-lead growth. Port dues and tolls are high. Some channels are not dredged as deep as they should be, so draft and channel limitations hamper trends towards larger vessels. Offloading


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equipment is sometimes lacking or antiquated, and road connections between ports and the hinterland are poor. Unions are active, impose costs and labour restrictions, and sometimes disrupt trade.

Trade Volumes

354. The economies of Argentina and especially Brazil dominate the region, and are known for their recurring boom-and-bust cycles. At present, both countries are booming, exporting their way out of earlier periods of stagnation. Both countries devalued, reformed, and liberalised a few years ago. The ensuing recovery is stimulating trade and especially exports.

355. Figure IV-16 shows the volume of eastbound and westbound containerised cargo trade on the route, by direction, for 2000-2010, historical and projected. The volume of ECSA containerised exports eastbound greatly exceeds the volume of EU-25 exports westbound, and the discrepancy is expected to grow in future.

Figure IV-16 Europe-East Coast South America Trade Volumes

Europe - East Coast of South America Trade Volumes 2000-2010

0200,000400,000600,000800,000

1,000,0001,200,0001,400,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

TEU

s EastboundWestbound


356. Westbound container trade volume on the route has stagnated in recent years and is expected to remain flat, recovering only slightly by 2010. After faltering a bit in 2001-2002, eastbound ECSA exports to the EU-25 are expected to resume growth, from nearly a million TEU in 2005 to almost 1.2 million TEU by 2010.

Commodity Review

357. Figure IV-17 below shows the distribution of eastbound trade volume by commodity in 2004. Eastbound trade to Europe is dominated by agricultural products, which were 59% of container trade volume in 2004. Refrigerated products ranging from meat to fruit are an important component of agricultural exports to Europe. Wood and paper


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products were second (16%), followed by manufactured products (10%) and chemicals and raw materials (5% each).

Figure IV-17 2004 Eastbound Trade by Commodity

2004 Eastbound Trade by Commodity

59%

5%

3% 16%

0%

0%

10%

0%

1%

5%0%

Ag. ProductsApparelBeveragesChemicalssElectronicsEnergy ProductsMachineryManufactured ProductsRaw MaterialsTransportation Equp.Wood & Paper Products


358. Figure IV-18 shows the commodity distribution of westbound trade. Westbound trade volume from Europe was dominated by transportation equipment (24%), manufactured products (23%) and chemicals (20%). This is a "traditional" trade pattern, whereby agricultural products and raw materials are exchanged for finished goods.

Figure IV-18 2004 Westbound Trade by Commodity

2004 Westbound Trade by Commodity

10%

0%

1%

20%

3%

0%

9%

23%2%

24%7%




359. There are seventeen individual direct carriers active on the route, of which three are slot operators. The largest carrier on the route based on 2004 capacity was Hamburg Sud (38% of capacity), which pioneered containerising the route in the 1980s. The


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second is Maersk Sealand (28% of capacity). The Hamburg Sued group claims a 30% share of liftings in the market.

360. Most locally domiciled carriers disappeared when trade liberalised and national restrictions were eased. Two surviving Chilean carriers are CCNI and CSAV; CSAV operates on the ECSA route. CSAV has a local Brazilian and a Uruguayan subsidiary. Some of the old local names survive as foreign-owned local subsidiaries.

361. Container carriers on the route include:

• Alianca Navegacao e Logistica Ltda, Brasilian sister company of Hamburg Sud. • CMA-CGM SA • CSAV – Compania Sud Americanan de Vapores SA • Grimaldi Naples • Hamburg Sued • Hapag-Lloyd Container Linie GmbH (slot operator) • Libra (owned by CSAV) • Lykes Lines Ltd LLC (CP ships) • Maersk Sealand • Marfret • Montemar(owned by CSAV) • Mediterranean Shipping Company (MSC) • NYK Line • P&O Nedlloyd (acquired recently by Maersk) • Safmarine (Owned by Maersk) • Senator Line GmbH (owned by Hanjin) • TMM Lines (CP Ships)

362. Consolidation is affecting this list, shortening it. P&O Nedlloyd will be absorbed into Maersk, and Lykes and TMM will consolidate into CP Ships, which itself is being bought by Hapag Lloyd.

363. None of the three major global alliances operate on this route. That is, CHKY, the Grand Alliance, and the New World Alliance are absent. The alliances on this route tend to be rather informal arrangements, which frequently change.

Service Patterns

364. There have been recent restructuring of service patterns and arrangements concluded in May of this year on the route. There are now five major services groupings on the route offering dedicated regularly scheduled weekly or near-weekly service linking the east coast of South America to Northern Europe. Several of these services offer multiple sailings per week. MSC offers two services to the Mediterranean. There are two other important services, one using conventional ro-ro ships to the Mediterranean, and a major frequent Maersk service centred on Algeciras. Algeciras serves as a transhipment point, and as a gateway to the Mediterranean.

1. VSA4 - operated by CSAV, Litra, Lykes, and NYK. TMM has slots. There are two weekly slings. Links ECSA to North Europe.


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2. Sling One: Five ships averaging 2500 TEU are deployed on the route.

3. Sling Two: Seven ships averaging 2000 TEU. (NYK does not participate)

365. North Europe-ECSA joint service – this is a new structure as of May 2005. Alianca, CMA-CGM, Hamburg-Sud, and P&O Nedlloyd (Maersk). NYK has slots. There are three weekly “express services”, soon to be combined into two when larger ships are introduced, to North Europe with stops in Lisbon.

1. Brasil Express: six ships averaging 2500 TEU, to the Brazilian ports. 2. Plate Express: six ships averaging 5600 TEU to Brazilian ports, Rio &Buenos

Aires - plans were to phase this in by August 2005-08-25 3. Lambada Express: 5 P&O Nedlloyd ships of 2500 TEU, to Brazilian ports. –

Plans are to phase this out. The new River Plate Express will replace the Lambada services.

366. Maersk Sealand & Safmarine – this partnership runs four weekly services, all passing through Algeciras.

1. Plate (L-Class) – six ships of 4500 TEU. Links to Northern Europe, Rotterdam.

2. Itajai Express – 4 ships of 1700 TEU, shuttle, Algeciras to Montevideo, Rio, Itajai

3. Samba Service – 7 ships of 1700 TEU, links to Africa and Algeciras 4. Paranagua Express – 4 ships of 1800 TEU, links to Africa and

Algeciras

367. Europe-Guyanas-Amazon Service – CMA-CGM and Marfret. Six ships of 1200 TEU link north Brazil ports to Europe in near-weekly service.

368. Mediterranean Shipping Company – This strongly independent stand-alone carrier has three weekly services on the trade route, deploying some 18 ships averaging 2900 TEU. One service links the ECSA to Northern Europe. Two services provide links to the Mediterranean and South Europe. MSC appears to dominate service between ECSA and the Mediterranean.

369. Grimaldi Naples – operates two loops offering near-weekly service, also serving Africa

• South American Line - six ro-ro multipurpose ships averaging 1400 TEU • Southern Express Loop - five ro-ro multipurpose ships average 1200 TEU (also

called the northbound service.

370. The trade route is served by thirteen or fourteen sailings per week on average. There is speculation that China Shipping Container Lines, already active in South America, may extend its service to include a Europe-ECSA service


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There is Currently No Conference On This Trade Route

371. Unique among the several routes to Europe examined for this study, and for major trade routes generally, there is currently no conference functioning on this route. Until recently, the Europe East Coast South America Conference (EECSAC) set rates for trade between North West Europe and the East Coast of South America. (It did not cover Southern Europe or the Mediterranean ports.) The EECSAC had fourteen members, most of which still exist, and together they currently still carry the majority of trade on the route. As of early 2004 the members included: Alianca, CMA-CGM, CSAV, Contship, Hamburg-Sud, Euroatlantic Container Line SA, Hapag-Lloyd, Libra (Braztrans) Maersk Sealand, Montemar, NYK, P&O Nedlloyd, Safmarine, and Senator Lines GmbH. It is interesting to note that a rather small European carrier, Hamburg-Sud, survives on the route without benefit of a conference.

372. The challenge of the EECSAC was to try to maintain southbound or westbound rates, with very low space utilisation rates. They faced chronic westbound overcapacity due to the imbalance of trade flows. An attempt to impose an imbalance surcharge per container failed. In mid-2003 the freight rate from North Europe westbound had fallen to 200 to 300 Euros per TEU, with rumours of some US$100 rates from the Mediterranean. In late 2003 and early 2004 the EECSAC announced a series of hefty increases on westbound containers:

1. October 1 2003 – increase of US$335/TEU 2. January 1 2004 – increase of US$170/TEU 3. April 1 2004 – increase of US$310/TEU

373. These attempted rate increases all failed to stick. Conference discipline was absent.

374. The EECSAC suspended operations silently in March 2004. The conference disappeared, and so far the carriers have not seen fit to establish a new conference, nor revive the old one. There are several possible explanations for this situation.

375. It appears that the main reason that carriers are not reviving the conference is that they view the entire conference approach as antiquated and ineffective, at least in this instance. Conferences are seen as ineffective in setting rates and managing capacity. They cannot and do not set and enforce freight rates that are not fully consistent with market forces and global competitive realities. Under the old regime of national reservation practiced in South America until the 1980s, regulation and national carriers proliferated. Local carriers were both protected and favoured by government policy, and foreign carriers were considered outsiders, especially third-party carriers and were often barred from entry into the trade. The old conference was once dominated by such national carriers, and foreign operators tended to be outsiders if not interlopers. Pooling arrangements were common. Following the liberalisation of sea transport in South America in the 1980/90s, a number of protected and highly inefficient national lines in most Latin American countries disappeared. Included were Lloyd Brasileiro in Brazil and Empresas Lineas Maritimas Argentina, (ELMA).

376. When these local carriers disappeared, much of the old conference “natural constituency” disappeared. Also, at one time the conference may have in part


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accommodated local nationalistic and protectionist government policies, which changed under liberalisation.

377. Other contributing factor may be that some of the current operators like MSC are unwilling to participate in conferences. The cooperative arrangements among carriers on this route tend to be somewhat informal and short-lived anyway. The usual major global alliances do not operate on the route.

Capacity and Utilisation

378. Currently, there are five direct services to Northern Europe plus three to Southern Europe and the Mediterranean. These services are presently deploying an annualised combined net capacity of about 1.15 million TEU on the route during 2005. See Table IV-14 below, which presents direct service capacity estimate. The estimate is constructed based on current service levels. Many small vessels serve the region.

Table IV-14 ECSA-Europe Estimate of Deployed Trade Route Capacity

Capacity in TEUs, mid-2005

Operator/Direct Services

Freq.

Ships

Average Capacity

Fleet Capacity

Net Trade Capacity

To Northern Europe Europe-ECSA Joint Service 2 12 4000 48300 293000 VSA4 2 12 2200 26700 159000 Maersk 1 6 4500 27000 151000 Mediterranean Shipping Co 1 6 2900 17100 93000 Grimaldi Naples <1 6 1400 8400 30000 CMA-CGM & Marfret <1 6 1200 7200 23000 Subtotal to Northern Europe 7.7 48 2800 134700 749000 To Southern Europe via the Mediterranean Maersk Sealand Algeciras 3 16 1700 27600 187000 Grimaldi Northbound <1 5 1200 6100 31000 Mediterranean Shipping Co 2 12 2900 34200 186000 Subtotal, So. Eur. & Med. 5.7 21 4500 67900 405000 Total, ECSA to Europe

13.5

81

2,500

202,600

1,154,000

Source: Calculation by authors, based on data provided by Dynamar. Note: It is assumed that „Net Trade Capacity“ for this trade route is about 70% of the total annual TEU maximum capacity deployed by the carriers.

379. By this estimate, the estimated total of nearly one million TEU (993,000) coming eastbound on the trade route in 2005 approximately matches and slightly exceeds the net direct capacity on offer, estimated at 1,154,000 TEU. If both estimates are accurate, the eastbound capacity utilisation rate is about 85% in 2005. (This capacity calculation is also conservative, assuming that ships cannot in practice completely fill up, in part for reasons of loading and convenience, in part because other routes are served, and in part because of draft restrictions.)

380. In any event, it appears that currently eastbound lines head to Europe fully laden, operating at high capacity. Westbound, if all the estimated 327,000 TEU for 2005 were put on direct services, the capacity utilisation rate would be below 30%, a dismal


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number. Due to the trade imbalance, eastbound container ships on the route are fully loaded, and some cargo finds its way to Europe by transhipment in Bermuda or the U.S. where there is over capacity Eastbound. Westbound ships are one-third full or less.

381. Capacity on the direct service along the route has increased in recent years. Table IV-15 presents a time series calculation using the same logic, for North Europe (excluding the Mediterranean). Capacity seems to have grown more slowly than eastbound trade in recent years. Presumably in the downturn of 2000-2001, when trade was slow and Brazilian and Argentine exports were low, some excess eastbound capacity may have existed. If so, perhaps operators waited until the boom filled ships eastbound, before beginning to add capacity.

Table IV-15 The Evolution of direct Capacity, North Europe-East Coast South

America

Date Frequency Ships Average TEU Total TEU Net Annual Growth Aug 2005 7.7 48 2800 134700 749000 +5.4% Dec 2004 8.5 52 2400 124900 710500 +7.1% Dec 2003 8.5 52 2300 119600 663300 +7.1% Dec 2002 7.5 50 2300 115000 619500

382. It seems likely that service and capacity on this trade route will grow in lock-step with the market in the near future, accommodating eastbound trade at near-full capacity utilisation rates. If port infrastructure develops and channels are deepened, larger and more efficient vessels will quickly move on to the route.

Pricing

383. For general freight rates, pricing is in Euros southbound, and in US dollars northbound. Table IV-16 shows data on the range of prevailing northbound and southbound freight rates as of mid 2005. These are net of surcharges. These rates fluctuate by season, due to the cyclic nature of the trade, and are under constant review. The charge for reefers in particular is commodity dependent and seasonal.

Table IV-16 Container Rates – “Freight All Kinds”

Europe-East Coast South America

June 2005

Southbound from Europe

EUR 350-400 Per TEU dry containers EUR 800-900 Per TEU reefer boxes

Northbound to Europe US$1,800-2,200 Per 20’ standard container US$2,100-2,500 Per 40’ standard container US$2,200-2,500 Per 20’ reefer container US$3,100-4,000 Per 40’ reefer container


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384. There is of course a premium for northbound over southbound, of about two to one. A similar premium ratio is observed on other routes with a big trade imbalance.

385. These rates do not include the generally applied Bunker Adjustment Factor (BAF). As of June 15, 2005, the BAF was raised to:

1. EUR 175 per TEU

2. US$269 per TEU

386. The BAF surcharge is about 10-15% of northbound rates and nearly 50% on southbound rates, so it seems to function almost like an equipment imbalance surcharge. Interestingly, the BAF is apparently still commonly applied by most carriers at present, even though formally there is now no rate-making conference.

387. Currency Adjustment Factor (CAF) surcharges are not common on this trade route. This is possibly due to the fact that European exporters pay southbound freight charges in Euros, while northbound shippers pay freight rates in US dollars, the usual “reference currency“ for foreign exchange in Latin America.

388. In addition, Terminal Handling Charges (THC) are often charged on containers at European ports. Rates for handling dry boxes range from 100 to 170 Euros, varying from port to port. These were set by the old EECSAC, and are still generally applied.

Absence of a Conference, and Shippers and the East Coast of South America Route

389. The Europe East Coast South America Conference (EECSAC) used to be the rate setting body. By mid 2003, southbound space utilisation was below 50% and the average basis rates from North European Continental ports to ECSA destinations (for standard dry containers) had fallen to between EUR 200 and 300 per TEU. From the Mediterranean even incidental rates of less than US$ 100/TEU were reported.

390. Northbound, ships were full and freight rates were USD 900 to 1,100 per 20' and 1,200 to 1,600 per 40' standard box, excluding surcharges. Conference carriers announced increases of US$ 335/TEU effective 1 October 2003, followed by US$ 170/TEU on 1 January 2004, and a further USD 310/TEU effective 1 April of the same year.

391. None of these efforts were successful, possibly due to the mix of direct ports of calls and transshipment via Bermuda and Algeciras. Probably out of frustration because of these failures the conference members decided to suspend the Europe East Coast South America Conference (EECSAC) in March 2004.

392. There is at present no conference on this trade route. Whatever the cause, the situation provides an indication of what may happen on other routes if conferences disappear or are abolished. Briefly, the impact appears to be marginal or nil. This Conference may


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simply not matter much anymore and its abolition was simply a process of catching-up with reality.

393. There is not much evidence that carriers cooperate any more or less effectively on this route than they do on other trade routes. The route does not seem to be significantly more or less disorderly, or better or worse served, or more or less disorganised, than it would be if there was still a formal organisation of carriers.

394. The community of carriers serving the route are precisely that, a community, and a rather small and well identified one at that. The players all know each other and what is happening in their market, by and large, and have adequate sources of information. There are informal, bilateral and social venues for dialogue. Under these circumstances, the presence or absence of a formally constituted conference of carriers seems to matter very little, or not at all.

395. Note that certain key functions other than general tariff rate setting, normally thought of as the responsibility of conferences, are being taken care of on the trade route in the absence of a formally established conference. For example, the Bunker Adjustment Factor for the entire trade route is still being decided somehow, on a more or less common basis, as are terminal handling charges. This clearly indicates that there must be some discussion forum at play which is not covered by Regulation 4056/86.

396. General freight rates eastbound do not seem to be much lower or higher than on other routes. Westbound rates are low, but similar discounts exist on other imbalanced routes.

397. The market seemed quite stable during the transition from a conference regime to a non-conference regime. Capacity deployed on the route has actually increased. Larger ships are not being deployed on the route, possibly indicating that investment and modernisation continues.

398. It would appear that shippers moving cargoes on this trade route are not much affected by the absence of a formal conference, or perhaps not affected at all. Of course, the “no conference experiment” has only been going on for a little more than a year.

West Africa Geographic Definition

399. Geographically, “Western Africa” consists of the numerous countries along Africa's west coast that stretch from Mauritania in the north to Angola in the south, including: Senegal, Gambia, Guinea-Bissau, Guinea, Sierra Leone, Liberia, Ivory Coast, Ghana, Togo, Benin, Nigeria, Cameroon, Equatorial Guinea (including Sao Tome and Principe), Congo (Brazzaville), Congo (Kinshasa; formerly Zaire), and the Cape Verde Islands. The landlocked states of Burkina Faso, Chad, Central African Republic, Mali and Niger are part of the hinterland served by West African ports. Nigeria is the main importer on the southbound direction, receiving 29% of the container cargo coming in from Europe. Ivory Coast is the biggest exporter on the


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northbound leg of the route, originating 35% of the container cargo going from Africa to Europe.

400. The largest port in Europe for the West Africa trade is Antwerp, both southbound and northbound. Antwerp accounts for 35% of the southbound cargo going from Europe to West Africa and about 32% of the cargo coming from Africa to Europe. The West African container trade accounts for about 23% of the total Africa trade. Between 1992 and 2002 the West African containerised trade market has grown 13% per year.

Trade Volumes

401. Figure IV-19 depicts northbound and southbound TEUs, flowing over the trade route, based on statistics of imports and exports. The figure provides historical data since 2000, estimates of current volume, and projections through the year 2010, of container traffic between the EU-25 and Western Africa. In 2000, there was about 400,000 TEU moving southbound over the trade route, and 240,000 moving northbound. This is a small trade route.

Figure IV-19 Europe West Africa Trade Volumes

Europe - Western Africa Trade Volumes

0100,000200,000300,000400,000500,000600,000700,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

TE

Us Southbound

Northbound


402. Unlike some other trade routes, southbound container flows greatly exceed northbound flows in physical volume. Much of African exports are commodities, ranging from wood to ore to agricultural commodities to petroleum. Much of these African exports do not travel only by containers, but also by bulk carriers or other non-containerised transport. However, many of the various products which Africa imports from Europe are well suited for containers, and containers provide a welcomed additional level of security for high value imports.

403. Northbound volume dipped in 2002, partly due to the disruption of cocoa and other exports from Cote d’Ivoire due to the war there. The northbound volume will continue to stagnate with minimal growth over the coming years, as agricultural commodity markets are mature markets. Southbound trade volume has shown modest


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growth through the first half of the decade and should continue at moderate pace. Total volume will only increase 13% by the end of the decade. Western Africa is poor and is not developing at a fast pace; consequently, trade is not projected to grow rapidly.

Commodities

404. Figure IV-20 shows the distribution of TEUs of EU-25 containerised imports from Western Africa, by top ten EU import commodities, for the year 2004. As one would expect, agricultural products dominate, with 68% of volume. Wood and paper products are second with 15% and raw materials third with 10%.

Figure IV-20 West Africa to Europe by Commodity

2004 Northbound Trade by Commodity

68%

10%

0% 15%

3% 0%0%

3%

0%0%

0%

Ag. Products

Apparel

Beverages

Chemiclas

Electronics

Energy Products

Machinery


Raw Materials




405. The northbound trade is half the size of the southbound trade and only accounted for 246 thousand TEUs in 2004. It is dominated by one commodity: cocoa. The production of cocoa beans in West Africa represents 70% of the world market. Ivory Coast is by far the largest producer with Ghana ranking second. Amsterdam is the largest cocoa handling port in the world. It received 30% of the cocoa exported by Ivory Coast in 2004. Much of the trade in cocoa is not conducted by containerships. Thirty to fifty percent of the cocoa beans that are shipped north are carried un-bagged in conventional ships (mega-bulk). During 2004/2005 cocoa season 80% of all cocoa beans that were shipped to Amsterdam arrived in bulk.70 Containerships still compete with other vessel types for this northbound trade, accounting in part for the relatively weak northbound volumes and tariffs. While other routes are dominated by containerised fleets, the northbound trade from West Africa is still using other methods.

406. Some grinding capacity is being developed in West Africa. But due to higher storage costs (due to high temperature and humidity) and high energy costs, combined with a disinclination of investors to invest in Africa, the vast majority of cocoa processing is done elsewhere. Much of the world coca grinding is done in the EU (37%) with the

70 Dynamar B.V., N.W. Europe – West Africa Container Trade: Full Report – November 2004, p. 14.


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U.S. (13%) second. The two largest companies in cocoa processing are ADM and Cargill (Gerkens) and they are situated in the Netherlands.

407. The southbound trade is more evenly distributed across commodities. Figure IV-21 shows the distribution by TEU of EU-25 containerised exports to Western Africa, by top ten EU export commodities, for the year 2004. Agricultural products such as flour, onions, salt and sugar account for 41%. Ironically, agrarian Africa imports food from Europe. Second are manufactured goods (20%), then chemicals (9%), and transportation equipment 8%.

Figure IV-21 Europe to West Africa by Commodity

2004 Southbound Trade by Commodity

41%

0%7%9%

2%

0%

5%

20%

1%8% 6%

Ag. Products

Apparel

Beverages

Chemiclas

Electronics

Energy Products

Machinery


Raw Materials




408. This is a traditional post-colonial trade route pattern, with raw materials and agricultural products flowing north to Europe, and food products and finished products flowing south in return.

Lines Active on Trade Route

409. The container vessel trade on the Europe/West Africa is dominated by two partnerships:

1. The Bollore group’s two subsidiaries Delmas and Otal, which have been acquired by CMA-CGM, and

2. A.P. Moller’s Maersk Sealand and Safmarine.

410. These two partnerships combine for almost 60% of the market. In other words, two carriers effectively control this trade. No objection was raised by shippers regarding the two recent acquisitions.

411. The Africa Express Line offers reefer service northbound and NVO’s use southbound container space. Baco Liner runs a seasonal (cocoa season) LASH service northbound only. Compagnia Sud Americana (CSAV) with its partners offers a southbound service to Abidjan and then on to the east coast of South America. Nile Dutch Line and Grimaldi Naples both offer multipurpose on ro-ro vessels with Grimaldi Naples adding a route to the east coast of South America. Two small Portuguese lines,


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Portline and Transportes Maritimos Insulares, are dedicated to the trade between Portugal, the Cabo Verde Islands and Guinea-Bissau.

412. Seven individual carriers operate/participate in end-to-end services. Maersk Sealand/Safmarine and Delmas/Otal, Compagnie Maritime du Congo and Marfret buy slots, and Mediterranean Shipping Company provides indirect service via Las Palmas.

Service Patterns

413. There are a large number of services offered. Many use small ships, some very small, some use unusual or atypical vessels, and many services are rather infrequent.

1. Africa Express Line runs two northbound weekly reefer service

loops. One loop is serviced by four ships each with a capacity of 260 TEU, the other loop is serviced by four ships with capacity between 50 and 150 TEU.

2. Baco Liner offers a northbound LASH service every 13 days with

three barge carriers with a capacity of 625 TEU each.

3. CSAV offers a weekly loop serviced by six ships with an average capacity of 1,700 TEU.

4. Delmas/Otal offers one seasonal weekly loop serviced by five

container vessels with capacities of 1,600 TEU. a. A seasonal loop every 12 days is offered serviced by three

container vessels with a capacity of 1,100 TEU each. b. A loop every 13 days comes from Lisbon serviced by three

container vessels with capacities of 600 TEU. c. Delmas/Otal also offers ro-ro service every eight days

serviced by 6 ConRo ships in the 1,300 to 1,800 TEU range. d. It offers a northbound Conbulk service every 23 days on

average with four multipurpose ships with 900 TEU capacities.

5. Grimaldi Naples offers three ro-ro loops.

a. The Northern route is every nine days and uses six ConRo vessels in the 1,330 to 1,600 range.

b. The Central route is also every nine days and uses five ConRO vessels of 1,300 TEU capacity each.

c. The Southern route is every ten days and uses four ConRo vessels with capacity between 1,110 and 1,300 TEU capacity.

6. Maersk Sealand/Safmarine offers two full weekly loops each

serviced by six container vessels with capacity between 1,100 and 1,600 TEU.

a. It also offers seven transhipment loops from Algeciras to West Africa on a weekly basis serviced by vessels ranging in capacity from 1,500 to 2,500 TEU.


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7. Mediterranean Shipping Company serves West Africa from a hub in Las Palmas in the Canary Islands. It uses its South Africa services for the leg from Northern Europe to Las Palmas. It runs three services from Las Palmas to West Africa with one route continuing on to the east coast of South America.

8. Nile Dutch Africa Line offers a ro-ro loop every 11 days using four

ro-ro multipurpose ships ranging from 900 to 1,500 TEU. It also offers a multipurpose loop every 15 days with three multipurpose ships with capacity between 750 and 900 TEU.

9. Safmarine has a twice monthly multipurpose loop with four ships

with box capacities between 420 and 560 TEU. It also runs a twice monthly multipurpose loop that caters to the oil and gas industry using three multipurpose ships with box capacities around 420 each.

10. Transinsular offers a service between Portugal and Bissau every

eight days using two semi-container ships with capacity between 450 and 550 TEU.

11. Universal Africa Lines offers a charter loop that runs approximately

every ten days and the ports of call change depending on the trip. It is serviced by various multipurpose ships and two semi-container vessels with 350 TEU capacity.

414. The West African trade has several feeder services linking numerous small ports with larger ports. These services use Algeciras, Spain, Las Palmas, Majorca, Apapa and Tin Can Island, Nigeria, as hubs for access to West African ports. Some of the deep sea carriers such as Maersk Sealand, Delmas/OTAL, Safmarine and P&O Nedlloyd offer dedicated feeder services. There are also a number of smaller players including, CEC Lines, Ecomarine, Messina, OACL and UAL. These hubs not only serve as transhipment point for cargo going from Northern Europe to West Africa, but also for cargo from as far away as Asia.

415. Because much of the cargo travelling northbound on the route can be shipped in mega-bulk, there are also a number of conventional shipping services on the route. This route is one of the last places where containerships have not taken over virtually any and all cargo that can move in boxes.

1. Bremen Overseas Chartering and Shipping offers a ro-ro conventional loop every 22 days using four vessels, three Astrakhan-type ro/ro-multipurpose units with capacities of 562 TEU and one vessel with 442 TEU capacity.

2. Compagnie Maritime du Congo offers conventional one-way charter service twice a month using chartered ships of around 15,000 dwt capacity.

3. Conti-Amiramar offers monthly break-bulk, roundtrip and one-way charters with vessels with capacity of around 15,000 dwt capacity.

4. Conti Lines offers a monthly loop with chartered vessels with capacity between 15,000 and 17,000 dwt.


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5. Conti Horizon Line offers a monthly loop with chartered vessels between 15,000 and 20,000 dwt capacity.

6. Cool Carriers offers a weekly chartered reefer and multipurpose loop between Antwerp, Cotonou and other ports depending on cargo.

7. Euro Africa Shipping Lines offers a loop starting in the Baltic region up to four times a month using six multipurpose vessels with capacities between 10,000dwt and 14,000 dwt.

8. Sealift Parcel Services and Oceanic Cargo Lines both offer monthly loops with chartered multipurpose vessels with capacity of around 15,000 dwt.

416. Whether or not these services give way to containerised in the foreseeable future, and how long the switch-over process takes, remains to be seen. On this route, other ship types still offer an alternative to container vessels for some shippers.

The EWATA Conference

417. The Europe West Africa Trades Agreement (EWATA) includes the two main partnerships, Delmas/OTAL and Maersk Sealand/Safmarine, Nile Dutch Africa Line, CSAV, Libra, Lykes and TMM and formerly included West-Afrika Linien-Dienste GmbH & Co. (WALS) which dropped out in October of 2004. The conference still dominates southbound trade with the northbound trade experiencing significant competition from tramp shipping contracted on a vessel load basis to carry primarily the cocoa beans.

Table IV-17 2003 Southbound Carryings

% TEU Total Trade 100% 337,000 Conference Members 75% 252,000 Delmas/OTAL 30% 102,000 Maersk Sealand/Safmarine 28% 95,000 Nile Dutch 7% 24,000 WAL 5% 17,000 Non-Conference Members 25% 85,000 Grimaldi 8% 28,000 MSC 6% 19,000

Percentages my not add because smaller shares were not included Source: Dynamar B.V.

418. Table IV-17 displays the carryings split between conference and non-conference carriers for 2003. Conference members dominated the market in 2003 garnering 75% of the trade. The non-conference members were reported to have gained share in 2004 to make the split closer to 70/30 (WAL left the conference). There has been some entry and exit in the conference and the route over the last couple of years, which has had an effect on the ability of the conference to set rates. Although the percent of cargo carried by the conference is high, it is misleading. Because of the nature of the northbound cargo (bulk) and the excess capacity, the conference has a hard time


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setting rates due to competition with non-conference competitors and even competition amongst members. Maintaining discipline has been an issue, even though just two carriers dominate both the conference and the route.

419. Prior to joining the conference, CSAV along with its partners Lykes and TMM along with non-conference carriers Grimaldi, MOL and Mediterranean Shipping Company were outside the conference. The market share of P&O Nedlloyd, estimated at 5%, was captured by CSAV and its partners upon P&O Nedlloyd’s withdrawal from the market in October 2003. WAL's market share was put up for grabs upon its departure from the route in late 2004. CSAV and its partners have since joined the conference, but competition still exists from non-conference holdouts Grimaldi, MSC and MOL.

420. There is prior history here worth mentioning. In 1992 the Commission acted on a complaint by the Danish government and the Danish Shipowners Association, making the decision71 that shipping company committees that controlled the liner trade between France and Francophone Africa (11 former colonies in West and Central Africa) were illegal agreements under then Article 85 (1) (now Article 81(1)). Furthermore in this case the committees were determined to have held and abused a dominant market position in violation of then Article 86 (now 82). This decision, in the context of an environment marked by the devaluation of the CFA Franc and general trade liberalization in the region, contributed to the change of very traditional post-colonial trade arrangements in the region.

421. In 1993, the Commission made another decision72 in the case of CEWAL et al, finding that members of the conferences CEWAL, COWAC and UKWAL had infringed Article 81 by establishing a geographically defined market sharing agreement whereby carriers agreed not to compete as an independent within the geographic boundaries of the conferences to which they did not belong. They were also found to have abused dominant market position, specifically an agreement with a government agency that all its cargo would travel on conference lines; and unfair competition practices against non-conference lines. These decisions contributed to the decline of conference power on this route.

Utilisation Rates

422. Table IV-18 shows the 2004 carrier capacity on the route. WAL is missing from the list because it left the route in October 2004.

71 See OJ 1992 L 134, page 1. 72 OJ 1993, L34, page 1.


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Table IV-18 2004 Carrier Capacity

Annualised

capacity share Annualised net capacity

Maersk Sealand/Safmarine 38% 274,000 Delmas/OTAL 25% 182,000 Grimaldi 13% 94,000 Nile Dutch 6% 42,000 CSAV/Montemar/CP Ships 5% 39,000 Mediterranean Shipping Company 4% 28,000 AEL (NVO's) 2% 14,000 Transinsular 2% 14,000 Baco 2% 12,000 UAL 1% 9,000 Portline 1% 6,000 Total 100% 714,000

423. Conference members, Maersk Sealand, Delmas/OTAL, Nile Dutch and CSAV control 74% of the recent route capacity. Conference members Delmas/OTAL, Maersk Sealand/Safmarine and Nile Dutch's utilization rates are 56%, 35% and 57% respectively. There appears to be excess capacity on the route.

Pricing

424. The conference publishes a detailed schedule of general freight rates (tariffs) on its website, www.ewata.org/img/EWATA.pdf. This is a traditional formal published rate agreement among the carriers, issued in January 2004, updated since, and apparently currently in force. Rates differ by 32 African ports, which are categorised into 6 zones, and by UK versus Europe. Rates vary by commodity, which are divided into three broad groups for containerised cargo. Rates are quoted in British Pounds and in Euros, depending upon whether the link is to the UK or to the continent.

425. The tariff schedule discriminates by commodity. “Group II” Commodities include everything from cement to food to fertilizer to fodder, i.e. dry goods which are either moisture sensitive or perishable. Southbound from Europe, Group II rates vary from 1775 Euros per TEU delivered to Abidjan, (zone 1, a major port); up to 3000 Euros per TEU to remoter Warri or Calaba (zone 6). That is, distant and remote ports pay more. Group I Commodities are “all commodities other than Group II or reefer cargo” and are uniformly 100 Euros per box less.

426. Southbound reefer freight rates are published for both 20 foot and 40 foot containers. Forty foot boxes are about 50% to 60% more expensive than twenty foot reefer boxes. From Europe, a twenty foot reefer delivered to Abidjan is 3,000 Euros, versus 7,700 to Cabinda or 8,200 to Namibe farther south. Forty foot reefer boxes delivered to Abidjan cost 4,400 Euros, versus 10,760 Euros to Cabinda or 11,260 Euros to Namibe.

427. Southbound there is a 10% surcharge for hazardous cargoes, and additional charges for special equipment. Some countries require tolls. European “outports” pay an extra 250 to 1,000 Euros per container, and Terminal Handling Charges in Europe range from 75 to 1,000 Euros per container.


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428. Southbound there are Currency Adjustment Factors and Bunker Adjustment Factors published in Euros and pounds per 20’ and 40’ container. Adjustments are made as often as monthly and the BAF and CAF are formally reviewed each month.

429. Southbound, certain African ports require a “Congestion Surcharge”, ranging from 50 to 400 Euros per box, and this surcharge is also updated regularly. Shipments to violence-plagued Ivory Coast, Sierra Leone, and Liberia are charged surcharges for risk. A number of countries charge tolls. There is a welter of port-specific special fees and charges, including scanning fees. There is a heavy lift surcharge.

430. There is an array of tariffs for conventional cargo, of similar specificity and complexity.

431. Northbound, there is also a complex array of tariffs. They vary by commodity shipped, size of container, whether bagged or bulk, zone of origin. There are also THCs.

432. Basically, northbound freight rates are generally less per TEU than southbound freight rates, as one may expect given the value of the goods transported, and slack capacity northbound.

Conference and Shippers on the West Africa Trade Route

433. The Europe-West Africa trade is for several reasons very difficult to operate for the carriers:

1. There are only few big customers (who thus have negotiation power)

2. There are large directional volume imbalances

3. There are strong currency fluctuations (although not with Francophone Africa's CFA)

4. there is institutional instability and poor infrastructure

5. Much of the cargo (cocoa beans) is carried in non-container mega-bulk ships. The principle northbound commodity, cocoa, can travel by either unscheduled conventional ships entirely outside the conference, or by container vessels, defeating conference attempts to maintain northbound rates and volumes

6. The biggest single northbound shipper, the Ivory Coast cocoa board, has considerable negotiating power to achieve low rates

7. In recent years there has been an increasing share of imports from South Asia.

434. Traditionally several conferences and consortia engaged in the trade to which belonged the United Kingdom West Africa Line (UKWAL) and the Continent-West Africa Conference (COWAC) and several local West African carriers. These groups were accused of anticompetitive business practices before the European Commission (see above). Maersk et al complained to the EC about the restrictive actions of the


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conferences, which were hit with fines. Delmas negotiated with the EC and for a reduction in fines it agreed to resign from the three existing conferences. This led to the dissolving of the several rate-setting conferences.

435. The short term consequence was a uniform tariff, which exceeded former rates by more than 50%, and the introduction of BAF and CAF surcharges after some forwarders had already withdrawn from the trade. Still Delmas and OTAL acted as outsiders, but were said to follow the tariff increases with some time delay.73

436. At one time there had been local carriers, national lines, which belong to the old conferences. These benefited by the practice of reserving cargoes for them, although conflict arose due to differing interpretations of the UNCTAD 40/40/20 rule. West African operators believed the split for cargo being handled by conference carriers should be 50/50. There are now no indigenous national carriers left on the Western Africa trade, all have been liquidated and ceased to exist. SAFMarine was sold to European interests.

437. By 2003 capacity oversupply still existed, although conference members agreed on capacity cuts. Lower freight rates were being offered by the independent operators CSAV and CP Ships to gain market shares, even with P&O Nedlloyd withdrawing from the trade74 and MOL reducing its fleet deployment on the trade by 2 ships, thus reducing the capacity by around 40,000 TEU.75 Nevertheless at this time P&O Nedlloyd considered the possibility of re-entering the trade if conditions improved.

438. On the first September 2003 Delmas and OTAL entered the conference; previously they had been independent operators. It was a reaction to the expansion of MOL and CSAV in the trade over the recent 2 years, with significant freight rate declines. The market share of the conference rose then to 70%.76 In 2004 niche player Deutsche Africa-Linien (DAL) withdrew from the Northern Europe- West Africa trade because of high charter costs combined with steady decreasing southbound freight rates. The announced reason was low rates, DAL was a conference member.77

439. There is demand on the route for service, but cost pressures arise from the unique operational problems in West African ports, which alone can cause carriers to withdraw services. Although the formerly independent operators CSAV and CP Ships joined the conference, the chairman Thierry le Roux just warned, that without rate increases the quality of services could no longer be sustained, and that the existence of service could even be at stake.78

440. Conferences have a spotty record on this route. They have come and gone, and been subject to legal discipline for their practices. The volume of trade is small and a large

73 Comp. ci-online Library: EWATA or bust, 1st January 2001. 74 The probable reason lay within the difficult conditions of the trade, especially in poor utilization rates with no

more than about 85% even in peak times and poor revenues. Comp. ci-online Library: North/south trade cargo analysis, 1st November 2003.

75 Savvides, Nick: West Africa rate skirmish set to spill over into next year, from ci-online Library, 15th December 2003.

76 Comp. ci-online Library: EWATA swollen by Delmas/OTAL September entry, 1st October 2003. 77 Thorby, Chris: WAL withdraws from troublesome West Africa trade, from ci-online Library, 10th June 2005. 78 Dekker, Neil: EWATA sets sights on 'crucial' general rate increase, from ci-online Library, 29th July 2004.


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portion of it can be shipped by the less expensive mega-bulk method. Growth is also flat and not expected to increase in the future. Conferences have found it difficult to set rates. Delmas at one point refused to cut rates and managed to institute a slight increase, but lost 5% market share. In July 2004, WAL announced it would discontinue its container liner service between Europe and West Africa effective in October. WAL cited a "lack of prospects for a stabilisation of the Europe/West Africa trade."79 The increasing costs, low rates and excess capacity may cause more carriers to exit the route.

441. This route is a classic example of market conditions traditionally cited in justification for the existence of conferences in order to ensure stable service in weak markets. But, service provided is very expensive, and conference rates are high and adhered to. While any one carrier may decide to leave the route, it seems very likely that carriers will serve the route in the absence of the conference. If any of the conferences examined in this study play the traditional service managing role of conferences, probably this one does at least for southbound cargo, if only because two players dominate both the conference and the route. However, these two players would still dominate the route in the absence of the conference, leaving service much the same.

442. The “EWATA TARIFF” is a classic formal rate-setting arrangement. The market is thin and stagnant; costs are high, and many factors boost costs. There are often excess capacity, and low utilisation rates. Perhaps the market is over-served, possibly in part due to high rates. Most of the capacity on the route belongs to carriers in the conference. The EWATA conference is probably the most classical example of a traditional conference in this study, i.e. conference rates are high and carriers stick to these rates.

Indian Sub Continent Geographic Description

443. The regional hinterland of the Indian Subcontinent includes the economies of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Bhutan and Nepal are landlocked and receive cargo via Kolkota. The small Maldive Islands are “sealocked“, receiving transhipments from Colombo.

444. The region is served by the ports of Port Qasim and Karachi in Pakistan; Mundra, Nhava Sheva, Tuticorin, Kandla, Pipavav and Kochi (Cochin) on the west coast of India; Colombo in Sri Lanka; Chennai (Madras), Vishakhapatnam, Haldia and Kolkata (Calcutta) on the east coast of India; and Chittagong in Bangladesh. Transhipments serving this region occur offshore in the Red Sea (especially Jeddah), Persian Gulf/Arabian Sea ports, Colombo, and Singapore.

445. In principle carriers can transit the Suez Canal and the Mediterranean, or to go south around Africa and the Cape of Good Hope. In practice, even the largest existing container ships can operate in the Suez Canal, so nearly all this traffic goes via Suez,

79 Dynamar B.V., N.W. Europe-West Africa Container Trade: Full Report, November 2004, p. 30.


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minimising the distance in transit. Very little if any sub-continent traffic goes around the world the other way, a much longer voyage. Much of this trade is associated with the Persian (Arabian) Gulf trade, which lies along the route. Furthermore, this trade route lies along the main East Asia- Europe trade route.

446. The region is partitioned into two zones. The western zone is the western coast of India and Pakistan by the Arabian Sea, adjacent to and served by transhipment at ports in the Persian Gulf, Arabia, and the Red Sea. The western zone is well served by dedicated direct services from Europe. The eastern zone includes Sri Lanka, the eastern coast of India, and Bangladesh, along the Bay of Bengal. The Bay of Bengal in the east zone is not directly served from Europe, other than by links via the very important port and transhipment centre of Colombo, Sri Lanka, as well as Singapore and Port Kelan, Malaysia.

447. In 2004, France was the leading EU-25 exporter in TEU volume terms to the Indian subcontinent, with 21% of eastbound trade. Germany was second in eastbound exports with 18%, the Netherlands had 14%, Britain had 11% and Belgium 9%. In the same year Britain received 23% of the westbound TEUs sent along the trade route, Germany received 16%, France and Italy got 11%, and Spain and Belgium took 9%. Hamburg is the leading European port for this trade. India accounts for well over half of the EU-25’s container trade with the subcontinent region.

Trade Volumes

448. Trade volume is growing. Figure IV-22 shows historical and projected container volumes along the route from 2000 to 2010, eastbound and westbound, based on trade data. Westbound EU-25 imports were about 426,000 TEU in 2000 and are projected to more than double to over a million TEU by 2010. Eastbound EU-25 exports were about 227,000 TEU in 2000 and will grow even faster to over 650,000 TEU by 2010. The imbalance of westbound volume over eastbound is thus expected to continue.

Figure IV-22. Europe – Subcontinent Trade Volume 2000-2010

Europe - Sub Continent Trade Volumes 2000 - 2010

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449. Growth of containerised subcontinent imports and exports in general and along this route in particular are forecast to grow strongly in future, as the main economies of the subcontinent continue to grow rapidly. If India and Pakistan and others begin to match the recent performance of China, there is considerable upside potential.

Commodity Review

450. Nearly a third of the boxes sent eastbound to the subcontinent from the EU in 2004 contained wood and paper products (31%), 20% chemicals, 19% agricultural products, 11% manufactured products, and 8% machinery. See Figure VI-23.

Figure IV-23 2004 Eastbound Trade by Commodity

2004 Eastbound Trade by Commodity

19% 0%

3%

20%

2%

0%

8%11%4%

2%

31%



451. Forty-two percent of the goods sent west by container from the subcontinent to Europe in 2004 were manufactured products, 28% contained apparel, and 15% contained agricultural products. As the subcontinent economies develop, the trade has largely lost its traditional colonial nature. See Figure IV-24.


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Figure IV-24 2004 Westbound Trade by Commodity

2004 Westbound Trade by Commodity

15%

28%

0%

5%

2%

42%

3%1%

2%

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1%



452. Eighteen or nineteen carriers were offering container service on their own ships on the trade route in 2005, along with another 11 carriers offering to arrange service. The largest fleet was deployed by Maersk (129,000 TEU), and the second was Mediterranean Carrier Service (MSC) deploying a fleet of 115,000 TEU. Another very large player of long standing is the Europe Pakistan India Consortium (EPIC). There is still one last remaining national carrier, the Shipping Corporation of India (SCI), now operating in partnership with foreign containership operators.

453. In 2000, there were only three services on the route: EPIC, Maersk Sealand, and India Europe Line (IEL). In early 2001, two more services were launched: the India Europe Express (IEX) consortium (Evergreen, Coscon, K Line, and MISC) and the stand-alone Mediterranean Shipping Company (MSC).

454. Most of the world’s major containership operators (19 of 25) are currently active on this trade route. Vessel operators presently operating vessels on the route include: Asia Pacific Lines (APL), China Shipping Container Lines (CSCL), CMA CMG (France), Contship (CP Ships), Coscon (Cosco Container Lines), Evergreen, Gold Star Line, Hanjin, IRISL Container Line, „K“ Line, Lloyd Triestino, Maersk Sealand, Malaysia International Shipping Company (MISC), Mediterranean Shipping Company (MSC), Norasia, P&O Nedlloyd, Shipping Corporation of India, Yang Ming and Zim. Many others offer slots.

455. These operators are grouped into five alliances at present:

1. EPIC3 : CMA-CGM, Contship (CP Ships) and P&O Nedlloyd 2. ISES: Evergreen, K Line, MISC, Yang Min, SCI, and ZIM 3. CHKY Alliance: Cosco, Hanjin/Senator, K Line, Yang Ming 4. Grand Alliance: Hapag-Lloyd, MISC, NYK, OOCL, P&O Nedlloyd 5. New World Alliance: APL, Hyundai, MOL


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456. With the Maersk takeover of P&O Nedlloyd, it will become the biggest container operator on the trade route by far. Maersk is also withdrawing from the Grand Alliance. So, the organisation of the industry on this trade route will continue to evolve in future, as will service patterns.

Service Patterns

457. There are five services (largely) dedicated to the Europe-Indian Subcontinent trade route. There are six other services aimed at other trade routes with East Asia that also serve the Europe-Indian Subcontinent trade route.

458. Dedicated Services: There are presently no less than five dedicated regularly scheduled round trip weekly sailing between ports in Europe and ports in the subcontinent. Two are stand-alone operators, three are consortia:

1. EPIC3 offers service on six ships of about 4,200 TEU each 2. Maersk Sealand (AE-3) offers weekly service on six ships of about

4,600 TEU 3. Mediterranean Shipping Company (MSC) –seven ships, 2300-3500

TEU 4. Indian Subcontinent Europe Services (ISES) seven ships, 2200-

3300 TEU 5. IRISL Container Line – (Europe Container Line) seven ships, 2200

to 3300 TEU

459. Colombo Roundtrip Operations: In addition there are three weekly roundtrip East Asia-Europe operations linking Europe to Colombo, Sri Lanka, serving the entire subcontinent region by transhipments to and from Colombo:

1. CHKY Alliance – eight ships, 5400 TEU, linking Europe and East Asia

2. Grand Alliance- 8 ships, 3600 TEU, Europe/Red Sea/Gulf/Singapore/Indonesia

3. Evergreen, Lloyd Treistino – 12 ships, 5400 TEU – Europe to East Asia/Pacific

460. There is weekly service offered by thirteen 2900 TEU ships operated by China Shipping, Gold Star Line (ZIM) and Norasia that provide a dedicated westbound round-the-world service.

461. In addition there are two weekly „Colombo Westbound“ operations, which help shippers deal with the imbalance of westbound cargoes exceeding eastbound.

1. CHKY Alliance - operates 12 ships of 4300 TEU on a pendulum service, which from Europe visits many East Asian and Pacific ports before calling on Colombo westbound

2. New World Alliance - CEX – eight ships, 5400 TEU on average, linking Europe with East Asia, calling on Colombo westbound


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462. All in all, there are eleven weekly container sailings connecting Europe to the Indian Subcontinent. All of them serve other trade routes to some extent, even the dedicated services (e.g. Arabian Gulf), but especially the East Asia services. There is an extensive network of feeder operations linking minor ports to transhipment centres, on both east and west. This is a very well served region. The trade route/service overlap makes the capacity allocation to various trade routes a quite arbitrary matter. That is, the subcontinent trade overlaps with the Arabia/Persian Gulf trade to some extent and the Far Eastern trade to a larger extent.

Review of Conference Data

463. The trade conference for this trade route, the India Pakistan Bangladesh Ceylon Conference (IPBCC), is headquartered in London. The conference has provided data on conference liftings by direction, for 1995 to 2004 annually, and for year to date up to May, 2005. See Table IV-19. Westbound conference traffic nearly tripled in nine years, while eastbound traffic more than doubled. Growth has been volatile, with strong surges in some years, and low or negative growth in other years. Conference liftings have grown along with the total market volume.

Table IV-19 IPBCC Trade Growth 1995-2004

TOTAL TRADE

By Direction TOTAL TRADE (Consolidated)

Year West-bound

% change on Year

East-bound

% change on year Total

Trade % change

on year 1995 194884 139444 5.10 334,328 1996 219266 12.51 146630 5.15 365,896 9.44 1997 241782 10.27 173056 18.02 414,838 13.38 1998 271245 12.19 144793 -16.33 416,038 0.29 1999 271208 -0.01 182328 25.92 453,536 9.01 2000 304447 12.26 178127 -2.30 482,574 6.40 2001 306189 0.57 198224 11.28 504,413 4.53 2002 343536 12.20 248535 25.38 592,071 17.38 2003 487568 41.93 271281 9.15 758,849 28.17 2004 578812 18.71 320311 18.07 899,123 18.49 2005 YTD 279849 162969 442,818

Source: IPBCC 9 Years increase

383,928 197.00 180,867 129.71

564,795 168.93

464. Some twelve of eighteen vessel operators operating containerships on this trade route in mid 2005 belong to the IPBCC. There are also conference members not deploying their own capacity. Members of the conference include CMA-CGM, Contship, Evergreen, Hapag-Lloyd, K Line, Maersk Sealand, MISC, Norasia, P&O Nedlloyd, SCI, Yang Ming, and Zim/Goldstar. Non-members operating ships on the route include APL, China Shipping, Cosco, Hanjin, IRISL, and MSC.


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Capacity and Utilisation

465. As of 2004, by one calculation IPBCC conference member shipping supplied 65% of eastbound TEU capacity, and 59% of westbound TEU capacity on this trade route. See Table IV-20 (which is not data from the conference). That is, non-conference members supplied 35% of eastbound TEU capacity, and 41% of westbound TEU capacity. A glance at the data shows how carriers use creative routing schemes to cope with the imbalance of westbound demand over eastbound demand. Both conference members and the non-conference carriers provide more capacity westbound than they do eastbound.

466. By combining this data with 2004 TEU lifting data supplied by the conference (which is admittedly mixing possibly inconsistent data sources), we can estimate utilisation rates by direction. This approach suggests that in 2004 the conference utilised only about 56% of its capacity eastbound, but as much as 98% of its capacity westbound. Even though capacity available westbound greatly exceeds that eastbound, there apparently remains a lot of excess unutilised space eastbound.

467. The fact that many carriers with much of the routes capacity do not belong to the conference, by itself would seem to suggest that the conference does not rigidly control the trade route container market. The carriers do seem to be achieving very high utilisation rates westbound.


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Table IV-20 Europe/Indian Subcontinent Container Capacity

Capacity in 2004, by carriers active in mid 2005

Non-Conference Carrier Capacity Carriers not in IPBCC 2004 Eastbound TEU 2004 Westbound TEU APL 0 68,600 China Shipping 0 4,200 Coscon 16,400 26,000 Hanjin 28,100 100,000 IRISL 55,800 88,500 MSC 72,400 114,800 Total, Not in IPBCC 172,700 302,100

Conference Carrier Capacity

Members of IPBCC 2004 Eastbound TEU 2004 Westbound TEU CMA-CGM 30,100 47,700 Contship 30,100 47,700 Evergreen/LT 55,400 87,900 Hapag-Lloyd 3,400 5,500 K Line 10,700 17,000 Maersk Sealand 81,600 129,300 MISC 19,100 30,300 Norasia 0 59,100 P&O Nedlloyd (Maersk) 46,500 73,700 SCI 17,500 27,800 Yang Ming 12,100 19,200 ZIM/Gold Star 13,600 33,900 Total, Members of IPBCC 320,300 578,800 Total Capacity on Route, Conference Plus Non-Conference Carriers

492,800 981,000

Source: Dynamar calculations based on corporate data.

Pricing

468. Here we review the IBPCC general freight rates by direction, eastbound versus westbound, for the ten year period 1995-2004, for twenty foot and forty foot containers. See Figures IV-25 and 26. The directional disparity is rather small compared to most other routes, considering the very large discrepancy between east-west cargo volume differentials, east-west capacity offered differentials, and east-west capacity utilisation differentials. For example, in 2004 the eastbound rate was $1,000 per TEU, versus $900 per TEU westbound. That small westbound premium seems suspiciously low, as does the fact that many rates are set rounded to the nearest hundred dollars. By contrast, on the busier Europe/East Asia route, the premium of westbound rates over eastbound rates has recently been over two to one. Also, these Europe/Indian Subcontinent rates do not closely track the trajectory or profile of Europe/East Asia rates; one would suppose that they should, as the one route overlies the other to a large degree and they are served by many of the same carriers.


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Figure IV-25 IPBCC – Average Eastbound USD Tariff Rate Levels 1995-2004

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40 4000 3300 2200 1950 1850 1700 1740 1800 1900 2000

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Source: IPBCC.

Figure IV-26 IPBCC – Average Westbound USD Tariff Rate Levels 1995-2004

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

469. There is geographical and operational overlap between the Europe-Far East trade and the IPBCC trade with the same ships being used for many segments of the two trades. That is, the Far East ships are being utilised to carry IPBCC traffic, which is an efficient use of the capacity, but it does question the need for the two separate conferences. Westbound, recent IPBCC rates from the subcontinent to Europe are only about half those of the FEFC rates for westbound TEUs going from the Far East to Europe. Eastbound, the rate for a TEU going from Europe to the subcontinent is similar to the rate for a TEU going much farther on the east Asia. The data appears to suggest that the premium of westbound rates over eastbound rates, in spite eastbound slack in the system. One possible explanation is that the IPBCC published rates may not reflect those actually charged.

470. Still, these IPBCC rates seem to indicate that freight rates fell in the late 1990s, and have stayed down since. This is consistent with the fact that two new dedicated container services have sprung up since the turn of the millennium, and that established players have increased capacity offered.


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Conference and Shippers on the South Asian Trade Route

471. Consider the geographic position of the Indian Subcontinent, which sits astride the high-volume East-Asia/Europe trade route and adjacent to other markets such as the Middle East. Operators coming to/from East Asia are always in a position to swoop in and pick up traffic to/from the subcontinent. Operators serving the Arabian Gulf and numerous other nearby markets (such as Singapore) will be able to easily reach over and serve the subcontinent. Geography appears to ensure that there will always be implicit competition from opportunistic potential entrants serving adjacent routes. To the extent that this is true, no market arrangement by ship operators seems likely to benefit carriers at the expense of shippers or consumers to any great extent in the long run in this market.

472. This market is not large, yet it is served by numerous services, who of course are also serving other markets to some extent. Eleven weekly sailings provide frequent service given cargo volumes. The large number of carriers participating in container operations on the trade route by itself suggests competition and an absence of collusion.

473. The conference has not been able to restore the dramatic fall in freight rates that occurred in the Eastbound direction in 1997. This is likely due to the dominance of the transhipment operations of cargo carried on the Europe to Far East vessels. There is not much evidence of rationing of capacity, or deterrence of entry particularly as the trade can be serviced by vessels whose main haul is on other trade routes in combination with feeder services or transhipment either at Singapore or Dubai. Many carriers do not even participate in the conference.

474. It is true that westbound capacity appears to be fully utilised at present. It also appears that carriers are ready to deploy additional westbound capacity whenever demand conditions warrant the investment.

475. Service appears to stable and frequent and reliable enough to serve the market, although service schedules and arrangements change frequently. There are many non-conference carriers. There is no indication that the conference plays a role in providing more or less stable service. There is no indication that conference carriers are more or less reliable than non-conference carriers.

Southern Africa Geographic Definition

476. Geographically, “Southern Africa” refers to the ports of the Republic of South Africa, Namibia, and Mozambique. The landlocked states of Lesotho, Swaziland, Botswana, Malawi, Zambia and Zimbabwe are part of the hinterland served by Southern African ports. In terms of economics and demography, as well as maritime trade, the Republic of South Africa dominates this trade route, as the largest and most advanced economy in sub-Saharan Africa. This is considered a ‘mature’ trade route.


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477. The major ports of call in Southern Africa include Capt Town, Durban, Port Elizabeth, East London, and Richards Bay in The Republic of South Africa; Walvis Bay and Luderitz in Namibia; and Maputo in Mozambique. There are a total of fifteen ports in these three countries. Ports of call in Europe offering direct regular service to Southern Africa include Hamburg and Bremerhaven in Germany; Newcastle, Immingham, Sheerness, Tilbury, Felixstowe, Southampton and Bristol in Britain; Amsterdam and Rotterdam in the Netherlands; Dunkirk, Le Harve and Marseilles in France; Livorno in Italy; Santander and Vigo in Spain; and Leixores and Lisbon in Portugal. Most of the smaller ports are however served either via feeder vessels or by inland transportation.

478. Britain was the EU-25 leading importer from Southern Africa by volume in 2004, at 23% of northbound TEUs. Germany and the Netherlands tied for second in imports, with Belgium and then France close behind. Germany leads southbound trade volume with 28%, France is second, Britain third, and Italy is fourth.

Trade Volumes

479. Figure IV-27 depicts total, northbound and southbound TEUs, flowing over the trade route, based on statistics of imports and exports (Source: Global Insight). The figure provides historical data since 2000, estimates of current volume, and projections through the year 2010, of container traffic between the EU-25 and Southern Africa. In 2000, there was about 200,000 TEU moving southbound over the trade route, and 300,000 moving northbound. Northbound traffic is expected to continue growing faster than southbound traffic, increasing the imbalance in north-south volume. By 2010, northbound trade is projected to increase to some 527,000 TEU, with southbound increasing to nearly 300,000 TEU.

Figure IV-27 Europe – Southern Africa Trade Volumes

Europe - Southern Africa Trade Volumes

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s SouthboundNorthbound



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Commodities

480. Figure IV-28 shows the distribution of TEUs of EU-25 containerised imports from Southern Africa, by top ten EC import commodities, for the year 2004. As one would expect, agricultural products dominate, with 46% of volume. Manufactured products are second with 14%, raw materials are 13%, and wood and paper 8%.

Figure IV-28 2004 Northbound Trade by Commodity


46%

4%3%

13%

5% 8%

0%5%

1%

2%

14%

Ag. Products

Apparel

Beverages

Chemiclas

Electronics

Energy Products

Machinery


Raw Materials




481. Figure IV-29 shows the distribution of TEUs of Southern African containerised imports from the European Community, by top ten EU export commodities, for the year 2004. Manufactured products lead with 34%, chemicals are second with 15%, agricultural products third with 14%, transport equipment fourth with 12%, and wood and paper with 10%.


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Figure IV-29 2004 Southbound Trade by Commodity


14% 1%

3%

15%

4%

0%

8%

34%

1%

12% 10%

BeveragesChemiclasElectronicsEnergy ProductsMachineryManufactured ProductsRaw MaterialsTransportation Equp.Wood & Paper Products



482. Dedicated regular container operations on this trade route are dominated by the round-trip full container services of the Southern Africa Europe Container Services (SAECS) consortium, and the stand-alone Geneva-based Mediterranean Shipping Company. Maritime Carriers Shipping GmbH & Co (MACS) offers a less frequent „multipurpose“ service on lo-lo and ro-ro vessels in association with SAECS.

483. LauritzenCool & Seatrade offer a seasonal reefer service with dedicated reefer (refrigerated) vessels. Thirteen individual carriers operate/participate in end-to-end services.

484. SAECS Consortium: partners include DAL, Maersk Sealand, P&O Nedlloyd, and Safmarine the latter three are effectively the same company). Slot charterers include Consortium Hispania Lines SA and Transatlantic Southern Africa Services. These lines effectively are the Conference lines.

485. The Mediterranean Shipping Company (MSC) is a stand-alone service accommodating two slot-charterers, Lloyd-Triestino (owned by Evergreen) and H. Stinnes Linien. In early 2004, a new carrier chartered a small new 750 TEU vessel and tried to start up service on the route. The owner took back the ship after one voyage.

Service Patterns

486. The SAECS consortium offers two „loops“ of complementary end-to-end container services, each on a weekly basis. The core service is offered by six new larger vessels in the 4,000-5,000 TEU range. The intermediate service is offered by six smaller vessels in the 1,700-2,100 TEU range, operated by Maersk/Safmarine. In 2005 SAECS „re-tonnaged“ its core service with new-builds, and upgraded its refrigerated service.


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487. MSC offers weekly container service on eight ships in the 3,200 to 3,500 TEU range. In 2003, MSC separated its Southern African services from its Indian Ocean and Australian services.

488. These two regular main container services between them offer three sailings per week (MSC and SAECS). There are two other services, one seasonal and the other multi-purpose.

489. LauritzenCool & Seatrade offer seasonal weekly reefer service from January to September to accommodate refrigerated fruit shipments. Some regular service is also offered.

490. MACS offers multipurpose service with four lo-lo ships of 1,900 TEU capacity and two ro-ro ships of 1,000 TEU, with a frequency of about twelve days.

The ESAC Conference

491. The Europe-Southern Africa Conference (ESAC) includes the main consortium, SAECS, and the multi-purpose lo-lo and ro-ro carrier MACS. The two carriers of the ESAC have been quite successful in recent years by most relevant performance criteria. The market has grown, as have conference liftings, and conference market share has increased, in other words, the SAECS share.

492. Table IV-21 shows TEUs carried by the conference (SAECS), and by non-conference vessels, by direction and total, for 1997 to 2004. ESAC has increased the containers it carries southbound by half over this eight year period, and nearly doubled the number of containers it carriers north-bound. During this period, the conference estimates that southbound traffic carried by non-conference carriers has actually declined, while non-conference northbound traffic has increased about sixty percent. The conference carriers have increased TEUs more than non-conference carriers.

Table IV-21 ESAC and Non-Conference TEU by Direction, 1997-2004

Year ESAC cargoes carried TEUs Non-Conference

Estimated Liftings South North Total South North*

1997 103500 86700 190200 103100 138000 1998 103000 93600 196600 111000 161500 1999 99000 97000 196000 127250 236250 2000 122700 116900 239600 107800 175000 2001 143500 132000 275500 103300 175000 2002 134750 171000 305750 108800 219600 2003 121955 163511 285466 108800 219600 2004 154145 169276 323421 90350 257600

* Northbound includes reefer carriers with 10 pallets/TEU assumption Source: Europe-Southern Africa Conference.

493. By conference estimates, total southbound TEUs on the trade route have increased about 18%, while total northbound TEUs on the route jumped nearly 90% for the 8 year period. The conference has increased its dominance on slow-growing


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southbound container trade, while increasing its minority share of the more rapidly growing northbound trade. The imbalance between northbound versus southbound total trade has increased over the period.

Table IV-22 Total Trade and Market Shares by Direction, 1997-2004

Year Total Trade TEUs ESAC Market

Share % Non-Conference Market

share South North Total (%)South (%) North (%) South (%) North

1997 206600 224700 431300 50.1 38.6 49.9 61.4 1998 214000 255100 469100 48.1 36.7 51.9 63.3 1999 226250 333250 559500 43.8 29.1 56.2 70.9 2000 230500 291900 522400 53.2 40.0 46.8 60.0 2001 246800 307000 553800 58.1 43.0 41.9 57.0 2002 243550 390600 634150 55.3 43.8 44.7 56.2 2003 230755 383111 613866 52.9 42.7 47.1 57.3 2004 244495 426876 671371 63.0 39.7 37.0 60.3 Source: Europe-Southern Africa Conference.

494. Table IV-23 shows the EU nation of origin and destination for TEUs carried by the conference on the trade route in 2004. In terms of total trade, Germany is first and Britain is second. Germany originated nearly 40% of the containers sent from the Community to Southern Africa, while Britain sent about 14%. Britain received over a third of the northbound containers, while Germany took 18%, and the Netherlands took 17%.


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Table IV-23 ESAC Liftings by EU-25 Origin & Destination ESAC 2004 Liftings Summary Southbound Northbound Total TEUs TEUs TEUs AT 1544 1.00% 193 0.11% 1737 0.54%BE 12958 8.41% 13044 7.71% 26002 8.04%CH Atlantic 676 0.44% 507 0.30% 1183 0.37%CH Med'n 5 0.00% 2 0.00% 7 0.00%CY 54 0.04% 101 0.06% 155 0.05%CZ 1140 0.74% 860 0.51% 2000 0.62%DE 60893 39.50% 30868 18.24% 91761 28.37%DK 1890 1.23% 1215 0.72% 3105 0.96%EE 18 0.01% 100 0.06% 118 0.04%ES Atlantic 2694 1.75% 4727 2.79% 7421 2.29%ES Med'n 7134 4.63% 4967 2.93% 12101 3.74%FI 3004 1.95% 992 0.59% 3996 1.24%FR Atlantic 5636 3.66% 6203 3.66% 11839 3.66%FR Med'n 643 0.42% 239 0.14% 882 0.27%HR 24 0.02% 62 0.04% 86 0.03%GR 332 0.22% 1039 0.61% 1371 0.42%HU Atlantic 526 0.34% 249 0.15% 775 0.24%HU Med'n 81 0.05% 1 0.00% 82 0.03%IE 913 0.59% 1856 1.10% 2769 0.86%IT 6014 3.90% 3830 2.26% 9844 3.04%LT 17 0.01% 158 0.09% 175 0.05%LU 24 0.02% 2 0.00% 26 0.01%LV 24 0.02% 165 0.10% 189 0.06%NL 10094 6.55% 29153 17.22% 39247 12.13%NO 1170 0.76% 1883 1.11% 3053 0.94%PL 1573 1.02% 229 0.14% 1802 0.56%PT 4841 3.14% 3973 2.35% 8814 2.73%RU 26 0.02% 138 0.08% 164 0.05%SE 5466 3.55% 2526 1.49% 7992 2.47%SK 181 0.12% 53 0.03% 234 0.07%SL 181 0.12% 398 0.24% 579 0.18%TR 3373 2.19% 1330 0.79% 4703 1.45%UK 20996 13.62% 58213 34.39% 79209 24.49%Total 154145 100.00% 169276 100.00% 323421 100.00%

495. Table IV-24 provides data on TEUs and traffic shares carried by members of the conference, that is, members of the SAECS consortium and MACS. Safmarine (owned by Maersk) carried over a third of conference container traffic. Maersk Sealand and P&O Nedlloyd carried over 20% of containers moved by the conference,


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while Deutsche Afrika Linien carried about 15%. Four members of SAECS took the top four slots in the conference. MACS was fifth, with a bit less than 8%.

Table IV-24 ESAC Traffic Share by Conference Carrier, in TEU, 2004

Carrier

TEU South bound

% South-bound

TEU North- Bound

% North-bound

Total TEU

% Total

CHL 1953 1.27% 1830 1.08% 3783 1.17%DAL 23572 15.29% 24883 14.71% 48455 14.99%MAC 13421 8.71% 11504 6.80% 24925 7.71%MSK 30654 19.89% 35941 21.25% 66595 20.60%PON 31596 20.50% 34259 20.26% 65855 20.37%SCL 50670 32.87% 58452 34.56% 109122 33.75%TSA 2279 1.48% 2269 1.34% 4548 1.41%

Total 154145 100.00% 169138 100.00% 323283 100.00%


496. ESAC has increased capacity utilisation in recent years. Table IV-25 shows historical capacity data for the three main services offered by conference carriers. SAECS core capacity and MACS capacity remained stable over the period, while SAECS Intermediate service more than doubled in 2002 and has risen since. In spite of the increase in capacity, the load factor (or “filling factor”) has improved from 43.5% in 1997 to 61.7% in 2004. The conference has managed to utilise a greater percent of its capacity over the period.

Table IV-25 Conference Capacity by Service and ESAC load factor,

1997-2004

CAPACITY (ESAC only) TEUs Filling factor Year SAECS Core SAECS Int MACS Total ESAC vessels 1997 322400 57200 57600 437200 43.50% 1998 322400 57200 57600 437200 44.97% 1999 322400 57200 57600 437200 44.83% 2000 322400 57200 57600 437200 54.80% 2001 322400 57200 57600 437200 63.01% 2002 322400 135200 57600 515200 59.35% 2003 322400 166400 57600 546400 52.24% 2004 331400 144000 57600 533000 60.68% Source: Europe-Southern Africa Conference.

497. The amount of traffic carried by ESAC members northbound is fairly close to that carried southbound by the conference. Its trade is in balance by direction, easing efficient use of capacity. But for total trade, the number of northbound laden containers now greatly exceeds the number of full southbound containers. This may imply that in order to carry a large amount of the northbound trade, non-conference carriers must have low capacity utilisation factors southbound, if they simply route their ships and containers north and south. If so, non-conference carriers have almost


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undoubtedly experienced falling load factors and capacity utilisation rates over the 1997-2004 period, southbound, as northbound trade has grown more rapidly than southbound.

Pricing

498. Figure IV-30 below provides freight rate indicators for Europe to Africa, which due to the prominence of South Africa can be taken as indicative of rates on this route. Indices of this nature are notorious for their generality and imprecision, but nonetheless are the best such data readily available. These are assembled by ISL, based on Containerisation International input data. The monthly indices break out northbound versus southbound, as well as providing the average for both directions of trade. There is a clear relationship between freight rates and conference capacity utilisation rates, indicating that rates are influenced by the balance of supply and demand.

499. By this index, rates were steady during 1995 to 1997, with little deviation between northbound versus southbound rates, with southbound rates commanding a very slight premium over northbound. In 1998 rates in general fell, especially southbound rates, and the premium switched as northbound commanded a premium over southbound. This is coincident with a surge in northbound cargo volumes relative to southbound, and some increases in capacity on the route. During 1997 to 2000, the ESAC conference experienced relatively low capacity utilisation rates, well below 50%, and held capacity steady. The rate slump started in 1997, was dramatic in 1998, and began to turn around in 1999. By the end of 1999 they exceeded the 1995-1997 levels by thirty percent. They remained high during 2000 and into early 2001, and began to ease in 2001 and on to 2002. In September 2000 SAECS introduced the second loop “intermediate service” boosting capacity. These freight rate movements coincided with very a high ESAC capacity utilisation rate in 2001 (over 60%), and increases in capacity on the route in 2002, which continued to the present. So, as the conference held capacity steady, freight rates and capacity utilisation rates recovered; when capacity increased and utilisation rates eased, freight rates moderated.

500. Competition within the Conference/SAECS is virtually non-existent partly because of the SAECS pooling arrangement and partly as a result of the conference tariff which is applied, albeit with volume discounts for shippers. According to the Commission decision on P&O Maersk merger surcharges and ancillary charges can make up to 40% of the freight charges.80 As these are applied by all carriers it can be deemed that competition for a large part of the freight charges does not exist.

80 See Case No COMP/M.3829 – Maersk/PONL, http://www.europa.eu.int/comm/competition/mergers/cases/decisions/m3829_20050729_20212_en.pdf.


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Figure IV-30 Europe Southern Africa ISL Freight Rate Indicators

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501. There are other components to container shipping costs besides the basic freight rate. One important surcharge is the adjustment for fuel costs, set by the conference, which is shown below for 2001 to 2005. This series shows that most of the drop in the general rate since 2001 has been offset by the fuel surcharge. The fuel surcharge increased from the 5 to 10 percent range in 2001 to mid 2002, to 15% by mid 2004, exceeded 20% in early 2005, and is now approaching 25%. This largely, if not completely, offsets the decline since 2001 of twenty to thirty points in the general freight rate. Reductions in the general freight rate are not all being passed on to shippers; most is simply re-allocated to cover the increased cost of fuel to carriers.

Figure IV-31 Europe-South Africa Fuel Surcharge

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502. Another important surcharge is terminal handling surcharge which varies from port-to-port. Briefly, the surcharges are large enough to considerably influence choice of destination port where alternatives are available, and thus can reflect and mitigate congestion, as well as port infrastructure and operational (in)efficiency.

Refrigerated Trade

503. The South African refrigerated trade with Europe is characterised by three main types of goods: deciduous and citrus fruits; soft fruits and exotic fruits; and frozen foods and dairy products. The general cargo/bulk operators such as LauritzenCool are primarily involved in the carriage of the first category and the container operators primarily with the other two categories and also with the high season surplus of the first.

504. The general cargo/bulk operator requires shipment sizes sufficient to fill a single vessel and to carry commodities that can be stored for a lengthy time without causing damage. This essentially leaves them with the deciduous fruits such as apples and pears, as well the citrus fruits, primarily oranges, all of which have a long shelf life. These products become available in three stages. The early season, with small shipments; the peak season, with very large shipments; and the end season, again with small shipments. The general cargo/bulk operator is active in the peak season and the container lines service the early and end season as well as the overflow from the peak season.

505. Prices are negotiated by the producers individually with the two shipping service providers and are generally market driven for the peak season. The negotiated peak season prices by the general cargo/bulk operators (Lauritzen Cool, Seatrade and Capesize) creates the market price for the container service for the same peak season. The early and end season prices are set by negotiations between the producers and the container shipping lines (SAECS and MSC). The non-conference carrier, MSC will usually price marginally below the SAECS lines that have significant reefer capacity (electric plug boxes). Each individual SAECS carrier negotiates their own price agreement with the producers. The price variation is however minimal according to market sources which suggests that some discussion on pricing must be taking place.

506. SAECS is the last full revenue marketing and pooling consortium and liftings are based on agreed market shares and revenue is split accordingly in the pool. This reduces the incentive to under price because a SAECS member that contracts at a lower rate than its partner lines will have to contribute revenue based on its consortium pool share. Therefore if it under prices and thereby carries more than its agreed share, it has to pay into the pool and is only paid out its agreed pool share. This is a major disincentive to undercut or rebate the "market" price.

Conference and Shippers on the South Africa Trade Route

507. The ESAC conference exercises considerable influence over the container trade route between Europe and Southern Africa, probably more than the reported conference market shares indicate. Essentially, the conference includes the dominant consortium


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(SAECS) and the biggest stand-alone player (MCS), and all the major regular container services. The other two services not in the consortium are one that specialises in seasonal reefer fruit transport, and a multi-purpose lo-lo/ ro-ro operator.

508. One result has been that conference fleet serving Southern Africa includes efficient modern new-builds. Upgrades have come in place which facilitate the burgeoning fruit exports moving in containers northbound. Capital has readily been mobilised to provide increased capacity and more modern equipment. South African exports have no trouble reaching European markets.

509. The conference (effectively SAECS) appears to play a role in managing freight rates and surcharges, as well as capacity on route. With direct competition from existing operators and indirect or implicit competition from potential entrants, and with noticeable swings in basic freight rates during times of excess supply, it appears at first glance to influence rather than rigidly control the costs shippers must pay.

North Europe - Mediterranean

510. The combined population of the 25 countries bordering the Mediterranean and Black Sea is 670 million consumers.81 More than 32 carriers operate 192 vessels on the Europe-Mediterranean trade, some up to 6,000 TEU. Currently there 25 dedicated services and 13 way-port round trip services. The region is subdivided into six trade areas, and their container trade growth rates varied between 9 and 44% in 2004.

511. The data collection and analysis for this trade has been extremely difficult. Whilst a conference does exist with official tariffs, there appears to be a significant amount of pricing competition not only within the conferences and vis a vis the non conference lines, but also with the easy option of using overland transportation facilities such as rail and trucking to many of the destinations. There is also competition from ferry operators in the Mediterranean.

512. The trade can effectively be described as a “short sea” business and is classified as such by the EU. To operate a conference within this framework of competition is challenging and despite some of the lines best efforts has been a losing battle. This is truly a trade route where the small operators can challenge the large ones. Fewer ships are needed, they do not have to be large and most of the trade is on a port to port basis. There are therefore fewer risks of entry into the trade lanes for small and medium sized businesses.

81 Dynamar, http://www.dynamar.com/pub.html, 26 October 2006.


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Geographic Scope

513. The North Europe - Mediterranean trade is a short Sea trade. The Conference covers containerised cargo carried by sea within the following geographic ranges:

1. Northern Europe

a. All ports of the Baltic (except Russia); all Scandinavian ports; all United Kingdom ports; all Irish ports; all ports of Germany, Netherlands, Belgium; all Atlantic ports of France.

2. Mediterranean

a. All ports of Egypt, Israel, Syria, Lebanon, Cyprus, Greece; Mediterranean and Marmara Sea ports of Turkey; Southern Italian ports (Bari, Naples, Salerno, Gioia Tauro, Taranto, Brindisi and all ports of Sicily)

514. The Conference is divided for administrative convenience into the following sectors, each with different tariffs applying, by Mediterranean scope:

Southern Italy Sector: Southern Italian ports (Bari, Naples, Salerno, Gioia Tauro, Taranto, Brindisi and all ports of Sicily) Route is only active for northbound trade. Greece-Turkey Sector: Greece and Turkey (Mediterranean & Marmara Sea ports) Cyprus Sector: Cyprus Levant Sector: Syria, Lebanon and Egypt Israel Sector: Israel

Trade Volumes

515. Figure IV-32 depicts total, northbound and southbound TEUs, flowing over the trade route, based on statistics of imports and exports. The figure provides historical data since 2000, estimates of current volume, and projections through the year 2010, of container traffic between Northern Europe and the Mediterranean. In 2004, there was about 700,000 TEU moving southbound over the trade route, and 370,000 moving northbound. Southbound traffic is expected to continue growing faster than northbound traffic, increasing the imbalance in north-south volume. By 2010, northbound trade is projected to increase to some 987,000 TEU, with southbound increasing to nearly 430,000 TEU. It must be noted however that large volumes of traffic move by road and rail and it is therefore extremely difficult to estimate the real market size of the trade.


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Figure IV-32 Mediterranean-Northern Europe Trade Volume

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516. Figure IV-33 shows the distribution of TEUs of Northern European containerised imports from the Mediterranean, by top ten import commodities, for the year 2004. As one would expect, agricultural products dominate, with 41% of volume. Manufactured products are second with 24% and chemicals third with 14%. Much of the agricultural produce coming north is warm climate produce such as olives, dates, figs and other temperate fruits and vegetables. World production of olive oil during the 2004-05 crop year came to some 2.8 million tonnes. Countries of the European Community account annually for almost 78 per cent of the global total. Leading European Community producers are Spain (43 per cent of the European total), Italy (35 per cent), and Greece (19 per cent). Other major suppliers of olive oil are Syria, Turkey and Tunisia.

Figure IV-33 2004 Northbound Trade by Commodity


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517. Figure IV-34 shows the distribution of TEUs of Mediterranean containerised imports from Northern Europe, by top ten export commodities, for the year 2004. Southbound trade is more evenly spread across commodities. The largest export commodity from Northern Europe to the Mediterranean is chemicals with 24% of the trade. The second largest is manufactured goods and wood and paper products with 17% each, the third largest is agricultural products with 16%.

Figure IV-34 2004 Southbound Trade by Commodity


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518. Table IV-26 lists the members of the conference and the sectors in which they are active. Most of the lines are active on other trade routes and use this particular trade route as an opportunity to increase their utilisation. Virtually every one of these carriers falls into this category. The conclusion one can draw from this is that the repeal of the block exemption would not have any substantive effect on the trade.

Table IV-26 Conference Members and Active Sectors

Greece/Turkey Levant

South Italy Israel Cyprus

Bulcon (Navigation Maritime Bulgare) Y Y N N N CMA-CGM S.A. Y Y N N Y Contaz Line Y N Y N N Hamburg Süd DG Y Y Y N N Iscont Container Lines Ltd. N N N Y Y Kawasaki Kisin Kaisha Ltd. Y Y N Y Y MSC - Mediterranean Shipping Co. Y Y Y Y Y P&O Nedlloyd Ltd. / NV Y Y Y Y Y Safmarine Container Lines NV Y Y Y Y Y Senator Lines GmbH Y Y Y N N Turkon Lines Y Y N N N ZIM Integrated Shipping Services Ltd. Y N Y Y Y


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519. The Greece – Turkey sector is the most heavily serviced sector with 11 of the 12 conference members active on the route. The Israel sector has the fewest lines active on the route, with six carriers.

Pricing

520. The tables below list north and southbound rates for all five sectors of the European – Mediterranean trade route. The most expensive trade lane is the one to and from Israel, which in the past was dominated by ZIM, Swedish Orient Lines and Borchard Lines.

Israel Sector (Ashdod & Haifa)

Table IV-27 Israel Sector (Ashdod & Haifa)-Southbound (Liner In/ Liner Out) Commodity From Standard Reefer $/20' $/40' $/20' $/40' Paper on Reels, Cardboard UK & NWC 900 1,800 - - Sugar 950 - - - Other Cargoes 1,030 2,060 1,400 2,400 Plus THC according to the custom of the ports of loading and discharge.

Table IV-28 Israel Sector (Ashdod & Haifa)-Northbound (Liner In/ Liner Out)

Commodity To Standard Reefer $/20' $/40' $/20' $/40' Other Cargoes UK & NWC 525 1,050 1,400 2,200 Plus THC according to the custom of the ports of loading and discharge

521. In the Israel Sector southbound freight rates are more than double for a twenty foot container of general cargo than those of northbound freight, $1,030 to $525. Reefer service rates are the same in both directions.

Cyprus Sector (Limassol)

Table IV-29 Cyprus Sector-Southbound (Liner In/ Liner Out)

Commodity From Standard Reefer 20' 40' 20' 40' Other Cargoes NWC € 665 1,190 1,140 1,645 UK ₤ 465 825 795 1,140 Plus THC according to the custom of the ports of loading and discharge.

Table IV-30 Cyprus Sector-Northbound (Liner In/ Liner Out)

Commodity To Standard Reefer 20' 40' 20' 40'Other Cargoes NWC € 210 380 1,065 1,670 UK ₤ 145 265 740 1,160Plus THC according to the custom of the ports of loading and discharge.


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522. The southbound freight rates in the Cyprus Sector are over three times as high as northbound freight rates, € 665 to € 210 for a twenty foot container. Rates for reefer service are enjoying more parity.

Southern Italy Sector Southbound (Liner In/ Liner Out) NOT APPLICABLE

Table IV-31 Southern Italy Sector-Northbound (Liner In/ Liner Out) Standard Reefer From To 20' 40' 20' 40' Southern Italian Ports Felixstowe ₤ 597 869 610 883 Cardiff ₤ 662 934 675 948 Tilbury ₤ 597 869 610 883 Liverpool ₤ 647 919 660 933 Hamburg € 613 1015 Rotterdam € 562 938 Antwerp € 562 938 Dublin € 898 1,238 Plus THC according to the custom of the ports of loading and discharge.

Table IV-32 Southern Italy Sector – By Commodity NWC UK* 20’ 40’ 20’ 40’ Canned Tomatoes € 640 € 790 £552 £774 Furniture £699 Tobacco US$750 US$950 £577 £799 Wine € 590 € 790 £502 £749

*Shipments to Liverpool: Additional £50 per container.

523. There is only one direction of trade in the Southern Italy Sector, northbound. Rates to the United Kingdom and Europe are comparable, around € 600 per twenty foot container. Reefer service is only available to the U.K.


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Greece – Turkey Sector

Table IV-33 Greece-Turkey Sector - Southbound (Liner In/ Free Out) Cargo, n.o.s.

Destination Port From Standard Reefer

20’ 40’ 20 40’ Mersin UK £ 450 £ 720 £ 1,300 £ 1,600 NWC € 650 € 1,050 € 1,800 € 2,200 Istanbul UK £ 400 £ 720 £ 1,300 £ 1,600 NWC € 650 € 1,045 € 1,800 € 2,200 Izmir UK £ 400 £ 720 £ 1,300 £ 1,600 NWC € 650 € 1,045 € 1,800 € 2,200 Gemlik UK £ 450 £ 810 £ 1,300 £ 1,600 NWC € 650 € 1,140 € 1,800 € 2,200 Piraeus UK £ 400 £ 650 £ 1,150 £ 1,650 NWC € 650 € 1,000 € 1,785 € 2,555 Thessalonika UK £ 400 £720 £ 1,150 £ 1,650 NWC € 650 € 1,045 € 1,785 € 2,555

Table IV-34 Greece-Turkey - Northbound (Free In/ Liner Out) Cargo, n.o.s.

Loading Port Ex. Standard Reefer 20’ 40’ 20' 40’ Mersin UK £ 360 £ 638 £ 750 £ 935 NWC € 385 € 740 € 1,155 € 1,430 Istanbul UK £ 325 £ 575 £ 750 £ 935 NWC € 385 € 740 € 1,155 € 1,430 Izmir UK £ 325 £ 575 £ 750 £ 935 NWC € 385 € 740 € 1,155 € 1,430 Gemlik UK £ 325 £ 575 £ 750 £ 935 NWC € 385 € 740 € 1,155 € 1,430 Piraeus UK £ 325 £ 575 £ 750 £ 935 NWC € 360 € 668 € 1,155 € 1,430 Thessalonika UK £ 400 £ 710 £ 750 £ 935 NWC € 390 € 725 € 1,155 € 1,430

524. Freight rates across the ports of the Greece – Turkey Sector are comparable, but there is a large discrepancy between the rates northbound and southbound. It should also be noted that terminal handling charges are not applied similarly at either ends of the trade with liner terms in northern Europe, but not in the Mediterranean.


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Table IV-35 Commodity Rates (Northbound) NWC UK EUR/20’ EUR/40’ GBP/20’ GBP/40’

Ceramics (including tiles, Sanitaryware and, marble) 300 500 255 430 Tobacco 285 440 $345 $575 Cotton 310 500 275 435

Preserves & Dry Fruit (including sultanas, apricots, spices and seeds) 335 500 310 435

Brown Goods (TV Sets) & White Goods (refrigerators, washing machines, etc.) 340 425 285 370

Levant Sector

Table IV-36 Levant Sector-Southbound (Liner In/ Free Out)

Destination Port From Standard Reefer

20’ 40’ 20 40’ Alexandria UK £ 450 £ 765 £ 1400 £ 1900 NWC € 700 € 1,250 € 1,700 € 2,200 Beirut UK £ 475 £ 810 £ 1400 £ 1700 NWC € 725 € 1,350 € 1,700 € 2,400 Lattakia UK £ 625 £ 990 £ 1400 £ 1900 NWC € 825 € 1,450 € 2,000 € 2,600 Tartous UK £ 650 £ 1035 £ 1400 £ 1900 NWC € 875 € 1,500 € 2,000 € 2,600

Table IV-37 Levant Sector-Northbound (Free In/Liner Out)

Loading Port Ex. Standard Reefer

20’ 40’ 20 40’ Alexandria UK £ 275 £ 485 £ 700 £ 1385 NWC € 335 € 620 € 1,055 € 2,095 Beirut UK £ 325 £ 575 £ 700 £ 1385 NWC € 385 € 715 € 1,055 € 2,095 Lattakia UK £ 425 £ 755 £ 700 £ 1385 NWC € 535 € 1,000 € 1,055 € 2,095 Tartous UK £ 450 £ 800 £ 700 £ 1385 NWC € 585 € 1,095 € 1,055 € 2,095

525. The southbound freight rates on the Levant sector are one and a half times to two times higher than northbound freight rates.


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526. There is little or no evidence one way or the other that the conference creates stability of service on this route. With the dominant market position of the overland transportation options and the increasing activities of the long distance large carriers serving these trade lanes the conference has been critically weakened and has lost its ability to fix freight rates. They do however continue to work together to maintain surcharges, particularly to Israel. To conclude, the absence of the conference would probably make little difference on this route, and would most likely help to reduce the level of surcharges.

D. Analysis of conference surcharges and ancillary charges

Conference Surcharges

527. Table IV-38 illustrates recent BAF and CAF for the trade routes. Note that the bunker adjustment factor for the Far Eastern route and the South American route are less than for the shorter Trans-Atlantic route. And, they differ by direction.

Table IV-38 Fuel and Currency Surcharges by Trade Route, 2005

Trade Route BAF CAF Comments

Far East $ US 230 / TEU 6.20% Also apply war, congestion and weather surcharges

Transatlantic $ US 423 / TEU 6.00%

West Africa EUR 248 / TEU (S)

149/ TEU (N) -

Also apply various congestion and extra risk surcharges at certain African ports

Southern Africa 24.53% Postponed Indian Sub-Continent $ US 165 / TEU 7.58%

Also apply congestion surcharges

East Coast South America $ US 269 / TEU -

Mediterranean

EUR 100 / TEU (S) 50/ TEU (N) Cyprus -

Europe -

GBP 83 / TEU (S) 41 / TEU

(N) Cyprus - UK

528. Bunker adjustment factors (BAF) are a long term bone of contention between carriers and shippers. In theory the BAF is a transparent formula that is provided to shippers on a regular (infrequent) basis, but the way the base figure was originally calculated is at the heart of the issue. The carriers have contended that the BAF is nothing but a true reflection of the actual cost increases incurred by them and is nothing more than a simple cost recovery mechanism that exists in other industries as well. Shippers have found this argument contentious, particularly if they cannot themselves pass the costs on.

529. The case that the BAF is a true cost recovery is hard to understand when considering vessels sizes and age ranges, two variables that influence fuel consumption. As an example Table-IV-39 reflects data from Clarkson’s Research “Container Intelligence Monthly” September 2005:


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Table IV-39 Bunker Fuel Consumption by Vessel Size

Average Vessel Size in TEUs

DWT Average Age

Average Speed in

Knots

Consumption tonnes per day

Tonnes per TEU

5,262 67,336 6.3 25.2 200.6 0.039

5,636 67,939 3.5 25.3 209.9 0.037

7,052 90,314 3.3 25.2 209.4 0.030

Global Insight Analysis of Clarkson’s Research Data.

530. It is demonstrated that increasing vessel sizes bring with them economies of scale with regard to fuel consumption when calculated either against TEU capacity or DWT. The larger vessels consume approximately the same amount of bunkers yet have an increase in capacity of 25 percent. Using the BAF surcharge on a voyage from the Far East to Europe of US$230, a fully utilised vessel of 5,636 TEU will collect USD1,296,280 and a vessel with a capacity of 7,052 collects 1,621,960. Assuming a voyage from Shanghai to Rotterdam with no intermediate ports of call and a transit time of 21 days, the two vessels consume 4,408 and 4,397 tonnes respectively.

531. It is certainly true that fuel oil costs and diesel fuel costs are volatile and that they can vary by country and even by port. In many cases, the price to the carriers is dependent upon the availability of the grade of fuel being output by the local refinery. Carriers will often only take on fuel in ports where the price is lower, which can at times affect the volume of cargo being carried. Carriers also "hedge" the purchase of fuel to lessen the volatility during the contract period. In an analysis by " Containerisation International" (February, 2005), it was reported that in the financial statement from APL they hedged up to 50 percent of their purchases and CP Ships reported the same ratio for managing the prices swings by using a range of different instruments.

532. Again, according to the "Containerisation International" report, fuel costs total between 9-10 percent of total net operating costs. This is not an insignificant amount and is a good indication as to why the Carriers take a keen interest in the BAF. However it is not clear what the relationship of the BAF as an additional cost to the base cost that is built into the sea freight is.

533. An assessment as to the fairness of the BAF suggests that as a flat rate per box it is not, strictly speaking, fairly applied. The fuel consumption rate per container varies, depending upon vessel size and engine efficiency as well as average speed. Container weight varies with the cargo. In the larger trades there is a considerable variability in vessel sizes on the route, yet all applying the identical BAF. In addition vessels that spend more time in ports, i.e. those on shorter routes, use different amounts of fuel per tonne-mile. This would suggest that the newer, large ships on a long haul route such as to the Far East will have a lower fuel cost, on average per tonne-mile, or per container, than a vessel on the North Atlantic trade.


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534. A second issue relates to the way the BAF is charged by the Conference, and probably the Non-Conference, carriers. The BAF is applied on a trade route basis, not on a port to port basis. Therefore two shippers with cargo from say Singapore to Le Havre and to Gothenburg will pay the same surcharge despite the difference in direct distance of 691 nautical miles according to Fairplay.

535. The larger shippers can avoid the BAF (and the Currency Adjustment Factor) by negotiating "All-In" rates. This is less likely to be the case for medium to smaller shippers. Yet, surcharges influence the negotiation and renegotiation of "all-in" rates even if they do not appear on the invoice. They are viewed by some shippers as signals among carriers that facilitate carriers as a group presenting a "united front" to shippers in negotiations.

536. By applying a flat fee per box on shipments by all carriers, common conference surcharges do not encourage efficiency in services, and dull competition to provide better service. If there are to be adjustments in long run contracts, they can be contract specific, reflecting cost fluctuations that actually pertain to the service at issue. Contract-specific fluctuating surcharges in such cases are then negotiated and mutually agreed by the shipper and carrier, not imposed by fiat by a carrier conference. In short, while parties may agree to surcharges, and adjustments as a concept may have benefits, it does not necessarily follow that they should be common across the entire industry. Nor does it follow that the conferences are the organisations best able to impose surcharges. Nor does it follow that all conferences will do so fairly in all instances.

537. Imposing BAF fuel surcharges essentially passes energy cost fluctuation risk off on shippers, who are unable to take steps to control them. This may not be optimal from a policy perspective. It must be noted that carriers are among the most fuel efficient of the transport modes, and that carriers focus strongly on fuel efficiency, if only because it is such an important variable cost to them. This emphasis on fuel efficiency tends to mean that the carriers contribute little pollution to the environment, especially compared to other modes of transport such as trucking or aviation.

Conference Terminal Handling Charges

538. Carriers claim that the terminal handling charge (THC) is strictly a cost recovery exercise. Ostensibly the THC should mirror the fees the terminal operators charge the carriers. But THCs are widely regarded by shippers as a back-door revenue-increasing mechanism which has lost connection to real costs.82

539. Carriers generally negotiate container handling charges individually with terminal operators and in most markets gain discounts with volume, just like any other business charge, but these discounts are not public record. Despite the discounts obtained by the carriers, the shippers pay the uniform rate set by the conference. This uniform rate takes into account the collective costs for its members and sets the aggregate rate. Many independent carriers charge the rate set by the conference. Carriers claim that this rate is a benefit to shippers because the shippers would fare worse if they were

82 "The European Shippers' Council's Submission to DG Competition of the European Commission: On the Review of Council Regulation 4056/86, p. 20.


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forced to negotiate individually with the terminal operators. So even if a carrier was able to negotiate a rate lower than the conference set rate, shippers using this carrier still have to pay the conference set rate.

540. Whether or not the ability of conferences to fix THCs is exempt from competition or not under Regulation 4056/86 has been subject to debate. The interpretation depends on whether the handling of containers falls under maritime transport services (covered by the block exemption), or stevedoring or other (landside) cargo handling services (not covered). The Court of First Instance interpreted the FETTCSA to state that THCs have nothing to do with Regulation 4056/86. This apparently leaves carriers and conferences subject to the charge that they improperly collude to set landside transport prices in violation of Article 81, or that they are imposing unnecessary conditions on contracts.

541. The issue of whether carriers are using THCs as a mere cost recovery mechanism or as an additional revenue generating device, is front and centre at the port of Hong Kong. In recent years, Hong Kong is facing more competition from ports in main land China. One of the advantages that the Chinese ports have is lower port costs. Under this pressure, terminal handling operators said that they have repeatedly lowered their charges, but carriers refuse to lower the THCs they charge shippers. Shippers have asked for more transparency with respect to THCs, if THCs are merely a cost recovery exercise as carriers claim, shippers would like to see the justification for the continued high THCs in the face of falling fees charged by port operators. One suggestion offered by shippers is to allow them to pay the container terminal operators directly. They believe carriers should make their revenue from moving ocean freight, not from surcharges.

542. The evidence in European ports of THCs acting as additional revenue generating devices rather than cost recovery instruments is apparent. Table IV-40 below lists the THC for a 20' dry container set by different conferences at the same European ports. This data is telling because, theoretically it should take the same amount of labour and capital to load or unload containers at a specific port no matter if the container is on a ship in the Far East trade route or if the ship is from the West African trade route. One would expect the THCs to be similar if not exactly the same, if THCs are truly just used for cost recovery83. There is no evidence that shippers refuse to pay THCs as opposed to some other surcharges which are not as easily enforceable (High Season Surcharge for example).

543. The individual Carriers and Alliances each negotiate their own THC with the terminal operators. Prices will most likely be determined by volume of container throughput. Many terminals will charge on a per container move basis, irrespective of the container size. Global carriers also have the possibility of negotiating global charges with global port operators such as Hutchison Port Holdings whose ports are spread globally on an East-West basis. The smaller to medium sized carriers will most likely be at a disadvantage with relatively small volumes and restricted to a single route.

83 To the extent that large carriers can negotiate larger discounts for their handling charges than smaller carriers, but impose a flat conference-set THC, the conference system may benefit large carriers at the expense of small ones, with shippers unable to participate in the benefits.


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544. THCs in the ports of Hamburg and Rotterdam seem to be the most consistent of EU ports here. They range from € 127 to € 170, a range of € 43, with the range 28% of the mean (Oslo's were a bit more consistent). The port with the largest discrepancy is Le Havre. Its THCs range from a high of € 180.80 charged by the IPBCC to a low of € 117 charged by the ESAC. These ranges contribute to a quite significant variation in total "all-in" charges per box, and the variation is apparently based mainly upon origin of freight.

Table IV-40 Conference Terminal Handling Charges by Selected Port, 2005

Port Currency Conference Statistics * FEFC EMTA EWATA IPBCC ESAC TACA Mean Range % Antwerp EUR 111.63 109 104 89.24 79 140 105.5 61 57% Hamburg EUR 152.36 159 151 153.39 127 170 152.1 43 28% Rotterdam EUR 137.5 120 118 136 113 156 130.1 43 33% Oslo NOK 813 813 700 793 900 n.a. 803.8 200 25% Le Havre EUR 123.33 122 160 180.8 117 143 141.0 63 47% Reported by conferences. * Statistics include the simple average, the maximum minus the minimum, and the range divided by the average

Global Insight Analysis of Conference Data.

545. Some fluctuation between conferences may be expected, attributable perhaps by various discounts negotiated by the various carriers in the conferences. But most major carriers have ships on all routes and most likely negotiate a global inclusive rate irrespective of the vessels trading range which is in any case irrelevant to the terminal. Since the same top carrier lines dominate on most routes, one would expect these carriers to apply the same negotiated rate at a certain port across routes, but this apparently is not the case.

546. This leads one to suspect that THCs are not simply a case of cost recovery, but another way for carriers to increase revenue. Individual carriers negotiate their terminal handling contracts with the terminal operators and as noted in Chapter IV, the charges will vary by individual line based on volume throughput. Not allowing THCs to be protected under Regulation 4056/86 makes sense under the argument that handling freight in port is not truly a maritime transport activity, but a landside activity. Allowing shippers to negotiate directly with port operators may bring THCs in line with the true cost of loading and unloading vessels, might resolve the controversy, however it is unlikely that terminal operators would welcome individual shippers negotiating their own THC contracts as this would create an administrative burden and costs. Given the lack of volume (viz a carrier), the THC charge may in fact end up being higher under this scenario. Another option is that each carrier could charge its own THCs, based on cost, in competition with other carriers.

547. In the 1998 TACA decision, shippers and carriers were free to contract independently, and greater competition ensued. Yet surcharges remain a component of shipping costs set by conference fiat. Conference imposed surcharges have been a matter of continuous controversy among shippers active on European routes. New surcharges crop up. For example, shippers rebelled at TACA attempts to impose the "Equipment Repositioning Charge" of $250 per container on westbound shipments in 1999. Surcharge increases are viewed by shippers in the same light as "general rate increase" announcements, attempts to increase revenues. They can influence negotiations for


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confidential service contracts if the shipper is large enough to be able to negotiate the THC as well as the ocean freight rate.

548. There are a host of other surcharges, of which the most intrusive are the Peak (sometimes referred to as the High) Season Surcharge. The justification for this is that due to seasonal demand vessel utilisation is high during the summer weeks (July or August through October) which puts increased demand and extra burden upon vessels and equipment as well as increasing operating costs above normal levels. The FEFC for example lists four specific items:

1. equipment imbalance 2. increased terminal congestion 3. cost of On (and Off) hiring containers 4. extra cost of Suez transit

549. None of these four items can be considered out of the ordinary daily operation of a

liner service. One would assume that items 1 and 3 are covered by the normal freight rate as nothing unusual is taking place compared with other dates; item 2 was partly due to poor planning on the part of the Carriers and lack of communications with the terminals, hauliers and railroads. In 2005 there is little, if any congestion on the East-West routes; and item 4 is already recovered by some carriers with a Suez transit fee. Based on press reports, the Lines appear to be having problems collecting this surcharge.

550. Carriers have also been quick to introduce congestion surcharges when there are

delays at the container terminals, even if they are calling at terminals that are under their own management. In case of labour disputes there have also been surcharges, in Israel for example where EMTA has been collecting a "Congestion Surcharge" in Ashdod Port at the high rate of 7% of the freight since April 2002, the EMTA Israel sector. The surcharge was initiated by EMTA during Spring 2002 following congestion in Ashdod Port primarily due to labour disputes. This surcharge, according to the Israel Shippers Council, was still in place at the end of August, 2005, despite the fact that the port was virtually back to normal operations by July.

E. Impact of Conferences

551. It is possible to make a number of general statements about the impact of conferences on the liner trade and shippers in Europe.

552. Conferences no longer have the power to impose the conference tariff on their members but they do set various surcharges on shippers. They do not set actual rates generally, nor even rates charged by conference members. This has certainly been true since 1998, and much control had been lost prior to that. One very important reason is confidentiality. In Europe, neither carriers nor shippers are required to report freight rates charged to any industry or government organisation.84 This confidentiality ensures that the conferences cannot know what rates their members are charging, let

84 Rates charged must be reported to the government in the United States, in confidence; this is another matter.


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alone take action to “police” rates85. All industry sources agree that all carriers can and do compete with each other on freight rates, and that shippers pay different amounts depending upon their negotiations. However, conference rates do serve as a coordination device for actual price setting. Annually, the conferences issue guidance on rate increases, typically pressing for or recommending rate increases of a certain amount or percentage per box. These conference rate announcements are non-binding, although they appear to be a basis for shipper-carrier negotiations for both conference and non-conference lines. Thus conference rate recommendations influence shipper-carrier rate negotiations and can be considered a form of price setting. The conference recommended rates are generally viewed as an upper bound for rates actually charged, with each shipper’s discount depending upon the outcome of private one-on-one negotiations.86 While rate confidentiality has spurred, or at least accompanied increased maritime container freight rate competition, it has lead to opaqueness about the level of rates. Carriers and shippers do not usually reveal the terms of their contracts, so rates charged are not openly and regularly reported.

553. Conferences set Surcharges – Much cargo is carried under contracts which specify a route-dependent ocean freight rate, plus a number of other charges to be levied at prevailing rates at the time the service is rendered. These surcharges appear on the bill of lading or invoice as extra charges to the shipper. There are a host of other such charges, including those that account for fuel price and exchange rate fluctuations, the fee charged for off-loading at various different ports, war risk if any, hazardous cargo if applicable, peak season charges if applicable, charges for boxes of non-standard dimensions or of special requirements, the Panama Canal surcharge if applicable, and a number of other less common charges. These surcharges fluctuate, even if the ocean freight rate is fixed under a long-term contract, and shippers often bear the brunt of that fluctuation. Alternately, some shippers and carriers negotiate “all-in” rates including all surcharges, passing the fluctuations back to the carrier. Conferences can and do set most surcharges, although in theory that can be modified by contract, and sometimes are. Non-conference carriers typically follow the conference surcharges. As these constitute a large percentage of the total shipping costs, conferences thus directly set a significant portion of the price for ocean transport service. The most common surcharges (usually) are the Bunker Adjustment Factor (BAF), the Currency Adjustment Factor (CAF) and the Terminal Handling Charge (THC). The BAF and CAF are generally set by defined formulae, are generally accepted references, and are subject to controversy. THCs are opaque, and although ubiquitous are subject to a great deal controversy. We discuss these at length below.

554. Conferences generally do not manage capacity - although in the case of the Southern Africa conference the difference between the SAECS consortia and the conference is virtually non existent. Individual carriers and alliances presently make their own decisions on capacity and service supply. However, they are influenced by discussions in the conferences. It is the shipping lines that order vessels, and they do so based on their own views of future demand. There are no regular or formal meetings on capacity management by route known, however there are regular meetings of the “Box Club”, a grouping of the Liner companies that includes the

85 At one time conferences could and did survey member transactions, visiting offices to inspect records, in order to enforce conference rates. Industry insiders report that „cheating“ or discounts were still common. This practice is no longer permitted. 86 In the past shippers groups have sometimes negotiated on behalf of shippers; this practice appears to be declining.


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ELAA members as well as other Lines that do not call in Europe. This organisation has been known to carry out studies on supply/demand issues and one can contemplate that there must be regular discussions on capacity. Conferences do not presently provide a significant venue for capacity management discussions by conference members, nor do conferences have any impact on the capacity and investment and vessel deployment decisions of non-member carriers, although the FEFC does send out monthly reports on individual carrier liftings, aggregated Conference cargo and an estimate of non conference carryings. The ELAA maintains that cargo carryings are readily available on the FEFC website. This is not the case however.

555. No indication that conferences contribute to stability of supply – The fact that conferences do not manage capacity questions the relevance of their activities for the stability of supply. Note that the end of the EECSAC at the East Coast of South America route had no significant effect on moving cargoes. Moreover, the West African trade shows that conferences essentially can contribute to instability. Entries into the conference were followed by exit of carriers during the last couple of years. This shows that conferences can be a source for instability.87

556. Many other information sources exist – One rationale for the existence of conferences is the need for carriers to obtain and share information and discuss non-operational matters of common interest. As we will demonstrate in subsequent sections, there is a thriving industry supplying information of all kinds to carriers, shippers, and others.

557. The Liner business' character of global supply and demand interactivity applies also to the employment of seafarers. The nationality of the seafarers employed by the companies is related to the flag of the ships as well as to international regulations. There is today less and less of a direct link between the nationality of the vessel owners and the flag of the vessels that they own.

558. A mix of different nationalities on one and the same vessel is in addition common practice and is compatible with most national flag regulations as well as international rules.

559. No impact on EU seafarers – Neither lifting of the block exemption for conferences nor the proposal of the ELAA will have a measurable impact on the employment of seafarers and officers on liner vessels.

87 We will provide further theoretical support for this observation in chapter V.


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V. ECONOMIC IMPACT OF REPEAL OF CONFERENCE BLOCK EXEMPTION

560. First, we review the experience of reform in other modes of transportation in the United States, which provides a model of what to expect in Europe. Then we analyse the question using economic theory. This provides us with the basis for judgements on what will happen if Europe abolishes the block exemption provided to the maritime liner industry.

A. Reforms in other industries

Trends in United States Transport Industry Regulatory Environment

561. The economic regulation of transportation in the United States has changed significantly during the last 27 years. U.S. government policy changes and new laws liberalising transport have affected the structure, operations and performance of the aviation, railroads and motor carrier industries as well as maritime shipping. The common theoretical foundation of these lower government regulations reduces market distortions and increases consumer welfare through increased competition. The timing and the results achieved differ across these industry sectors.

Railroad Reform

562. The Interstate Commerce Commission (ICC) was directed to keep on file and publish for public review relevant rate information. Confidential contracts were intended to encourage carriers to compete on all aspects of service not just rates. Collusion that was then prevalent would become more difficult, since rates were confidential and singular in nature. Contracts could be challenged by shippers and ports if they were thought to be discriminatory, but not by other carriers. The burden of challenging rate reasonableness was shifted largely from carrier to shipper, and the cost and complexity of challenging rates increased.

563. In 1996, the venerable Interstate Commerce Commission itself was dissolved by the ICC Termination Act (ICCTA) and the remaining functions turned over to a new entity within the Department of Transportation, the Surface Transportation Board (STB). The act also eliminated tariff filing requirements and oversight for all but agricultural products, and shortened the oversight process in rate cases and mergers.

564. With deregulation, market forces resulted in a healthier industry. Railroads attracted sufficient capital, reinvested in their physical plant, and exploited new business opportunities. Industry consolidation that began during the 1960s was largely completed by 1999, with only seven large railroads remaining in the U.S. and Canada. Ton-kilometres grew by 68% and originated tonnes by 21% between 1980 and 2003. A shift from carload to unit-train technology, and the development of high-volume intermodal service between major markets drove traffic growth. Shippers reaped most


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of the benefits from productivity gains, with real rates falling by 46% between 1982 and 1996.88 This has been one of the primary benefits of the Staggers Act.

565. How much of the improved industry finances can be attributed to deregulation versus changes in the competitive and general economic environment is not clear, however, according to the CEO and Chairman of the BNSF Railway Company the deregulation was cited as the direct cause of improvements in efficiency and innovation through investment.89 However, the improved ability to enter and exit markets, primarily through the mechanisms of pricing and service allowed railroads to be more responsive to market demands and improve financial stability. The indirect impact of rail deregulation and the parallel deregulation of the motor freight industry gave carrier management the impetus and the flexibility to undertake structural change.

566. The most important of these was rationalising labour, which had not undergone significant changes in work rules since the 1940s. Since 1980, railroad labour productivity growth has outpaced the U.S. economy as a whole, with revenue ton-kilometres and revenue-ton-kilometres per employee almost five times higher in 2003 than in 1980.90 On the other hand revenues have remained flat and profits modest, with carriers yielding the productivity gains to shippers through lower rates.91 The rate of return on net investment has increased from less than two percent in the mid-1970s to about seven percent today, which is inferior to most industrial sectors but higher than other modes of transportation such as air and motor freight. The industry has consistently failed to earn its cost of capital as defined by the Surface Transportation Board, which was 9.4 percent in 2003.

567. Railroads now use value of service or demand-based pricing strategies. Though there are still proponents of re-regulation of rail rates, the railroads so far has successfully argued that any attempt to coercively define the shipper-carrier relationship or re-impose regulation would impair the future viability of the railroad industry92

Motor Carrier Reform

568. Regulation and deregulation of the U.S. motor carrier industry has followed that of railroads. By the mid-1970's, calls for reform escalated. The "energy crisis" dampened domestic and international trade. By 1975, businesses were lobbying intensively for lower transportation costs. Following aviation deregulation in 1978 and 1978, Congress passed the Motor Carrier Act in 1980, deregulating interstate motor carriers by erasing barriers to entry, permitting rate competition, and removing anti-trust immunity that permitted collective rate setting. But motor carriers were not completely deregulated as the act did not loosen restrictions on intrastate commerce. As time passed the difference between costs of shipping across borders versus shipping within borders widened dramatically. In 1994 intrastate rates were an average of 40 percent higher than rates for deregulated interstate moves. In 1995, the Interstate

88 Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990. GAO/RCED-99-93, Washington, DC: General Accounting Office, 1999. 89 Matthew K. Rose at University of Denver Intermodal Transportation Institute, October 4, 2005, Denver, Colorado, U.S.A. 90 Railroad Facts: 2004 Edition (Washington: Association of American Railroads, 2004) . 91 Carl Martland, Sources of Productivity Improvement in the U.S. Railroad Industry, 1965 to 1995, Journal of the Transportation Research Forum, 1999. 92 Why the Rail Reregulation Debate is Important (Washington: Association of American Railroads, June 2005).


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Commerce Commission Termination Act eliminated remaining economic regulation of intrastate motor carriers as well as eliminating the ICC.

569. The impact of motor carrier deregulation was significant:

1. The number of companies increased dramatically. Existing carriers expanded service and new carriers entered the business. The number of motor carriers increased from 18,000 in 1975 to over 500,000 in 2000.

2. The industry restructured. Truckload carriers merged and consolidated to expand coverage. Less-than-truckload carriers (LTL) shrank and streamlined operations. And the use of private carriers declined as companies took advantage of lower rates and improved service from for-hire carriers.93

3. Lower rates benefited the U.S. economy as a whole. Prior to deregulation, motor carrier expenditures were 5.7 percent of GDP, while by 1997 they fell to under 5.0 percent.94

4. Motor carrier share of the freight market expanded. Today, motor carriers have about 80 percent of the U.S. freight transportation market by revenue.

570. The motor carriers – at least those firms that survived the transition from the regulated to the deregulated market – are lean, competitive, and marginally profitable, which is the outcome that had been promised by the advocates of deregulation. Through the mid-1990s, industry wages fell by half.95

571. While motor carriers are no longer subject to economic regulation, government involvement in the industry through safety regulation and highway infrastructure maintenance and construction remains. Remaining government regulatory oversight of motor carrier business practices are the same as those governing general industry including anti-trust law and fair trade practices, which are not particular to transport.

Aviation Reform

572. The youngest transport mode, aviation was initially highly regulated. The comprehensiveness of the regulation of air cargo has been greater than for the much older regulation of ocean shipping. Air passenger transportation was viewed as an essential public utility with relatively low revenue compared with the required capital investment, and sufficient public interest justified strong regulation. As the regulation of international cargo aviation started much later than that for ocean shipping, the political pressures at the time were different than when ocean shipping was given anti-trust immunity earlier in the 20th century. The reasoning behind granting air carriers

93 Lawdog.com Publishing, Inc., “History of Trucking Regulation at Lawdog.” Available at http://www.lawdog.com/transport/tp1.htm, as of December 2000. 94 Cass Annual Session of Logistics Management, 13 October 1998. Available at http://www.cassinfo.com/bob_clm_annual.html, as of December 2000. 95 See Michael H. Belzer, Sweatshops on Wheels: Winners and Losers in Trucking Deregulation (Oxford University Press, 2000). http://www.ilir.umich.edu/sweatshopsonwheels.


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limited immunity to antitrust regulations was similar to that used in ocean shipping, in that it would guarantee a stability of rates, service supply and consistent schedules for the U.S. economy and the public, thus ensuring that American companies would have uninterrupted access to international markets.

573. The scope of economic regulation of international air cargo went beyond the rate regulation and anti-trust exemptions found in ocean shipping to the control of entry, exit and the quantity and type of services permitted. In contrast to ocean shipping regulation, governments have maintained control of the location and frequency that carriers may enter the country, or whether they are permitted to serve the country at all. International air cargo markets have been mostly closed to new entrants unless they were national flag carriers who could obtain government approval to purchase existing "landing rights" from an existing carrier that owns them. In the U.S., starting 25 years ago, limited deregulation of international air cargo followed domestic aviation deregulation, in the form of bilateral and multilateral agreements negotiated to liberalise, but not fully deregulate, U.S. international aviation.

574. While air cargo and passenger transport services within the EU and within the US are now reasonably competitive as a result of air transport liberalisation, air cargo and passenger services between EU countries, the US and with the rest of the world are still governed by a web of bilateral and multilateral agreements. Under these agreements, reciprocal traffic rights were granted among countries to the exclusive benefit of their own national airlines. The agreements typically specified the carriers that may operate between cities in each country and the capacity that could be operated on these routes.

575. The U.S. Congress deregulated U.S. domestic aviation in 1977-1978, eliminating the CAB's economic regulatory control of the domestic airline industry. Subsequently, only safety regulation, enforced by the Federal Aviation Administration (FAA) remained96. In 1979, Congress passed the International Air Transportation Competition Act of 197997. This law permitted the US State Department to promote more competitive international aviation markets by negotiating treaties that were bilateral or multilateral agreements with other countries. The US has been steadily pursuing these "Open Skies" agreements ever since, now including several with individual EU member countries and with 73 agreements in place worldwide.98

576. The deregulatory aspects of Open Skies agreements are substantial yet they are still far from resulting in a truly free market for international air cargo. Though there are differences between individual agreements, among the typical aspects of Open Skies agreements with the US are99: rate setting freedom, operational freedom, and allowance of cooperative marketing arrangements including sharing of services and

96 Under the US Airline Deregulation Act of 1978, the federal government agency that regulated pricing, entry and protected against anti-trust violations, the Civil Aeronautics Board (CAB), was phased out of existence in 1984. Remaining aviation regulatory functions (e.g. merger approvals) were moved into the U.S. Department of Transportation. 97 This law granted automatic antitrust immunity under the US Federal Aviation Act to international carriers who file agreements if the US DOT subsequently approved them. 98 The U.S. Department of State, reports that as of May 2005 there are 70 individual country 'Open Skies' agreements plus three cargo-only country agreements. 99 Office of Aviation Negotiations, U.S. Department of State, January, 2001.


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leasing arrangements. Not included in U.S. Open Skies agreements are liberalisation of U.S. law that prohibits foreign ownership, regulates airline mergers and cabotage.

577. Although there are now international airline alliances, foreign air carriers are still at a marketing disadvantage within the US borders. The arguments used in defence of continued cabotage are similar to those used in support of the anti-trust immunity for ocean shipping, where it is assumed that destructive competition and unreliable service would result if markets were opened freely to international competition.

578. The strong link between cargo and passenger aviation mixes regulatory challenges for air cargo with regulation of passenger aviation, as about half of international air cargo moves in the bellies of passenger aircraft. This has greatly complicated steps towards international air cargo liberalisation as separate agreements covering only all-cargo carriers could be perceived to favour freighter operations over combination carriers.

579. The world has increasingly been moved towards an international Open Skies operating environment, with multiple carrier designations and unrestricted access to gateway cities without capacity constraints or discriminatory practices, and with the right to set competitive rates to meet market demand for air cargo service.

Impact of the U.S. Ocean Shipping Reform Act

580. The impact of aviation deregulation has been to lower real rates, attract increased traffic and expand the industry. Operational flexibility has led to adoption of innovative pricing practices such as yield management, adoption of technology to manage and sell aviation capacity, and consolidation among carriers. New entrants have provided price and service competition that has kept rates low and forced consolidation and operational efficiency steps by the legacy airlines. After moving to liberalise, deregulate, and reform the other major modes of transport during the mid-Twentieth Century, rail, road and air, the United States finally turned its attention to international maritime liner shipping at the very end of the Twentieth Century. The US experience is very informative, providing valuable guidance for Europe. In the US, reform of the liner industry started with OSRA in 1998. This seems to have sparked pro-competition reform initiatives elsewhere; for example, the OECD began to re-examine liner shipping in 1999.100

581. The Congress of the United States of America enacted the Ocean Shipping Reform Act101 of 1998, "OSRA," on October 14, 1998. OSRA amended the language of the Shipping Act of 1984, provided for the confidential filing of contracts with the Federal Maritime Commission (including stipulated data), provides for the 1998 FMC budget, and a number of other provisions relating to maritime trade. Moreover, the FMC Chairman reorganised the FMC in early 2000.

582. OSRA greatly impacted liner conferences, limiting their power and effectiveness, and became a model for Canada and its subsequent reform. It implements three principles which mitigate the effectiveness of anti-trust exemptions in the liner industry:

100 The OECD began a study in 1999, which lead to a conference in 2000 and an OECD paper entitles International Shipping Regulation: Its Rationale and Benefits". 101 Public Law 105-258


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1. Freedom of carriers and shippers to negotiate rates, surcharges and terms on an individual and confidential basis

2. Freedom of carriers and shippers to protect contractually the confidentiality of terms and rates, especially rates

3. Freedom of carriers to make operational and capacity agreements with other carriers, as long as that does not confer upon them undue market power

583. Conferences were forbidden by OSRA from preventing their members from entering into service contracts. Contract rates were no longer publicly filed. Rates and terms of service could be confidential. Shippers no longer had "me-too" rights to obtain the same essential terms as others. Joint service contracts could be offered by any agreement among carriers, not just by conferences. Activities covered by carrier anti-trust immunity were limited, and conferences may not require members to reveal confidential contract details (especially rates) nor limit or prohibit service contracting by members. Conferences may not limit fees to ocean freight forwarders. Conference contract guidelines are only indicative and are not enforceable. Carrier tariffs are no longer filed with the FMC, but must be published electronically.

584. Two years later the FMC issued an interim report on OSRA102. A primary aim of

OSRA was to produce a more market driven shipping industry. With confidential contracting, post-OSRA, shippers were negotiating one-on-one with carriers. Conferences for the US trades declined in number, from 32 in 1997 to 22 in 2000, replaced by non-binding discussion agreements which included lines which had been outside conferences. Most carrier agreements were service related rather than price related. Rates and services had become more market-driven. The FMC moved to internet contract filing. Most contracts, after two years, were individually negotiated rather than "standard" contracts.

585. In 2001, the FMC issued an impact statement on OSRA,103 drawing upon extensive

invited public input. It concluded that OSRA was successful in promoting a more market-driven and efficient liner industry, helped foster dynamic change in the industry, helped the industry meet market challenges, that it had not had major negative effects on business relationships, and that the FMC had developed the comprehensive regulations and oversight approaches needed under OSRA. More specific changes post-OSRA in liner shipping were noted in contracts, agreements, tariffs, and other issues.

586. Specifically, a few years immediately after OSRA the industry moved to bilaterally

negotiated service contract carriage, away from conference rates. Many service contracts were still linked to surcharges, access charges, and rules. No shipper alleged that they could not get contracts. Non-vessel-operating common carriers sought authority to offer service on the same footing as liner carriers.

587. Liner shipping continued restructuring after OSRA. Conference agreements on file

declined, from 35 in 1998 to 17 in 2001. "Supply-side" operating agreements increased. Conferences were increasingly supplanted by discussion agreements and

102 See Federal Maritime Commission, "The Ocean Shipping Reform Act: An interim Status Report", June 2000, posted on the FMC website. 103 See FMC, "The Impact of the Ocean Shipping Reform Act of 1998", September 2001.


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voluntary guidelines. An FMC audit of service contracts in 2000 and 2001 revealed that carrier success in achieving general rate increases and minimum rates "depended upon market conditions".

588. After OSRA, there was consolidation among "ocean transport intermediaries" (OTI),

which are subject to oversight by the FMC. Non-vessel-operating common carriers (NVOCC) complained that they were at a disadvantage because they must publish their rates, but carriers can enter into confidential contracts with shippers. The trucking union (Teamsters") complained of harsher conditions for truck drivers and operators due to lower inland rates. It was felt that e-commerce was encouraged.

589. On balance, the experience of OSRA was that it was relatively painless, with

immediate beneficial effects on the industry. Like the European experience, making rates confidential and implementing free contracting had great impact on US trades, primarily beneficial, and either coincided with, or hastened, the decline of liner conferences as they had previously been constituted.

590. It appears that the FMC has greater oversight capability than its European

counterparts, in that service contracts are filed with the FMC, and although they are confidential, they are readily available for official scrutiny if the need arises. In Europe, oversight authority is divided between the Community, and the many member nations.

591. Port Import and Export Reporting Service (PIERS) data is available for US trades, but

not for non-US trades. PIERS data output is in part what the ELAA's proposed Independent Data Service would produce. The PIERS data is sourced from the manifests filed by the carriers with U.S. Customs and Border Protection. Historically, the maritime journal, “The Journal of Commerce” gained access to the manifest filings via the Freedom of Information Act which allowed newspapers access to non classified documents filed with and held by the U.S. Government. In more recent years this has become more accessible to private citizens and PIERS now has a number of competitors.

592. The PIERS data however is not a wholly reliable document, but it is the best that is

available. There is a significant amount of analytical estimation required to identify the countries of origin and destinations, pricing is not available, and increasingly, the shippers field is not available. There is also a significant amount of conversion of data into TEUs. Nevertheless it is the most widely used source within the maritime community to assess carrier liftings by commodity, importer and exporter and market share.

The Transpacific Stabilisation Agreement

593. The Transpacific Stabilisation Agreement (TSA) in the US provides a rough glimpse of what a “trade association” might look like in the modern competitive liner industry (although it is a discussion agreement in fact). The TSA has broader coverage than traditional conferences. Its focus is the entire trans-Pacific trade, encompassing several trade routes. Current members are APL, CMA/CGM, COSCO, Evergreen, Hanjin, Hapag-Lloyd, Hyundai Merchant Marine, K Line, Mitsui OSK, NYK, OOCL


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and Yangming. Maersk is not currently a member of TSA, having withdrawn in September, 2004.

594. TSA announces its annual recommended rate program in advance. This program has

five components, three increase recommendations, a recommended peak season duration and target surcharges. The recommended increases are for containers shipped (1) from Asia to the US West Coast (2) from Asia on to US East Coast via overland routes (3) from Asia on to US by all water routes (the canals). These are intended as inputs for the annual contract cycle negotiations. Also discussed are cost factors, including operating costs, congestion costs, network costs, and peak season costs. Furthermore, the transpacific trade is characterised by a contracting season that runs from May to April.

595. Member lines review the US-Asia freight markets, and forecast supply and demand,

and utilisation. TSA posts reports on its website104, on recent trends as well as the outlook for the near future, as well as subjects of interest such as China and port gridlocks. The analysis of the markets is used to develop guidelines, to provide an initial frame of reference for independent confidential negotiated service agreements between carriers and shippers.

596. The TSA is different from a traditional conference, it covers a broader geographical

range, and does not attempt to set rates or manage supply on a specific route. It serves as a carrier forum for discussing rates, surcharges, capacity and utilisation at a broader non-operational level. Rather than setting rates and charges and terms, it provides guidelines intended to streamline carrier-shipper confidential negotiations.

U.S. Transportation Reform and the E.U. Liner Industry

597. The US provides a good model for comparison for Europe, as both are large advanced unified economies spanning continents. To summarise the impacts across the U.S. transportation industry from economic deregulation, it is possible to group major regulatory characteristics together and compare them with the EU regulation of the liner industry, describing the degree to which they have been liberalised. The characteristics of the economic regulation of the U.S. transportation industry segments are summarised and compared with the EU liner industry in the table below. Of the observed developments across the deregulated U.S. transportation industry segments, it is likely that impacts on the European liner industry, if the block exemption is removed, will share similarities.

598. Prices will fall. The greatest impact will be on the pricing of services within the market. Benefits from industry productivity increases due to removal of the regulatory environment will be passed through to industry customers, rather than kept as higher operating margins.

104 http://www.tsacarriers.org.


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Table V-1 Comparison of U.S. Transport Segment Deregulation and Impact with E.U. Liner Industry

Characteristic Railroads Motor Carriers

Domestic Aviation

International Aviation

EU Liner Industry

Barriers to entry / exit

Deregulated Deregulated Deregulated Routes controlled by

treaties

Deregulated

Capacity; change after deregulation

Largely deregulated;

initially fell, now increasing

Deregulated; increased

significantly

Deregulated; increased

Controlled by treaties;

incremental increases only

Consortia, alliances

concentration

Rate setting; rate level after deregulation

Extremely limited anti-trust immunity: lower

No anti-trust immunity;

lower

No anti-trust immunity; much

lower

Voluntary collective

ratemaking only; lower on certain routes

Block exemption;

Expected to be lower

Infrastructure Lightly regulated

privately owned track network

Government owned / operated highways

Government owns airports and Air Traffic

Control

Government owns airports and Air Traffic

Control

Public and privately

owned ports

Firm structure Consolidation of large rail-roads; many

more small rail-roads

Consolidation of large firms; many more small firms

Growth of new entrant, low cost carriers

Little change to legacy carriers

Consolidation of large firms

599. Capacity planning can defeat price reductions. However, for the EU liner industry, if capacity is still being controlled through some type of collaborative capacity planning process, it is unlikely that capacity increases will be as dramatic as seen in U.S. domestic markets after deregulation, such as that observed in the US for railroads and motor carriers. The cost of entry into the liner market with sufficient vessels to provide a regular fixed service is relatively high, and concentration at the route level is high for carriers.

600. The industry will reorganise to provide better service. All reform initiatives in US transportation prompted sweeping changes of ownership, with substantial entry and exit. All reforms prompted substantial changes in operations and changes in services on offer. Another lesson from U.S. deregulation is that the variety and range of services offered will likely increase as carriers try to compete not just via rates but through differentiating between customer needs and value of services offered on a global basis. Firms will reorganise operations to better serve the market, so we can expect the organisation of the industry to change. Both industry reorganisation and innovative new services should be both anticipated and supported by policy and the regulatory environment.


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B. Theoretical Assessment

Insights and Shortcomings of Received Theory for the Liner Industry

601. This section presents the theoretical insights on the impact of competition and collusion on prices and service reliability in liner markets. We start by discussing the relevant existing literature, showing that we had to develop a new sophisticated model of the liner market in order to evaluate the economic impact of conferences. We then proceed by developing a new model and discussing its results.

Theory of the Core Applied to the Liner Market

602. Most of the theoretical and much of the empirical analysis on the liner shipping market

is based on the theory of the core. This theory analyses the set of “stable market equilibria”. It holds that a necessary condition for the existence of a stable equilibrium is that no individual can improve its position by deviating from the equilibrium. Deviation may take two forms, either a unilateral action taken by one individual, or a joint action of several individuals based on a contract (a “coalition”). It might happen that such an equilibrium does not exist in a market, i.e. that the core is empty. In that case any proposed market outcome is unstable in the sense that there is an incentive for a subset of individuals to deviate from it, unilaterally or jointly.105 Hence, a market with an empty core is in this sense unstable.

603. There is a fairly large body of literature supporting the view that the liner shipping

market has an empty core and, therefore, liner shipping is characterised by an “inherent instability”.106 The following specific features of the industry are brought forward as a reason for that:107

● Demand is inelastic, but of great variability (sensitive to business cycles,

exchange rates, and other), and unbalanced on important trade routes. ● Supply conditions are characterised by high fixed costs (of, e.g., ships) and

lumpiness of capacities, implying inelastic supply both in the short and medium term.

604. Carriers claim that conferences naturally enhance cooperation between carriers and

therefore lead to a stable market. Conferences are therefore seen as a measure to enhance industry performance. It is noteworthy that the literature is silent on how

105 See Osborne M. and Rubinstein A., 1994, A Course in Game Theory, chapter IV. 106 McWilliams A., 1990, Rethinking Horizontal Market Restriction: In Defense of Cooperation in Empty Core Markets, The Quarterly Review of Economics and Business, vol. 30, no. 3, 3-14. Pirrong S, 1992, An Application of Core Theory to the Analysis of Ocean Shipping Markets, The Journal of Law and Economics, vo. XXXV, 89-129. Sjostrom W., 1989, Collusion in Ocean Shipping: A Test of Monopoly and Empty Core Models, Journal of Political Economy, vol. 97, no. 5, 1160-1179. Sjostrom W., 1993, Antitrust Immunity for Shipping Conferences: An Empty Core Approach, The Antitrust Bulletin, vol. XXXVIII, 419-423. Haralambides H. et al., 2003, Final Report, Contract of Services, For the Assistance in Processing Public Submissions to be Received in Response to the “Consultation Paper” on the Review of Council Regulation 4056/86, prepared for European Commission, Competition DG Services/Transport. 107 ELAA, August 2004.


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conferences (let alone conferences plus independents) would be able to overcome an empty core problem.

605. In order to show that the liner market is indeed suffering from an empty core the

theoretical literature normally comes up with idealised market scenarios that have some of the specific features mentioned above. Table V-2 provides an often cited example.108

Table V-2 Non-Existence of a Core in a Market with Three Shippers and Two

Carriers Suppose a market with two carriers, each having one ship, and three shippers. Each shipper wants to ship exactly one container and is willing to pay at most 10 Euro for the transfer. Each carrier has a transport capacity of two containers, and the cost per trip is 5 Euro. This example has some of the properties mentioned above: demand and supply are lumpy, and inelastic for a wide range of prices. In particular, one carrier can operate at full capacity while the other has to put up with half capacity. The market is modelled as follows. Carriers charge a price equal to costs of 5 for each trip (independently of whether a carrier carries one or two containers) and shippers have to find among each other an allocation of ships and payments. Note that this approach does not fit very well to regular liner shipping; it may be more appropriate for bulk shipping. Moreover, the assumption of a given price of 5 is not well explained; it superimposes some unexplained competitive process on one side of the market in order to focus on a coordination problem on the other side of the market, thus unduly divorcing the interdependence of the two sides. (Below we will show that the stipulated price of 5 constitutes no Nash equilibrium of this market.) As each ship can carry at most two containers two shippers, say A and B, which share the capacity of one ship will enjoy a joint benefit of 2x10-5=15. Suppose that the shippers share the price evenly. Then, each one of them realises a benefit of 7.5. However, the third shipper, C, will enjoy a benefit of only 10-5=5. He would benefit from offering shipper A to use its carrier and to pay only 2, say, instead of 2.5. Since A benefits from this deal he agrees. However, then the remaining shipper B is left with a benefit of only 10-5=5. He would therefore benefit from an offer to shipper C, who pays 3 at the moment, to jointly use its carrier and share the price evenly (i.e., pay only 2.5). Once shipper C has agreed, the situation is similar to the one in the beginning. We already showed that this situation is not stable.

606. A basic problem with the theory-of-the-core approach is that it does not take due account of the working of competition and competition policy. The assumption that each side of the market (carriers and shippers) can coalesce in any form, using enforceable contracts, is unrealistic and grossly violates competition laws. Therefore it seems that a more adequate approach to the liner market might be found in the theory

108 This scenario has been used in, e.g., Haralambides H. et al., 2003, Final Report, Contract of Services, For the Assistance in Processing Public Submissions to be Received in Response to the “Consultation Paper” on the Review of Council Regulation 4056/86, prepared for European Commission, Competition DG Services/Transport. We slightly modified the example by considering carriers and shippers instead of taxi drivers and passengers.


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of industrial organisation, which is characterised by a more restrictive view about the implementability of coalitions (contracts) among parties.109

Lessons from the Theory of Industrial Organisation for the Liner Market

607. What can we learn from the theoretical literature of industrial organisation about the

impact of competition and conferences on the market result in liner shipping? Firstly, we turn to the question whether theory provides any indication for the assumption that the characteristics of the liner market mentioned above contribute to instability in a market without conferences. Secondly, we figure out what can be learned about the impact of both conferences and independents on the liner market.

Competition in the Liner Market

608. An important result of the theory of industrial organisation is that price competition

between at least two companies leads to marginal cost pricing under certain conditions. This is remark-able because marginal cost pricing also maximises social welfare. However, this result of “pure price competition” depends on certain market conditions that have to be checked for the liner market.

609. One condition is that firms are really competing in prices, i.e. that a carrier emphasises

price as an issue and responds to the prices of competitors by setting its own price accordingly. Since the primary aim of liner shipping conferences is to fix prices there is some reason to believe that the liner market fulfils the assumption of price competition.

610. However, another condition for marginal cost pricing being a result of “pure price

competition” is that carriers do not face capacity constraints. Obviously, the liner market does not satisfy this condition since the maximum number of containers a ship can carry is restricted, as well as the number of ships. For that reason the model of “pure price competition” does not adequately include an important feature of liner markets. Taking capacity constraints into account changes the theoretical results considerably. Competition can then result in prices well above marginal costs simply because higher prices are required to match demand with the constrained supply.

611. Moreover, capacity constraints might not only affect the level of prices but also the

volatility of prices. Let us define “stable market prices” as a set of prices so that none of the competing carriers can increase its profit by changing its price (a so-called Nash equilibrium in pure price strategies). Levitan and Shubik showed that due to capacity constraints there might not exist a set of stable market prices in a market with two carriers.110 Market prices will then be volatile in the sense that carriers will try to increase profits by constantly changing their prices. In fact, each carrier will try to take his competitors by surprise. One can actually calculate the probability function of their price-mixing behaviour, constituting a so-called Nash equilibrium in mixed price strategies. An example of price-mixing in the liner industry is given in Table V-3 below.

109 In the language of game theory, the theory of the core is a branch of cooperative game theory, which allows for any kind of coalitions (or contracts) between parties, whereas modern theory of industrial organization is rooted in non-cooperative game theory, which allows to restrict the set of feasible contracts between parties. 110 Levitan R. and Shubik M., 1972, Price Duopoly and Capacity Constraints, International Economic Review, vol. 13, no. 1, 111-122.


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TableV-3 Mixed-Price Equilibrium in a Market with Three Shippers and Two Carriers

Let us vary our example of Table V-2 by taking into account the fact that shippers are charged independently and that carriers are in price competition. As before, there are two carriers (say A and B) with one ship each and cost of 5 for the run in question. There are three shippers, each of them wants to ship exactly one container and is willing to pay at most 10 Euro for the transfer. We can show that there is no stable price (per container transferred) that clears the market. Moreover, there is not even a stable combination of two different prices by the two carriers that could prevail. To see this, suppose carrier A sets a rather high price, say pA=8. Carrier B would then undercut him slightly, say pB=7.5, in order to attract two shippers and earn 15-5=10. Since carrier A would then earn only 8-5=3, he would now have an incentive to change its initial price and undercut carrier B. The same argument can be applied to any price higher than 5, which shows that there is no stable price equilibrium in which a carrier chooses a price higher than 5. Now suppose that carrier A sets a rather low price, say pA=4. Its rival will then compare two alternatives. He can undercut carrier A and attract two customers (this yields at most 2x3.5-5=2), or he can set a very high price and be satisfied with only one customer (this yields at most 10-5=5). Whatever he does, carrier A will again have a reason to revise its price. In particular, if carrier B chooses a very high price, say pB=10, then carrier A would want to increase its price to, say, pA=9.5. The same argument can be applied to any price below or equal to 5. In short, carriers find no price at all that makes them satisfied with their choice, given the response by the other firm. They always find a reason to revise it. In this example, carriers will always try to take each other by surprise. One can actually calculate the probability density function of their price-mixing behaviour (a mixed-strategy equilibrium). Choice will be confined to prices between 5 and 10, so that both carriers will make a non-negative operating profit in any case. On expectation, the price is about 7, and each carrier’s profit is 5. Suppose the situation described in our example comes up regularly. Then carriers will sometimes turn out to be lucky (“this time I managed to undercut my rival slightly” or “this time I rightly chose a high-price, since my rival’s offer was just too cheap to undercut”) and sometimes not so lucky.

612. The example of Table V-3 shows that, indeed, prices can be volatile. But what is the consequence? It does not mean that the market breaks down, since firms have a positive expected operating profit on average (and even so in every price combination that can occur). From everyday experience we are well-acquainted with such pricing behaviour. It resembles the well-known sales offers by large retail stores – with the latter ones being far from a breakdown. Recent examples from the transport sector are the irregular price cuttings and sales offers in the airline industry. There may be some indication that this industry could be ripe for a consolidation; but no-one expects that airfares will ever rise again to the heights of former times or questions service reliability.

613. The above considerations take carriers' capacities as given. There is also some literature that addresses the choice of capacities, with subsequent price competition. Kreps and Sheinkmann as well as Osborne and Pitchik showed that in this case the


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final equilibrium outcome does not exhibit price mixing behaviour.111 This indicates that in the long run market prices will always be stable. This model result is, however, only of limited relevance to the liner shipping market because it depends on two assumptions: only two firms compete and capacity is arbitrarily divisible. In liner shipping there are usually more than two firms competing and supply is lumpy, i.e. capacity can only be adapted in discrete steps by adding or withdrawing vessels or even entire vessel strings. Therefore a more adequate model for the liner market needs to be developed that takes these features into account, in order to derive convincing results on prices, service reliability, and market entry.

Conferences in the Liner Market

614. With respect to the proposed repeal of the block exemption, two important questions have to be investigated: can conferences exert market power, and what influence do they have on the stability of the market structure? These questions are difficult to answer because several factors with opposed impacts interact with each other. On first sight one might think of conferences as traditional price cartels, which they used to be until a few decades ago; in that case they would exert a lot of market power. However, nowadays conferences operate side by side with independent carriers. Moreover, there is basically free entry to both, the conference and the independent segment of a market. These aspects question the market power of conferences and also the stability of competition between conference and independent carriers.

615. It is fair to say that, if conferences have an impact on ocean freight rates, then it is because the conference prices (and other decisions) have a signalling impact on the market. One way to model this is to assume that conferences act as a cartel of price leaders. This assumption has a tradition in industrial economic modelling. The literature regards the cartel as the price leader and the independents as price followers in the sense of Stackelberg. That is, conference members jointly decide on a price, announce it, and will afterwards stick to it; the independents will then respond by setting their prices simultaneously.

616. Moreover, assuming that carriers are free to enter or leave the conference, Selten as well as D’Aspremont et al. have introduced and investigated a notion of cartel stability. For a stable distribution of conference carriers and independent carriers two conditions have to be fulfilled:112

1. Internal stability: If no conference carrier can improve its position by leaving the

conference and becoming an independent carrier then the conference is called internally stable.

2. External stability: If no independent carrier can improve its position by entering

the conference then the conference is called externally stable.

111 Kreps D and Scheinkmann J., 1983, Quantity precommitment and Bertrand Competition Yield Cournot Outcomes, Bell Journal of Economics, vol. 14, 326-337. Osborne M. and Pitchik C., 1986, Price Competition in a Capacity-Constrained Duopoly, vol. 38, 238-260. 112 Selten R., 1973, A Simple Model of Imperfect Competition, where 4 are Few and 6 are Many, International Journal of Game Theory, vol. 2, no. 3, 141-201. D’Aspremont et al., 1983, On the Stability of Collusive Price Leadership, Canadian Journal of Economics, vol. 16, no. 1, 17-25.


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617. The authors showed that, for a given number of carriers, one can always find a stable split-up between the group of conference carriers and the group of independent carriers. However, this literature does not consider firms with lumpy supply, nor does it take market entry into account. Therefore, the setup has to incorporate these aspects in order to be applicable to the liner industry with regard to the impact of conferences on market outcomes.

A Model of the Liner Industry Basic Set-up of the Model

618. We model the liner market on a run from one port to another port. The following assumptions are essential to our model, as they address particular features of the liner market:

1. Lumpy supply: The capacity which a carrier has available on the run can only be

varied in discrete steps by adding or withdrawing a vessel. For simplicity, each carrier is assumed to deploy at most one vessel on this run and the capacity of all vessels is the same. The capacity of a vessel determines the maximum number of standard containers (a given number of TEUs) which a carrier can transport on one trip. Therefore, the capacity each carrier has available is constrained.

2. Operating cost of a carrier: Deploying a vessel on the run under consideration

comes at a cost, since carriers have to pay seamen, fuel, etc. Furthermore, carriers lose revenue because they could deploy the vessel on a different trade (opportunity costs). The overall costs of deployment are assumed equal for all carriers. We can model the longer and shorter trade routes by considering higher resp. lower costs of deploying a vessel.

3. Negligible cost of transporting containers (up to capacity constraint): A

carrier’s overall costs do not depend on the number of transported containers, i.e. marginal costs are zero.

4. Market entry: Outside the market there exists a sufficiently large pool of carriers

ready to enter the market. This can be interpreted as the existence of a sufficiently large market outside of the run between the two ports under consideration.

5. Price competition: Carriers compete by setting prices. Carriers’ prices refer to the

transport of one container. There is no price discrimination.

619. The following assumptions are of a more technical nature and complete our model:

1. The total demand for container transport on a single trade is linearly decreasing in

prices. Note that we make no assumptions with regard to the slope and the axis intercept of the demand function. Therefore, we are able to adjust the demand function in a way to model inelastic demand. Furthermore, it allows distinguishing between smaller and larger market sizes (by parallel shifts of the demand function).

2. We assume that the carrier with the lowest price sells first to the shippers with the highest willingness to pay for container transport. If – due to the capacity


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constraint of the carrier – not all shippers are served then the carrier with the second lowest price serves the remaining shippers with the highest willingness to pay for container transport, and so forth. In other words: “Vessels with lower prices are booked first. Shippers with higher willingness to pay are served first.”113

3. If some carriers charge the same price then the demand is distributed evenly among these carriers.

4. All carriers know the model (i.e. the demand function and the cost conditions of their competitors). Moreover, when it comes to setting prices, we assume that carriers know how many other carriers are active in the market.

620. The model allows a detailed analysis of the economic impact of the specific features of the liner industry that are named by the ELAA as potential sources of an “inherent instability”: We consider carriers with lumpy supply and high fixed costs for deploying a vessel, compared to low variable cost. We will focus on inelastic demand conditions. On the other hand, since vessels with lower prices are booked first the demand of the individual shipper is elastic. We fully take into account the contestability of the liner market since there are always carriers “ready” to enter the market if it is worth doing so. Furthermore, the number of carriers in the market is not considered as exogenously given but determined by the market conditions. Our results are general with regard to the market size, i.e. our analysis covers the analysis of small as well as large trades.

621. To keep the model tractable we have made several simplifying assumptions as described above which are quite common in the literature. In particular, we assume that carriers are operating under the same supply and cost conditions (assumption of symmetry between carriers). However, we do not consider this to be a substantial shortcoming of our analysis because we mainly focus on market features that are named as potential sources for instability by the ELAA. Asymmetries between carriers are not claimed to be a source for instability in the liner market.

Different Regulatory Regimes

622. Our market model can be applied to different regulatory regimes. We will analyse the following three different regulatory regimes:

Table V-4 Regulatory Regimes Name of regulatory regime Economic characterisation 1. “No-Conference” forbids carriers to form a conference; as a

consequence all carriers compete as independents. 2. “Conference-Independents” allows formation of a conference as well as

competition by independent carriers. This conforms to the current legislation.

3. “No-Independents” forbids the existence of independent carriers, i.e. every carrier active in the market has to join the conference.

113 This assumption has been dubbed “efficient rationing” in the literature.


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623. To evaluate the economic impact of a repeal of Regulation 4056/86, which allows conferences alongside with independents, we will compare the market result of the current Conference-Independents regime with that of the No-Conference regime. Next, in order to evaluate the economic impact of the existence of independent carriers, we will compare the Conference-Independents regime with the No-Independents regime.

624. The No-Conference regime is modelled as a game with two stages. In the first stage each carrier decides whether to deploy a vessel on the considered run between two ports, or to stay out of the market. In the second stage, all market participants simultaneously decide on their individual prices without communication between each other (since there is no conference).

625. The Conference-Independents regime is modelled as a game with three stages. In the first stage each carrier has three choices: He can deploy a vessel and join the conference, he can deploy a vessel and become an independent, or he can stay out of the market. Suppose that the number and structure of market participants is known by all carriers in stage two. Then, in the second stage the conference carriers agree on a common price which becomes known to anyone else (suppose the conference price is published). Finally, in the third stage, the independent carriers set their individual prices without communication between each other, while the conference carriers are assumed to stick to the announced conference price.114

626. The No-Independents regime is modelled as a game with two stages. In the first stage, carriers decide between joining the conference by deploying a vessel, or staying out of the market. In the second stage, the conference carriers agree on a common price. Table V-5 summarises the different games.

Table V-5 Timing of the game under the Different Regulatory Regimes

No-Conference Conference-Independents

No-Independents

Stage 1: • Deploy a vessel or • Stay out

• Deploy a vessel and join conference or

• Deploy a vessel and join independents or

• Stay out

1. Deploy a vessel and join the conference or

2. Stay out

Stage 2: All market participants set their prices without communication between each other

Conference members agree on a common price and publish it

Conference members agree on a common price

Stage 3: Independents set their prices without coordination between each other

114 This is a crucial assumption because there usually is an incentive for conference members to slightly undercut the agreed conference price afterwards. For a discussion see the concluding section.


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627. Note that the results for the Conference-Independents regime and the No-Conference regime can be considered as corner stones for reality. A repeal of Regulation 4056/86 will promote a move of the liner industry from the Conference-Independents regime into the direction of the No-Conference regime. In contrast, the No-Independents regime only serves the purpose of a benchmark.

Analysis and Results of the Model

628. Before presenting the results of our theoretical analysis a short note on the method is in order. Each regulatory regime, as summarised in Table V-5, defines a game on its own that can be solved analytically. We will apply the solution concept of a Nash equilibrium. This enables us to compare the different equilibrium outcomes of the games, where we will focus on the respective equilibrium results on prices, individual revenues and profits, ship load factors, numbers of ships in the market, and their distribution to conference members and independents (as far as possible), and social welfare (which is defined as the sum of carriers’ and shippers’ profits).

629. Note that the comparisons and their interpretations will not always be easy. The equilibria of two different regulatory regimes for the same market will differ in several variables which are also interrelated (for example, the number of market participants will affect the market price). It is the strength of our approach that allows us to evaluate regulatory regimes by taking into proper account the important interdependencies of the market.

630. A Nash equilibrium is defined as a situation in which no carrier can increase its profit by changing its behaviour. A look at Table V-5 shows that we have to solve games with sequences of two or three stages. To solve such a game one uses a refined equilibrium concept, the so-called subgame perfect Nash equilibrium. Quite intuitively, it requires us to solve the game backwards (backward induction). For example, in the No-Conference regime we have to start by solving the price game of stage 2 (including load factors, individual revenues and so on) for a given but arbitrary number of market participants. Then, knowing the result, we can solve stage 1 of the game in order to determine the equilibrium number of market participants (which will then imply the corresponding price equilibrium of stage 2). This corresponds to the reasoning of a rational liner company. A company will first calculate its revenue under the assumption that it enters the market (corresponding to stage 2), then it will decide about entry, taking into account the expected market result and the cost of entering the market (stage 1).

631. In the following, we will consider the impact of the regulatory regimes on market structure and service reliability, prices and welfare. As an indicator for service reliability we will check the existence of a Nash equilibrium for the complete market. In particular, we figure out whether there exists an equilibrium number of carriers in the market. A regulatory regime that sometimes induces carriers to continuously revise their status and the market entry decision has not a stable number of carriers in the market. In that case, we will say that the regulatory regime endangers service reliability because it entails deadweight losses (investments, planning, transaction costs, ship deployment) and leads to fundamental uncertainty on the side of shippers (“Which market structure will I be confronted with tomorrow?”). We will also look at


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price levels and price volatility. As an overall measure of welfare we will compare the sum of shippers’ and carriers’ profits in the various regulatory regimes.

The impact of Conferences: Comparisons of the Conference-Independents and the No-Conference Regimes Market Structure and Service Reliability

632. Consider the No-Conference regime, where all carriers compete in prices on an equal footing. It turns out that this regime always has a unique Nash equilibrium which we shall call the competition equilibrium. In particular, this equilibrium determines a stable number of carriers in the market. This result holds generally, that is, for large as well as small trade markets (e.g. long or short trade routes, boom or recession), for different market entry costs, and for an inelastic as well as an elastic demand function. The intuition behind this result is simple, if the ensuing price game has an equilibrium in pure strategies: Firms will then reduce prices until their capacity is sold completely (implying that each carrier’s load factor is 100%). Since every market participant adds to the overall capacity, it follows that the equilibrium price and therefore the revenue of an individual carrier is strictly decreasing in the number of market participants (and this property can be shown to hold also in the case that price equilibrium is in mixed strategies, as described in Table V-3 above). It follows that there is a unique number of market participants at which individual revenues cover the operating cost in the market. If the number of market participants would be raised by only one additional carrier then the individual revenue would not cover carriers’ cost any more.

633. Note that in the competition equilibrium no carrier has an incentive to either enter or leave the market, implying that the number of market participants is stable. Therefore, we cannot find an indication for a lack of service reliability in the No-Conference regime.

634. The results for the Conference-Independents regime are more complex.115 Under certain conditions there exists an equilibrium with a conference that fulfils the conditions of internal and external stability as described above jointly with the existence of a unique number of market participants. We shall call this a conference-independents equilibrium. In such an equilibrium, the independents undercut the conference price marginally, say, by 1 cent. The independents sell their full capacity (load factor of 100%) while the conference participants usually do not (load factor smaller than 100%). This generates higher individual revenues for the independent carriers than for the conference carriers. Note that it follows that each carrier would prefer to be independent rather than a conference member. However, price competition between independents is very harsh, and an additional independent carrier in the market would severely drive down prices and profits; therefore it can be wise to stay in the conference although independents have higher profits due to their higher load factor.

115 Note that the equilibrium of the No-Conference regime is always a Nash equilibrium for the Conference-Independents regime, too (the one with zero members in the conference), since the setting up of a conference requires a joint action by more than one liner. However, in the following we analyse the Conference-Independents regime under the assumption that a conference is being set up.


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635. It should be noted that the results stated for the conference-independents equilibrium are quite typical for a model of sequential price competition. Those firms (here the independents) who can adapt their prices to the prices of others (here the conference members) enjoy a “second-mover advantage” in that they can attract more customers by undercutting the others slightly.116 At the same time, sequential price setting softens competition compared to simultaneous price setting so that both groups effectively benefit from it. This is why firms may hesitate to join the (free-riding) group of second-movers.

636. A conference-independents equilibrium does not always exist. This can be explained as follows. It can be shown, and is quite plausible, that the individual revenues of independent and conference carriers decrease strictly as the number of market participants (of any kind) increases. However, recall that the revenues of independent carriers always exceed those of the conference carriers. Therefore, it is possible that the following situation arises: (i) an outside carrier would like to enter the market as an independent, since he can cover operating cost; (ii) however, his entry would drive revenues of the conference carriers below operating cost, so that a conference carrier would then exit the market; (iii) once a new independent has entered and a conference carrier has exited the market, an independent carrier would find it profitable to join the conference (mainly because this would reduce the number of independents by one and thus the profit of all carriers increases). When these three conditions are satisfied, there exists no equilibrium in pure strategies in the Conference-Independents regime. Table V-6 describes a situation of instability in some more detail.

Table V-6 Instability Under the Conference-Independents Regime

Suppose a potential market entrant can choose between three alternatives: becoming a conference carrier (C), becoming an independent carrier (I), or not entering the market at all (N). For simplicity, assume that, with a given number of carriers before entry, everyone chooses to become a conference member. The potential entrant, carrier A, can choose from the strategies (N,C,I). For each strategy, the following table lists the profits of each conference carrier (first number) and of the entrant (second number), assumed in this example. The entrant would prefer to enter as an independent carrier, as is indicated by the numbers (0<0.5<1) (here the second-mover advantage dominates). However, once this has happened, the market is not profitable any more for the conference carriers (the -1) because the number of market participants has risen. Hence, one of the conference carriers, say carrier B, should leave the market (assuming that it is not profitable to become a second independent carrier, which is reasonable because this would put even higher pressure on prices). After this has happened, the number of carriers in the market is the same as before, implying that, as already stated, the condition of external stability requires that all carriers join the conference. Thus, carrier A who entered the market as an independent will now find it profitable to join the conference. But if he does, this will invite the other carrier, B, who dropped out of the market, to re-enter again as an independent carrier. And so on.

116 Models of competition in quantities (Cournot competition) usually lead to the opposite result, i.e. a first-mover advantage. However, liner conferences are usually regarded as price leaders, not as leaders in quantities.

N C I 3, 0 0.5, 0.5 -1, 1


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One might argue that the independent carrier A will not join the conference if this triggers re-entry of carrier B. But why not? If carrier B re-enters, some other conference carrier (say, carrier C) might drop out of the market as a response. Moreover, the sequence of moves is not always as clear as indicated above. There may also be some uncertainty or inertia in carrier B’s re-entry to the market. Therefore it is plausible to expect some circling of market participation and of conference membership in the above example.

637. When there does not exist an equilibrium in pure strategies with respect to the “status decision” (i.e. the choice between conference membership, independent operation, and staying out of the market) then there will surely exist an equilibrium in mixed strategies. In such an equilibrium, firms will constantly try to take each other by surprise, similar to the circling behaviour described in Table V-6. Our model is not very suitable for a rigorous treatment of a mixed strategy equilibrium with respect to the status decision.117 In the following we will therefore take a simplified approach by assuming that, if a (pure) conference-independents equilibrium does not exist, the market can be described by circling behaviour among a few firms, along the lines described in Table V-6.

638. Note that there is reason to believe that status mixing (or circling) is more of a concern than price mixing as described in Table V-3. In particular, market entry and exit will usually not be without cost. Moreover, the availability and stability of supply may be a more fundamental concern for shippers. Therefore, the non-existence of a pure equilibrium can be interpreted as an unreliable service in the Conference-Independents regime. Note that this kind of instability cannot occur under the No-Conference regime, since there always exists a stable competition equilibrium with a unique number of firms.

639. Figure V-1, to be explained immediately, shows for a numerical example the number of market participants for the No-Conference regime and the Conference-Independents regime.

640. Figure V-1 displays the number of carriers as a function of the market size. Market size is shown on the horizontal axis; it is increasing from the left to the right from “Small trade” to “Large trade”.118 The vertical axis counts the number of carriers (vessels) in the market.

641. The black line segments depict the number of carriers in the equilibrium of the No-Conference regime. The jumps are due to the fact that capacity is lumpy. As the market increases an outside carrier will find it profitable at some point to enter the market. After this threshold point, the equilibrium number of carriers will stay

117 In particular, we did not specify the number of carriers outside the market and capable of entering. Moreover, for a sensible discussion of an equilibrium in the status decision one should introduce some heterogeneity between the carriers with respect to their propensity to stay in the market resp. to enter the market. For example, carriers in the market usually differ in the form and strength of their customer relationships, their route-specific investments made, and their options outside this market. Likewise, carriers outside the market differ in their ease to enter this market. Heterogeneity of this sort would have a major impact on the nature of a mixed-strategy equilibrium. 118 In this and the following figures variations in the market size are based on parallel shifts of the demand function. Functional and numerical specifications are given in Annex IV.


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constant for slightly larger market sizes. As a result we obtain a regular step function for this regime.

Figure V-1 Number of carriers under the No-Conference Regime and the Conference-Independents Regime.

Number of carriersNo equilibrium No equilibrium

A

B

C

D

Small trade Large trade

Conference-IndependentsNo-Conferences

642. The red line segments show what can happen in the Conference-Independents regime. For regular, but short intervals the curve exhibits a single number of carriers. These are the intervals where a conference-independents equilibrium exists. In the other intervals the curve exhibits three different numbers of carriers, indicating that there is circling behaviour (so that no stable number of carriers exists). Note two properties of our example:

643. In the regions of instability there is initially room for even two firms entering the market as independents. Double entry would of course have an even stronger deteriorating effect on conference carrier’ profits so that two of them would then consider exiting. In return, this would invite the entrants to join the conference, and so forth. Notwithstanding, it is also conceivable that only one carrier enters and leaves at a time.

644. Consider Figure V-1 For market size A the number of carriers can be equal to B, C, or D. Assume that the number of carriers in the market is equal to B. Then, one or two independent carriers could enter the market and cover cost of market entry. The number of carriers in the market then rises up to C or D, respectively. However, the market entry runs conference carriers into losses. For that reason one or two of them will leave the market. This invites new entry so that the number of carriers is unstable, oscillating between B, C and D.


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• In the figure, the regions of instability are not smaller than the regions of stability. This indicates that the problem of instability is not a side-issue, i.e. the chances for conferences to destabilise the market may indeed be significant.

645. Comparison of the No-Conference (black) and Conference-Independents (red) curves in Figure V-1 shows that the number of ships in the market is sometimes identical for the two regimes and sometimes higher for the Conference-Independents regime. Since conferences are used to mitigate price competition, more firms fit into the market. However, one also shows (see below) that welfare is always lower in the Conference-Independents regime than in the No-Conference regime. Thus, the larger number of firms under the Conference-Independents regime is an indication of excess capacity.

646. We come to the following conclusions concerning market structure and service reliability.

647. Coordinated behaviour between carriers, as is allowed in the Conference-Independents regime, is a potential danger for service reliability in the sense that the market structure itself (i.e., the number of market participants and their distribution to conference members and independents) may be unstable. Moreover, conferences may contribute to excess capacity in the market. In contrast, the No-Conference regime leads to stable conditions of supply and to a reduction of excess capacity.

Prices and Welfare

648. Concerning prices, we start by looking at the short-run effect of a repeal of conferences, taking the number of ships in the market as fixed and given from the Conference-Independents regime. In the short run, the abolishment of conferences will unequivocally lead to a reduction of market prices. This is demonstrated in Figure V-2. The red curve in this figure depicts the market prices under the Conference-Independents regime. Since the independent carriers will undercut the conference price only marginally, say, by 1 cent, the prices of conference and independent carriers cannot be distinguished in the figure; they are depicted by the same red curve. Similar to figure V-1, for certain market sizes the equilibrium market price does not exist in the Conference-Independents regime. This is due to the lack of a pure equilibrium in the status decision. For instance, for market size A the price can be equal to B, C, or D, depending on how many independent carriers are active in the market.119

649. Suppose that Regulation 4056/86 is repealed, so that conferences are disallowed, but that the number of carriers is still given by the Conference-Independents regime (short run). The black curve in Figure V-2 depicts the price which comes up (rises?). Observe that the black curve is always below the corresponding red curve (arrows always show downwards). The reason is that conferences are used to mitigate price competition. Therefore, it can be expected that a repeal of Regulation 4056/86 will reduce market prices in the short run.

119Again, note that none of these prices is stable in the long run. Price will be low if one or even two carriers enter the market as independents. It will be high if conference carriers decide to exit the market in order to prevent losses. Since there is no stable equilibrium in the status decision, prices will be volatile as well.


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Figure V-2 Prices under the Conference-Independents Regime and after Repeal

of Conferences in the short run (number of firms still determined by the Conference-Independents Regime).


PricesNo equilibrium No equilibrium

A

B

C

D

Conference-IndependentsNo-Conferences for given number of carriers

650. We noted above that our results are in line with other models of price competition. In particular, sequentiality of price setting softens competition. This suggests the following interpretation of conferences. Due to the need to reach an agreement, a conference exhibits internal inertia in the decision process, particularly in revising its price. It is this inertia that extends to the competition process as a whole, resulting in a higher market price for any a given number of carriers in the market.

651. Turning to the long run effects, it must be taken into account that the change of regulatory regime can affect the number of carriers in the market. Due to the higher level of competition under the No-Conference regime some less efficient carriers might reduce their capacity (i.e. reduce excess capacity in the market) or move to different markets after a repeal of conferences. As a consequence, it might happen that the market price in a No-Conference regime is higher than that in the previous Conference-Independents regime.

652. Figure V-3 demonstrates the long-run effects of a change in the regulatory regime on prices. The black curve shows the price in the No-Conference regime in the overall equilibrium (i.e. taking account of induced market entry or exit). The curve is upward sloping with regular downward jumps. In the continuous parts the number of ships is constant, hence, with constant supply and growing demand the equilibrium price is increasing, and so is carriers profit. However, when profits reach a threshold level, a new carrier will enter the market and drive prices down, which is the discontinuous jump downward. The red curves are the same as in Figure V-3, describing the long-run situation in the Conference-Independents regime.


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Figure V-3 Prices under the Conference-Independents Regime and after Repeal

of Conferences in the long run (number of firms adapted).


PricesNo equilibrium No equilibrium

Conference-IndependentsNo-Conference

653. Comparison of prices under the two regimes shows a mixed result. Consider the narrow intervals where the Conference-Independents regime has a stable equilibrium. The thin vertical lines connect the market prices in the No-Conference regime. To the right of a thin line the number of ships is the same in the two regimes; thus, the Conference-Independents regime leads to a higher price. In contrast, to the left of a thin line the Conference-Independents regime has one more carrier in the market leading to a lower price. Considering the intervals where the Conference-Independents regime has no stable equilibrium shows that prices are changing continuously between levels above or below the market price of the No-Conference regime, depending on the number of carriers in the market.

654. To assess the overall long-run effects on welfare one has to take account of two factors. First, the market price has an effect on carriers’ and shipper’s profits, the net effect being determined by the quantity transported. Since lower prices increase the quantity of transported containers this has a positive effect on welfare. Second, the number of carriers determines the total operating costs of vessels (while its impact on the market price is already taken account of in the welfare effect of prices). Our numerical calculations suggest that there is a clear-cut relationship: welfare under the No-Conference regime is always higher than under the Conference-Independents regime.120 Obviously, if the Conference-Independents regime provokes more market entry (and thus lower prices), this is not welfare enhancing once the operating costs of ships are taken into account. In the language of industrial economics, the Conference-

120 The No-Conference regime generates in many cases the maximum attainable welfare subject to the condition that carriers make no losses.


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Independents regime induces “excess entry” (implying excess capacity). We thus come to the following conclusions concerning prices and welfare.

655. A repeal of conferences will in the short run (before market entry or exit occurs) reduce market prices. In the long run (taking account of market entry or exit) there is no clear cut relationship between prices. Notwithstanding, the No-Conference regime always leads to higher social welfare, since it gives the right investment incentives. If prices are lower under the Conference-Independents regime, this is only due to excess capacity (over-investment).

656. Both the No-Conference and the Conference-Independents regimes can lead to price volatility. In the No-Conference regime this is due to price-mixing. In the Conference-Independents regime, the source of price instability lies in the possible non-existence of an overall equilibrium. This is because prices strongly depend on the number of carriers in the market, and the number of carriers in the market is not always stable under a Conference-Independents regime.

The impact of Independents: Comparisons of the Conference-Independents and the No-Independents Regimes

657. What impact did independent carriers have when they first appeared in the liner market? In order to assess this question from a theoretical point of view we compare the market results of the Conference-Independents regime and the No-Independents regime which, by definition, allows for conferences but not for independent carriers. In this regime, the conference acts as a single monopoly. Outside carriers are free to enter the market as conference members, implying that the monopoly profit will have to be shared by a larger number of carriers, however, consumers (shippers) will always have to pay the monopoly price.

658. Figure V-4 displays market prices under the Conference-Independents (red curve, identical to Figures V-2 and V-3) and the No-Independents (blue curve) regimes. Not surprisingly, the price of the No-Independents regime (monopoly price) is well above that of the Conference-Independents regime. Moreover, in the No-Independents regime the market price continuously increases as the market size grows. In the background, there is a lot of market entry, since many carriers wish to have a share of the monopoly profit of the conference. In view of the cost of entry, there is overinvestment (excess capacity) and the market is characterised by low load factors in equilibrium. In contrast, under the Conference-Independents regime, the market price is bounded from above because the number of competing independent carriers increases as the market grows. There is still excess capacity, but on a smaller scale, as waste of resources is kept in check by the competition of independents. The only advantage of the No-Independents regime is that it assures stability, both in the entry decision and in the choice of prices (since there always exists a unique number of participants in equilibrium, and the monopoly price is uniquely determined). In contrast, recall that the Conference-Independents regime can lead to volatility in both respects. But this stability of the No-Independents regime comes at a high price in terms of social welfare. We come to the following conclusion concerning the impact of independents.


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Figure V-4 Market Prices under the No-Independents and the Conference-Independents Regimes

Prices

Conference-IndependentsNo-Independents


659. The possibility of independent carriers has a massive impact on the behaviour of conferences and on the performance of the market as a whole. Competition between conference and independent carriers reduces excess capacity, decreases prices, and, as a consequence, increases social welfare. Thus, the model confirms an observation made by many insiders of the liner shipping market: the advent of independent carriers fundamentally changed the structure of liner markets by making it more competitive. As a negative side-effect, the competition between independent and conference carriers leads to volatility in the market concerning, both, participation and prices.

660. However, a repeal of conferences would further improve the market, by further reducing excess capacity and eliminating volatility in market participation.

Summary of Theoretical Assessment

661. The main facts characterising the liner shipping industry are:

• Lumpy supply: Capacity can only be varied in discrete steps, by deployment or withdrawal of a vessel or even an entire vessel string. There is a fixed operating cost for a vessel whereas, up to capacity constraint, variable cost for the number of transported containers is negligible.

• Contestability: Outside a market (defined as a run between two specified ports) there are enough other carriers ready to enter the market. Entry costs (besides the fixed operating cost) are relatively low.


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• Inelastic demand: Total demand is not very responsive to the fares. However, an individual carrier faces a high elasticity of demand, since shippers can go to a competitor.

662. The ELAA claims that these facts are a source of an “inherent instability” of the market. According to them, conferences or information exchange systems would have beneficial efficiency effects in this environment, since they would contribute to price stability, reliability of services, adequate efficiently scheduled maritime transport services, and in general to more efficient planning and investment decisions by carriers.

663. The existing theoretical literature that is usually cited to underpin these claims is based on the “theory of the core”. However, this literature is hardly adequate to address liner markets because the competitive process is not adequately modelled. Moreover, this literature gives no clue of how conferences (or information exchange systems) could overcome the instability problems arising in an “empty core” situation.

664. We have therefore developed a new model, based on “industrial economics”, that includes the above characteristics of the liner industry and gives due account of the competitive process. Two features of our approach should be mentioned, one strengthening and one weakening the role of conferences in a market:

• On the one hand, we have modelled conferences as cartels that are able to enforce

agreements internally. This is a crucial assumption because as long as at least one conference carrier does not operate at full capacity he would be able to increase profit by slightly undercutting the agreed conference price (as this would attract additional demand, fill up capacity, and, thus, raise revenue and profit). In Chapter VI we will discuss in some detail how conferences respectively information exchange systems (or, more precisely, the respective block exemptions from Article 81(1)) are capable of stabilising collusive agreements among carriers.

• On the other hand, we have modelled conferences in a very competitive

environment by assuming that (i) there can be independent carriers competing with the conference, (ii) competition takes the form of price competition, which is usually very harsh, (iii) there is free market entry from a potentially unlimited source of carriers outside the market and the outside carriers have the same costs as the incumbents. As a result of these assumptions our model gives a lower bound for the distorting effects of conferences on the market.

665. Of the above-mentioned efficiency effects of conferences, as claimed by the ELAA, our model is capable to address aspects of the issues of price stability, reliability of services, and efficiency of investments. However, we made no attempt to model potential beneficial effects of mere data availability to the quality of planning.


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666. Our main findings are:

1. Conferences can lead to excess capacity (over-investment) and endanger service reliability. The latter effect is due to instability with respect to market participation and conference membership which gives rise to constant moves in and out of the market, as well as in and out of the conference (non-existence of a pure equilibrium).

2. In the short run (before market entry or exit occurs), a prohibition of conferences

will lead to lower prices.

3. In the long run (taking account of market entry or exit) a prohibition of conferences will set the right investment incentives for carriers, so that any existing excess capacity will be removed from the market. As a consequence, the long-run prices will be higher or lower after the repeal of a block exemption (if there was no excess capacity before, the long-run price will be lower than before, otherwise it depends). In any case, social welfare will be higher. Moreover, service reliability is assured because the potential instability with respect to market participation and conference membership is removed.

4. With or without conferences, there can be price volatility. Without conferences,

price volatility is due to price-mixing behaviour (as described in Table V-3 above). With conferences, the source of price volatility comes from the instability of market participation and conference membership.

667. Price volatility due to price-mixing behaviour is not always a problem. This phenomenon is related to the sales offers in retail stores or the airline industry, which we are used to from everyday experience and do not regard as a major problem of market instability. On the other hand, the instability with respect to market participation seems to be more fundamental and more wasteful, if alone because market entry and exit is usually associated with transaction and investment costs.

668. Apart from considering the impact of conferences (resp. the removal of conferences) on a competitive market, we also had a look at the impact of independents on a monopolistic market. The main finding is not surprising and confirms the opinion of many insiders of the market that the advent of independent carriers fundamentally changed the structure of liner markets by making it more competitive:

669. The possibility of independent carriers has a massive impact on the behaviour of conferences and on the performance of the market as a whole. Competition between conference and independent carriers reduces excess capacity, decreases prices, and, as a consequence, increases social welfare. However, the coexistence of independents and a conference can lead to volatility in the market concerning, both, participation and prices.

670. The repeal of conferences would further improve the market result, by further reducing excess capacity and eliminating the potential volatility in market participation. In fact, this repeal leads to the welfare maximising allocation in many cases.


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VI. Future Scenario: Impact of a Repeal of Conferences

671. This paper has produced the following relevant evidence regarding the Commission’s forthcoming decisions on the maritime liner block exemption (Regulation 4056/86):

1. In similar circumstances, reform of other modes of transport, including the abolishment of price-fixing (whether by regulatory agency or industry organisations) and ending capacity coordination, has actually improved the transport (distribution) of goods at lower prices;

2. No “instability” is noticed on routes where conferences are ineffective or do not exist, and other industries that deregulated did not experience instability detrimental to the public interest;

3. Theoretical models of the liner trade incorporating what are normally considered “instability assumptions” yield stable markets with lower prices and improved welfare in the absence of conferences

4. Limited reform of the maritime liner trade to date (such as free confidential price negotiations, and OSRA) have produced benefits;

5. Technological and economic progress continues apace in the industry and is indeed apparently a root cause of the lack of effectiveness of conferences at present

6. Theory and experience further indicates that the abolition of conferences and administered pricing mechanisms, however ineffective, is likely to yield benefits to consumers in the form of lower costs and better service

672. We summarised the current impact of conferences on shippers, at the end of the last chapter. We now turn to the issue of what would happen if conferences as we know them today ceased to exist in Europe, which would be the expected result of abolishing the Regulation 4056/86 and the maritime block exemption. We base this assessment on the results of our trade route evaluation, the U.S. experience in transportation reform, and the theoretical model of conferences in the liner industry.

673. If the block exemption allowing maritime line conferences is abolished, based on theory, experience in other modes, and upon the current liner market conditions, we expect the following developments:

674. Impact on Ocean Rates: Expect Moderate Price Declines – At present conferences have little impact on rates. However, the annual rate guidance may influence rate negotiations, and the fact that conference members assemble and exchange views may have some influence on rate levels, stemming from carriers presenting a „united front“ to shippers. Thus, we expect the ocean rate impact to be very moderate, but with some declines, noticeable to many small shippers. Moreover, increased competition


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puts further pressure on carriers to innovate and improve performance which is the basis for stronger rate reductions in the future. With a view on a future with conferences, if the block exemption is not repealed, one should also keep in mind that their impact on prices might be re-established one day. The last decades saw many structural changes, up to “revolutions” in the liner markets – in such circumstances it is difficult to make and hold up collusive agreements. In the future, particularly if the current consolidation process rounds up, conferences might regain influence on actual prices. After all, they provide suitable institutions, with legal backing, for collusive agreements.

675. Impact on Ancillary Charges and Surcharges – Declines, a Review of Surcharge Determination, and Further Moves to All-In Rates - Already surcharges are under criticism for their size, the opacity of their determination, and how they are unilaterally imposed by conferences. In the absence of conference „guidance“, the united front by carriers on surcharges will weaken, lowering overall rates. Note that carriers can still apply individual formulae to calculate surcharges for their customers. Another possibility is that carriers and shippers will move farther towards „all-in rates“ for the sake of simplicity. On the other hand, certain surcharges will probably be negotiated in individual long-term contracts between shippers and carriers, as this expedites long run rate contracting without forcing carriers to accept all the risks of cost fluctuation.

676. Positive Impact on Service Reliability – The claim that conferences stabilise markets must rest either on their influence on prices and capacity management or on their information function. A pure information function will be evaluated at length in the next section. Furthermore, conferences at present do not manage capacity. However, if conferences have an impact on prices, the theoretical insights and recent experiences of, e.g., the West African trade show that conferences are likely to have de-stabilising effects on markets. So no negative impact upon service reliability is likely if conferences disappear. In contrast, due to the experiences from other industries, our theoretical results, and our trade route analysis we expect that service reliability might even improve. Hence, new-buildings will continue, the size of the average containership will continue to grow, consolidation of ownership will continue and provide fewer but stronger competitors, weaker carriers will continue to disappear, and stronger carriers will gain market share at their expense.

677. Positive impact on developing countries: The Repeal of the block exemption could lead to improvement in service reliability on the thin North –South trades (see West Africa example) with transport prices decreases. Thus exports from these countries, i.e. commodities with a relatively high transport cost share, could become cheaper on the world market.

678. Shippers Expect No negative Impacts, and Substantial Positive Impacts –

Shippers argue that rates will fall and service will improve on average if conferences disappear, as carriers will be forced to respond to customer needs. The ESC and other shipper organisations are unanimous in their view that increased competition is their best guarantee of good service, not conference market coordination. European shippers are not alone; for example, Australia's Productivity Commission has found no support for carrier block exemptions among Australian shippers.


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679. Impact on service quality and innovation could be positive due to increased liberalisation of the market similar to the airline industry, but this will depend on the individual carriers’ investment policies.


firms are doing well in terms of profitability and capacity share and in a more competitive environment they should be able to compete and grow

681. Positive impact on Small carriers: None of carriers are actually small by the normal

definition and a number of these ‘small’ carriers, which are not conference members on all trades on which they operate, are ordering over 5.000TEU (para 138). Liberalisation gives small carriers the opportunity to grow fast (see Ryanair example in the airline industry). It is rather a question of how rapidly they can adapt to a competitive environment than a question of size whether they are successful. Small carriers will find niche market or join alliances. Liberalisation will create more niche markets that allow for rapid growth – see airlines low cost carriers – so more business opportunities for small carriers exist.

682. No impact on investment: Carriers will continue to invest: these decisions are based

on long term strategies by individual companies.

683. No impact on concentration: Concentration is a process independent of the repeal. Carriers are integrating horizontally and vertically (buying terminals), a trend reacting to customer demand for door-to-door services. It provides greater reliability to the Carrier to provide such services if they control all the key elements of the transportation chain.



685. No or positive impact on EU trade: if transport prices drop external EU trade will

grow.

686. No impact on employment: no impact on investment in vessels is foreseen, therefore there will also be no impact on employment neither on vessels nor in ports.

687. Carriers Views Are Mixed – Carriers within conferences argue that conferences are necessary, providing stability and acting as a central body for data collection. However a third or more actually decline to belong to conferences, including some of the largest carriers among the top ten.

688. Other Cooperative Arrangements May Increase – Without the minimum amount of industry-wide cooperation that conferences provide, joint ventures, consortia and alliances are likely to increase in scope. The trend is there anyway, as conferences have declined. By removing an traditional (and some say „anachronistic“) venue for non-competitive collaboration among competing carriers on a given route, ending conferences may spur new partnerships with logistics firms, land transport firms, and carrier-shipper partnerships, sharpening competition.


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689. Other Sources of Information Will Emerge – The functions of the conferences in terms of representing carrier views on trends, seeking and providing information, setting surcharges, and responding to policy issues, are all legitimate functions which will migrate to other organisations in the absence of conferences.

690. No or Positive Impact on Small and Medium Sized Carriers – One can expect no impact on carriers which are small and medium sized enterprises (SMEs) for the simple reason that there are no deep sea international carriers which meet the formal definition of an SME121. The investment cost of a transoceanic container vessel exceeds such thresholds, let alone the cost of a string of containerships sufficient to service a trade route. All deep sea container carriers are “big business” by the usual criteria. Furthermore, many of the smaller carriers are subsidiaries of larger corporations. Smaller carriers can well survive by serving niches and small/short trades, teaming, offering feeder services and the like. Such strategies will make entry possible. It is a question of how rapidly the smaller and medium sized carriers adapt to their competitive environment rather than a question of size. Liberalisation will create niche market opportunities that these carriers can exploit, not unlike in the airline industry with the entry of low cost carriers.

691. No Impact on Cargo Flows – Cargoes are the demand driver of the liner business, which exists to serve international trade. The level and incidence of freight rates, and variations due to competitiveness and the regulatory regime, may readily affect the distribution of benefits among carriers versus shippers, thus impacting public welfare. In an efficient maritime liner market, minor variations in the level of freight rates are of second-order or third-order importance in determining the level and composition of the cargoes constituting international trade flows. So a change in regulatory regime will have no material negative consequence on world trade flows.

692. No or Positive Impact on Port Employment – Port employment is directly generated by terminals and other container handling and cargo transshipping activity, and indirectly by the industries that carriers serve. Port employment directly linked to the liner trade, which is already highly automated and capital intensive, will be unaffected by changes in the regulatory regime. Direct port employment is related to container throughput volume by location. So, conferences have little or no measurable impact on levels of port employment. Therefore, changing the regulatory regime impacting conferences will not impact port employment. However, if port calls would be raised due to the trend to hub-and-spoke systems this would also have positive effects on port employment.

693. No affect on Port Congestion – Congestion at ports is usually a question of shore-side infrastructure, including quays, cargo handling equipment, roads leading to ports, and the like. It is sometimes a matter of channel depth and width. These are matters for public policy makers and the port authorities in charge of privatised ports. It is true that some carriers own ports, or terminal facilities, but in such cases they make shore-side infrastructure decisions as individual commercial entities (not collectively with other carriers). In such cases, they manage their shore-side interests as landlords, not carriers. Conferences have no special or direct impact on such matters relating to port

121 See OJ L 124 20 May 2003 p 36-41.


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congestion. Changes in the regulatory regime of international liner shipping thus will not affect port congestion.


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VII. ECONOMIC IMPACT OF AN INFORMATION EXCHANGE SYSTEM AS PROPOSED BY THE ELAA

A. Evaluation Focus: the ELAA Proposal

694. The European Liner Affairs Association (ELAA) has proposed an alternative regime to the traditional conferences, in a document entitled: “The ELAA Proposal for a New Regulatory Framework for the Liner Shipping Industry”, issued on 10 March 2005, and in earlier documents (See also ELAA Letter of 6 August 2004122). The purpose of this section is to evaluate this specific proposal, and the impact this new regime would have on the liner industry and upon shippers.

695. In the last section we looked at the impact of abolishing the EU liner block exemption, without replacement. Here we scrutinise a specific proposal for a regime for an organisation similar to liner conferences or "discussion agreements" to continue to exist, but in a different and elaborate form.123 This section evaluates the likely effect of the regime as proposed by the ELAA on competition and consumer welfare (especially shippers) if it were adopted.

696. First, we describe key features of the new "information exchange system" proposed by the ELAA; the justification; proposed organisational structure, functions of the organisational components of the system; proposed information processing; and proposed trade route operational coordination.

697. Second, we look at the information currently available to the industry and public, listing and categorising information currently available for and about the liner trade. This section summarises an exhaustive review of currently available data found in Annex C. We then note the relationship between available data, and compare it to that to be made available by the proposed ELAA regime.

698. Third, we discuss in economic terms how additional data may aid carriers in achieving efficiencies in operations, balanced against how it may play a role in anti-competitive collusion.

699. Finally, we summarise our results.

122 See especially an earlier short description of this concept, entitled "Review of Regulation 4056/86:Proposal for a New regulatory Structure", 6 August 2004, ELAA letter to L. Evans, Director of DG/Competition/Services, European Commission, by K.B. Sorensen, and citations contained therein. 123 Establishment of this new regime as fully specified would apparently require a new block exemption regulation, one replacing Council Regulation 4056/86.


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B. Summary of the ELAA Proposal

700. In Annex B we recapitulate the key features of the ELAA proposal. We cite their justification for the need of a block exemption. We provide an overview of the proposed organisational structure of the institution that would house the information exchange system, the functions each organisational component would perform, the information processing system and process, the data and its use in decision making, and the functions of the successors to the traditional conferences. After providing this description, we can posit pros and cons of each feature individually, and of the proposal as a whole.

701. The proposal recognises and emphasises the need of carriers to communicate with each other, and their need for good data to plan. The need of shippers, consumers and other stakeholders (e.g. ports, other transport modes and logistics providers) for good information is not discussed in much detail or not all.

702. Coverage of many areas of interest is good. We discuss coverage for various categories of information at length in Annex C. Excellent data or estimates and often forecasts are currently available for:

1. Demand – cargo volumes 2. Conference surcharges 3. Indices of charter rates and tenure 4. Characteristics of the container fleet, including capacity (supply) 5. Vessel Characteristics, including capacity 6. Investments, vessel orders, new-building, sales and scrapping 7. Some elements of operating costs (fuel, crew costs, insurance) 8. Published liner schedules, service capacity

703. The available data is less complete, or largely unavailable, for:

1. Freight rates actually charged 2. Surcharges and total charges actually applied 3. Carrier specific operating costs and profitability 4. Utilisation rates 5. Carrier market share by route 6. Service quality and reliability

704. Essentially data at the trade route level can be particularly hard for carriers to know, especially for capacity by route, and utilisation by route. The confidentiality of carrier specific data is the main reason why these data elements can be hard to establish.

705. Yet, trade route capacity and utilisation are according to the ELAA two extremely important data items for carriers to know if they wish to cooperate in order to manage capacity and utilisation rates on specific routes in order to keep freight rates at acceptable levels. The ELAA proposal provides an information processing mechanism for making these two decision criteria, capacity and utilisation, as well as demand data, available to carriers. The data is to be tailor made for carriers and presented to liner managers monthly, at a meeting where the liner managers then “vote” on a “forecast” (or goal) for capacity and other issues. Not only does it provide this data, it provides them in a discussion forum. Much of this data is currently available within


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the Conferences, but they are forced to estimate non- conference carrier liftings based on assumptions of capacity that they provide on a route.

Proposed ELAA IES Will Use Sensitive Information

706. Manifests and other shipping documents are confidential, as they contain commercially sensitive information. For each shipment they report information on commodity type and volume and value, often the freight rate for a specific quantity of goods, route, shipper's name, origin and destination, and so forth. This data is only released by most government agencies at a highly aggregated level, if released at all. (The US releases such information via PIERS, discussed in Annex C and below. In Europe, such data is not released in any form. In particular, manifests either contain or permit one to derive information presently unavailable from existing sources for European trades, such as:

1. Volume of specific commodities on a specific trade for review or forecast purposes, in TEU

2. Capacity utilisation and market share in detail

707. In addition, the carriers will provide their freight rate data to the system, currently considered confidential and business sensitive, and held closely.

708. The ELAA proposes that the carriers will provide their freight rate data to the system, currently considered confidential and business sensitive, and held closely. Use of such data would facilitate estimation of patterns and trends of trades by commodity and routes. (Indeed, the reason the US PIERS data stands out is that it arises from manifests, which are also confidential and contain information from bills of lading.) Those with access to the data would have advantages over those without access.

709. Bills of lading and business sensitive confidential documents are not usually available to anyone beyond the contracting parties, and manifests may not be released by governments. A reason why the proposed ELAA information exchange system could generate additional useful information is that it uses otherwise confidential business-sensitive data from bills of lading. The source is not governments, rather, it is the carriers themselves, voluntarily sharing data normally considered far too sensitive to share. Of course, this data is to be processed and aggregated, reducing the sensitivity and firm specificity of the information shared to an extent. It is to be shared on a limited-circulation-basis, only within “a club” of members within the ELAA proposed system.

Basic requirements for collusion

710. In order to evaluate the economic effects of the ELAA proposal we will consider its potential effects on efficiency and also its potential impact on collusion. The ELAA provides in its documents (particularly that of 10 March 2005) a detailed description of the potential efficiency effects of each element of the proposal and of the proposal as a whole. Our task is, on the one hand, to assess to what extent the benefits claimed by the ELAA are reasonable. On the other hand, we have to evaluate the potential effects on collusion. For the latter purpose we will first address the problem of


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collusion more generally, in order to identify valid evaluation criteria for the assessment of the elements of the ELAA proposal.

711. Collusion is an agreement among undertakings to coordinate their market conduct. Not all such agreements are anti-competitive in effect, but agreements on prices, transport volumes, market sharing, or service quality are usually seen to endanger the forces of competition and have very little countervailing benefits. In Chapter V-A we have shown that price collusion in the liner market is detrimental to overall welfare, even in the presence of competing independent carriers, because it either leads to excessive prices or to excess capacity. Price collusion is normally forbidden by competition laws. The question remains whether successful collusion is manageable by conference carriers in reality.

712. Successful collusion requires a joint action by the members of the colluding club. The easiest way to implement a joint action is by use of enforceable contracts. However, under the existing block exemption, liner conferences cannot legally enforce price agreements among themselves. Without contract, a joint action is difficult to implement because of a “free-rider problem” or “prisoner‘s dilemma”. For instance, assume that conference carriers agree on a high price that increases their profits while leaving some of their capacity unused. Then an individual conference carrier could raise his profit even more by cheating on that agreement. He can offer to shippers a small discount compared to the agreed price, thus attracting additional demand for himself, filling-up capacity, and raising his own revenue. His additional profit would come at the expense of the other members of the colluding club. Once they find out about it they are not likely to stick to the agreement themselves anymore. This shows that a colluding agreement suffers from an internal credibility problem making it inherently unstable.

713. On the other hand, the example also illustrates that collusion may be based on a „hidden or implicit contract“ (tacit collusion). If, in the above example, each member of the colluding club believes that his cheating will promptly trigger a period of harsh competition by the other members, then this might seen as a kind of “punishment” and deter him from cheating.

714. What is needed for collusion is the establishment of common beliefs about what is “conforming” respectively “deviating” behaviour and of a conviction that “punishment” will be severe for a deviating carrier. This leads to the following basic requirements for the sustainability of collusion:

Condition 1: Profit from collusion > Transaction costs of collusion

Condition 2: Profit from collusion > Profit from deviation

1. Where the profit from collusion is the additional individual profit of a carrier from the collusive agreement. That is, the carrier’s profit if there is collusion minus his profit if there is no collusion.


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2. the transaction costs of collusion include the carrier’s costs of

negotiations for a common price or on guidelines for pricing, which can be time consuming. They also include the monitoring costs in order to detect deviation.

3. the profit from deviation (or cheating) consists of two

components. For some time, a carrier can make another additional profit from cheating (i.e., from offering small price discounts to shippers while all other colluding carriers stick to the common pricing scheme), but in the more distant future he will incur a reduced profit due to “punishment” by the other members of the club, after deviation has been detected.

715. Condition 1 requires that collusion pays, i.e., the additional profit generated by it must cover the additional transaction costs caused by it. Condition 2 requires that the collusive agreement will hold, i.e., that there is no incentive to cheat. For collusion to arise, both conditions need to be fulfilled for each member in the colluding club.

716. Whether these conditions can be satisfied depends on several factors, some structural and some institutional.124 Among the structural factors, the degree of market concentration ranks high. If concentration increases, the profit from collusion is higher and transaction costs of colluding are lower. As was demonstrated in Chapter III, there is an ongoing process of increasing concentration in the liner market worldwide. Therefore, even though market entry on individual trades is fairly easy for the large mega carriers, the new entrants are likely to be in the club already.125

717. Turning to the institutional factors, one factor favouring collusion is the existence of an agency that allows regular meetings and negotiations (as this reduces transaction costs). Another factor supportive of collusion is availability of reliable information about the market. This is particularly so in an uncertain market environment. Uncertainty poses problems for effective collusion because it makes it more difficult to detect deviation. Two types of error can occur:

• Error 1: A deviating conference carrier gets away unpunished because the effect of his behaviour is misattributed to other factors (like demand shocks).

• Error 2: Costly punishment is triggered because the effect of other market factors

is misinterpreted as deviating behaviour by someone.

718. The possibility of the first error raises the expected profit from deviation. The possibility of the second error reduces the expected future profit from collusion because the agreement may break down with some probability. Finally, a more complicated environment requires a more complicated agreement (partly in order to reduce the likelihood of errors); therefore transaction costs will also be higher.

124 For a general survey see Ivaldi, M. et al., The Economics of Tacit Collusion, Final Report for DG Competition, European Commission, March 2003. Another classical reference is Bain J., Output quotas in imperfect cartels, Quarterly Journal of Economics, 62:617-622. 125 If entry by new firms in a market would be easy this would likely reduce the profit from collusion.


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However, the better the information available to colluders, the better they can avoid Errors 1 and 2. In the following we will assess the ELAA proposal for its impact on both, collusion and efficiency.

Evaluating Information Exchange Proposed by the ELAA

719. One useful way of dividing activities undertaken by the "system" as proposed by the ELAA is to distinguish between proposed "pure information exchange" activities versus "other" proposed activities. While ELAA calls their regime an "information exchange system", it is clearly much more than just that.

Pure information exchange activities - The ELAA proposal consists of exchange (in various ways) of the following types of data:

1. Trade size and capacity utilisation 2. Commodity developments 3. Capacity developments (including number of sailings) 4. Price indices 5. Carriers’ own market shares 6. Other relevant developments on trade

720. Other proposed activities - In addition, there would be:

7. Discussions and evaluations of the above information (except own market shares) in trade committees, including "forecasting"

8. An Independent Data Service (IDS) as institution carrying out information exchange

9. Publication of certain data exchanged by carriers 10. Common formulae for surcharges and ancillary charges

721. We start by analysing the pure information exchange part (1. through 6.), assuming initially that there are no subsequent discussions in trade committees. In a next step we will look at discussions as well as alternative forms of dealing with the information (like making it publicly available, in particular to the shippers). Then, we will address the common formulae for surcharges and ancillary charges. A look at the overall effects of the whole proposal will complete the picture, followed by a conclusion.

Evaluation of "pure information exchange activities"

722. Here we look at information exchange only, without discussion and evaluations by a trade committee and without subsequent publication. The basic point is that information useful to promote efficiency in individual carrier operations, independently and individually decided upon, can also help promote anti-competitive collusive behaviour by a number of cooperating carriers, acting collectively. That is, in general, information sharing can either help carriers compete or to collude more effectively. A main requirement for effective collusive behaviour is for colluders to detect deviations from the collusive behaviour by "cheaters", so that the other colluders can then "police" and enforce the collusive arrangement.


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723. The following important aspects of information relevance and utility will be assessed:

• Relevance for collusion: The assessment of the impact of information availability on the risk of collusion will follow the concept set out above.

• Relevance for efficiency: The ELAA claims several efficiency effects of information exchange that will be assessed.

• Level of detail: The precision or coarseness of the data (concerning regions and other characteristics except timing), i.e. the degree of aggregation versus desegregations.

• Historic delay (timeliness) and frequency: How often is the information released (frequency) and does it refer to a recent or to a more distant time period, that is, timeliness or historic delay?

• Reliability and credibility: Information shall be said to be reliable if there are not many mistakes or errors in collecting and processing it. Information (or information source) shall be said to be credible if there are not many distortions (by intention) in collecting and processing.

724. In general, the more relevant a piece of information is the more useful it is, for decision making and to guide operations. To be useful it should be precise, credible, timely, and frequently available. These criteria hold for its utility for improving efficiency – however, they also hold for its utility to support collusion. As stated above, providing better and more detailed information will help to raise the profit from collusion, to police deviations by cheating carriers, and to reduce transaction costs – all of which are favourable to sustain a collusive agreement.

725. The main reason is that additional information can neutralise effects of an uncertain market environment (noise), by cutting through that "noise". Noise, uncertainty and lack of information tend to mask "cheaters," tending to allow them to undercut attempts at collusion while escaping detection. Information that aids efficient operations by carriers acting independently also tends to help colluders police each other's collusive activity.

1. Trade size and capacity utilisation by direction

726. Type of data: The ELAA proposes to collect data on trade size by direction and capacity utilisation and provide them as monthly aggregate figure on a region/zone to region/zone basis.

727. Caveats: Note that the ELAA proposal is ambiguous on two issues, geographic level of aggregation, and automatic data collection. It remains unclear what is meant by “region/zone-region/zone”-level of aggregation (for example, does it refer to “North Europe – East Asia” or to “North Sea Range – Shanghai region”?).

Potential collusive impact

728. Relevance: Information on trade size and capacity utilisation can be helpful in monitoring and keeping up discipline in a group of colluders. The reason is that it allows to identify whether a deviation has taken place and to punish a deviator more efficiently. Quantity information is particularly important to sustain collusion (more than prices, as will be argued below). Note that it is not necessary to identify the deviating carrier in order to sustain collusion, since punishment by fallback to outright


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competition does not depend on the identity of the cheating carrier. However it might be helpful knowing his identity to reduce the cost of punishment.

729. Level of detail: In comparison to more aggregated data, data disaggregated by trade route reduces noise that might cover deviating behaviour. Moreover, it also allows the colluders as a group to tailor punishment or retaliation more efficiently. For example, since not all carriers are active on all routes, if deviation has been observed on one route, it will be desirable for the colluding group to confine punishment (retaliation by switching to outright competition) to the route in question. Finally, a low level of aggregation might in some instances facilitate identification of a deviating carrier, in particular on highly concentrated routes. This would enable more tailored punishments, and better targeted retaliations.

730. Historic delay, timeliness, and frequency: A monthly provision of current information is a case of high frequency and low delay. This facilitates collusion, since it allows sort out noise (may even lead to identification of an individual carrier’s actions) and arrange quick punishment in case of deviation.

731. Reliability and credibility of data: The more reliable and credible the data is the more useful it is for supporting collusion. Reliability and credibility will depend on collecting and processing procedures and institutions. If the information is probably automatically drawn from the bills of lading the collection process is very objective, i.e. reliable (no errors) and credible (no manipulation). On the other hand, if there is room for manipulation, the information will be less useful for monitoring.

Potential efficiency effects

732. Relevance: According to the ELAA this information enables carriers to understand the market and adjust capacities more efficiently, thus assuring stability of supply for shippers. In particular, the ELAA points to deployment decisions and to the need to coordinate schedules with feeder operations, facilities and access to ports. The issue here is that a carrier’s own, internal knowledge is drawn from a smaller and less complete data base, so it is noisier and less reliable than data from an IES.

733. Level of detail: Disaggregation by trade route cleans random noise from the data, noise or masking that arises from lumping in data from various markets. Disaggregated data allows for better tailored regional planning.

734. Historic delay and frequency: Monthly provision of current information may allow sort out noise (shocks due to particular events) and make more precise planning.

735. Reliability and credibility of data: The more reliable and credible the data the higher are the potential efficiency effects.

Assessment

736. Assuming the maximal attainable reliability and credibility of data, the following conclusion can be drawn. The benefits of the information claimed by ELAA are reasonable in principle, and the decisions in question are quite important. However,


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information on quantities can significantly increase the danger of collusion, by helping colluders identify and retaliate against cheaters.

737. It might therefore be advisable to provide this information in a more diluted form, for example, at a higher degree of aggregation. The level of detail or geographic aggregation must be chosen carefully (by appropriate definition of the “region/zone-region/zone” level), in particular on highly concentrated routes. The load of a few ships should not stand out clearly in the data, that is, knowing for certainty one carrier's part of the data should not be sufficient to permit them to compute or guess the rest.

738. The following test might be of guidance: the definition of the market or trade route in question should be large enough so that its usual stochastic noise, or randomness, as measured by the standard deviation of in the reporting period, exceeds the normal load of several ships, say, a string of seven ships. This degree of imprecision would not upset planning very much, but make collusion more difficult. In particular it will make it difficult to identify behaviour of individual carriers.

739. Also the historic delay and frequency should be chosen carefully. A monthly issue of a non-delayed figure is too dangerous with respect to collusion because it allows quick punishment of a cheating carrier.126 Moreover, to get the "planning" benefits, monthly data is not needed. The norm for "historic data" in this context in the EU is one year, in any event. Quarterly data would probably be sufficient for many planning purposes.

2. Commodity developments

740. The effect of disaggregating trade volumes by commodity types is very similar to geographic disaggregation – it may facilitate policing of cheaters. The logic of the analysis is similar to that above.

741. Type of data: The ELAA proposes to distribute aggregate figures of volumes of specific commodities carried on a trade on a monthly basis without delay.

742. Caveats: The word “trade” leaves room for interpretation. Will these data be a refinement of the data on trade size (“region/ zone to region/zone”) or will they be based on a broader regional level?


743. Relevance: The evaluation of the effects on collusion is very similar to the trade size above, item 1. Just as data on trade size, data on commodities can also help to identify whether deviation or cheating took place and to punish or retaliate more efficiently. Note that break-outs of both trade size and commodity data may be particularly problematic, in the sense that combining the two data break-outs provides greater detail and may more readily enable participants to identify other individual carriers, or detect the presence of cheating on the route generally.

126 One month is very rapid feedback for some trade routes. For example, the steaming time from Shanghai to Rotterdam without stops is twenty one days at 22 knots; say twenty five days with 6 stops of 16 hours each. For this trade route, one month delay is about one ship-cycle through the route.


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744. Level of detail: In comparison to more aggregated data, providing disaggregated data by commodity reduces noise that might cover a deviating behaviour and also allows tailoring retaliatory punishment more efficiently. In particular, certain special markets, like fresh fruit, are served by a few specialised carriers.

745. Historic delay and frequency: A monthly provision of current commodity information raises the dangers of collusion, since it allows for the better sorting out of noise, and permits arrangement of quick punishment in case of deviation. Recent data in a thin specialised market would certainly help other carriers active in that trade identify cheaters.

746. Reliability and credibility of data: A high reliability and credibility will add to the potential collusive effects of the data.


747. Relevance: The ELAA claims that this information helps carriers to understand the market by enabling them to make better assessment of commodity trading patterns. In particular, the ELAA points to investment and deployment decisions for special equipment (like specialised ships and containers). Two very different types of special containers exist: refrigerated (reefer) containers and other special containers i.e. open tops, flat racks, open sided, bulk etc.

748. Reefer containers, used for the transport of perishable goods under controlled temperature are costly to buy (US$15,000 per 20', US$19,000 per 40') and to maintain due to their sophisticated equipment. They usually yield good revenues due to the high value of reefer cargoes. Their number is steadily increasing as more and more reefer cargoes are containerised and with 625,000 units in service, they represent almost 6% of the total current world container fleet. The decision for a carrier to offer or not this type of equipment to his customers is a matter of market opportunities and ships capacities, as these containers need to be plugged to the vessels electric supply. The decision to operate a fleet of reefer containers is made within a company and is not related to conference membership.

749. Other special containers, and particularly open tops containers represent slightly more than one per cent of the world container fleet. Their number has decreased over the years as cargoes for which they had been designed, such as out of gauge cargoes, are disappearing with the development of containerisation. Carriers usually achieve poor utilisation factors with this type of containers as it is extremely difficult to find return cargoes and maintenance costs are high. They are also difficult to position to clients in a cost efficient manner. Carriers more and more reluctantly provide these containers and they are considered as a way to offer a full scope of service to regular customers rather than for their capacity to generate revenues. Decisions to offer this type of equipment are taken by individual carriers irrespective of their belonging to a conference. Container leasing companies have also been reducing their fleet of specialised equipment, increasing the overall scarcity.


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750. Level of detail: Disaggregation by trade and commodity cleans data from noise arising on other commodity markets and allows better forecasting and planning. It may make it easier to put the right amount of special equipment on the route.

751. Historic delay and frequency: Monthly provision of current information on commodities may allow sort out noise (e.g., well documented shocks in other commodity markets) and make more precise planning. Some special equipment serves seasonal trade; e.g. reefers serve the fruit markets. To respond within the growing season, to match special equipment capacity or seasonal fluctuations in demand, carriers arguably need to respond almost immediately.

752. Reliability and credibility of data: The more reliable and credible the data the higher are the potential efficiency effects.

Assessment

753. Assuming the maximal attainable reliability and credibility of data, the following conclusion can be drawn. The benefits claimed by the ELAA are reasonable in principle, and the decisions in question are also important. However, information on commodities can contribute to the danger of collusion.

754. Concerning the level of detail, fairly aggregated commodity information linked to specialised container equipment (like “reefer goods”) based on a highly aggregated geographic level (like “EU-Asia”) would be completely innocuous. On the other hand, if commodity data were a refinement of an already detailed trade size data (on a region/zone to region/zone basis) it would considerably magnify the danger of collusion.

755. Concerning delay and frequency, to generate the beneficial effects, commodity data is not needed on a monthly basis. As with trade size data, quarterly would be sufficient.

3. Capacity developments (including number of sailings)

756. Type of data: According to the ELAA proposal, information should be provided on capacity that has been added or re-deployed in a trade. In addition, the number of sailings of ships should also be provided.127

Assessment

757. The information on added or re-deployed capacity seems to be just a time series of the figures on vessel capacity on a region/zone to region/zone basis. As such it deserves no separate treatment. The ELAA states itself that this time series is simply a compilation of what is already available in the public domain, with some additional refinements.

127 This item was not in the initial ELAA proposal of 6 August 2004 but has been added in the more detailed description of 10 March 2005.


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758. However, the number of sailings of ships is a new aspect. It supplements the information on trade size and capacity. In that respect it may add to the respective collusive and efficiency effects. The above discussion concerning level of detail and timing applies. It should be added that the full portfolio of data –trade size and capacity utilisation data, commodity data, and number of sailings– provided on a monthly basis, could really pose a threat to competition in the liner market.

4. Price index

759. Type of data: Price index by trade, direction and equipment type provided as a monthly figure with three months’ delay. It is an index number referring to a base year (not expressed in monetary terms). The data will be based on the bill of lading and refer to an aggregate of all rates, e.g. on all port pairs. The split by equipment type will refer to dry and reefer equipment. The price index is also considered to be made available to shippers and the wider public.

760. Caveat: Again, it is not completely clear what level of aggregation a “trade” is.


761. Relevance: In principle, price information can help colluders to monitor and maintain discipline in a group of colluders. The reason is that it can allow identifying whether a deviation has taken place, if a member cheats by price-discounting. Note that it is not absolutely necessary to have disaggregated price information, in order to detect the identity of cheating carriers, as detection of an unexpected drop in the price index might be enough to trigger punishment.

762. Nonetheless, it is doubtful whether a price index can be used as a good monitoring variable. As the individual price elasticity of demand is high, a deviating carrier needs to offer only a small discount to shippers in order to attract additional demand. But a small price discount will have a marginal effect on a price index and is therefore difficult to identify.

763. Carriers increasingly engage in yield management strategies that include complex pricing schemes with a considerable amount of price differentiation. Therefore, a systematic deviation is even harder to identify. A collusive agreement that is being monitored on the basis of a price index is likely to break down by accident, i.e., due to misinterpretation of noise in the index.

764. Apart from monitoring, current price information can also be used as a coordination device by colluding carriers. In other markets coordination is usually accomplished by price announcements by a large firm. In the liner industry this may also be possible. In a very thin market a large liner may signal his intentions via his impact on the common price index. Note, however, that this is a rather costly form of communication. The time lag may increase the cost, and certainly makes for slow communication. Moreover, this kind signalling will become less effective once differentiated yield management strategies spread throughout the industry. Complex price regimes are harder to police than simple ones, especially using an indicator as crude as a three-month-old index.


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765. Level of detail: A price index for a narrowly defined market segment (trade route, direction and equipment type) might avoid some of the above mentioned problems of aggregation. It may then indeed serve as monitoring variable and/or a coordination device. A relatively low degree of aggregation is already sufficient to render it inappropriate given that market concentration is low. On the other hand, if market concentration is high then the degree of aggregation should be raised.

766. Historic delay and frequency: The danger of collusion arising from a monthly provision of a broad price-index provided with a three-month delay is moderate. For more disaggregated price indices it might be advisable to introduce more noise from the time dimension, for example by providing only three-month price figures (with monthly frequency).

767. Reliability and credibility of data: The use of a price index as a monitoring variable increases with the reliability and credibility of the price information. On the other hand, less credible price information is more useful as a coordination mechanism. Suppose the price data is not taken from the bills of lading, but by simple notification by carriers. Then the “price index” could transform from a factual statistic to a ballot on common pricing goals. From a competition point of view, it therefore seems important to avoid exchange of highly manipulable information.


768. Relevance: It is claimed by the ELAA that the price index in combination with the capacity utilisation data enables carriers to make efficient investment and, possibly, redeployment decisions. The price index is expected to provide a more informed view on the past which should help individual carriers to better assess investment opportunities. The monthly update of the price index is considered to be useful because it reflects cycles and seasonality. This would help to improve short-term capacity adjustments and redeployment.

769. Level of detail: Distinctions on trade route, direction and equipment type seems to be reasonable in comparison to more aggregate information. A price index with this level of detail might improve decisions on the deployment of capacity between trades and on trade specific investments since it might help to improve short-term capacity adjustments and redeployment.

770. Historic delay and frequency: With respect to investment decisions a monthly provision of a price-index with a historic delay of three months is not necessary. On the other hand, for deployment decisions and short-term capacity adjustments it can be useful.

771. Reliability and credibility of data: The more reliable and credible the data the higher are the potential benefits for better decisions on short-term capacity adjustment and deployment.

772. Dissemination: In this instance, it is proposed that the price index data will be shared with the public. Thus consumers (shippers) may to some extent benefit, in this instance, perhaps dulling any collusive utility to some extent.


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Assessment

773. Concerning collusion, only very disaggregated and frequent price indices are useful as a monitoring variable for collusion. The same holds for its usefulness as a coordination device (as long as the underlying price data is reliable). Concerning efficiency, there might be some efficiency gains in short-term capacity adjustments and redeployment arising from the proposed price index. Furthermore, its combination with information on capacity utilisation might give some further indication for the need for capacity adjustment and redeployment.

774. The ELAA proposal asks for price indices that are too disaggregated and frequent to rule out their use for collusion. However, this danger can be considerably reduced by lowering the level of detail and frequency only a bit; for example by broadening the markets covered and providing price indices only for three-month periods. This would not harm efficiency effects very much. And, the fact that this information is made public probably offsets most risk that the data may be used as a collusive tool. However, for concentrated markets further aggregation might be necessary. 128

775. The credibility of the data will depend on the system of data collection. If information is purely subjective, e.g. data submission by simple notification, the credibility of data is questionable. In particular, cheating carriers might not want to submit correct pricing information. Furthermore, there might be some danger that the price index can be misused by carriers to coordinate on future prices.

5. Carriers’ own market share

776. Type of data: Each member is informed about his own market share by trade, region, and port, with one month’s delay.


777. Relevance: Monitoring of individual carrier’s behaviour can facilitate successful collusion between carriers substantially. Since a cheating carrier will try to increase its quantity at the expense of others, it is in particular, individualised data on quantities or market shares that will pose a danger of collusion if the data were to be fully disseminated.

778. Level of detail: Monitoring of individual carrier’s behaviour on trades, regions, and ports reinforces dangers of collusion.

779. Historic delay and frequency: Monthly provision of current information reduces noise and allows for quick punishment and, therefore, significantly eases collusion.

780. Reliability and credibility of data: The more reliable and credible the data the higher is the danger for collusion. The proposed system of information exchange can significantly raise the credibility of data information if the process of data collection

128 The issue of publication will also be addressed below.


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leaves no room for manipulation. Under these conditions, the provision of information about individualised market shares is a formidable basis for collusion, because the credibility of this data is complete. In contrast, if the data is calculated by the carriers on its own, the credibility of data is not guaranteed.


781. Relevance: Provision of own market shares by the data processing body does not add information if the total volume in the relevant segment is known to the carriers. This will normally be the case under the system of information exchange proposed by the ELAA. As an exception the individual market shares on ports are named. However, it is not explained how carriers’ benefit from this additional information.

Assessment

782. Data on individual market shares by trade, region, or port which is provided by an Independent Data Service can be more credible than carriers’ own calculations on market shares. Furthermore, it is difficult to guarantee that individualised data on market shares will not circulate between colluding carriers in order to monitor individual behaviour. This poses great dangers of collusion, since monitoring rests on credible data. There are also no beneficial effects of this data discernible. Therefore, provision of individual market shares by an Independent Data Service should not be part of an information exchange system.

6. Other relevant developments on trade

783. Type of data: Notification of significant events that may affect developments on the trades, e.g., shifts in production, terminal/port developments, war risks, stevedore strikes. This information is considered to be obtained from public sources.


784. The information aggregated and processed by the Independent Data Service can be helpful to investigate the need to change surcharges or ancillary charges and to coordinate implementation. However, it is unlikely to support joint coordination of the level of surcharges and ancillary charges given that common formulae do not exist.


785. Potential efficiency effects are not named by the ELAA.

Assessment

786. We do not expect that such notifications pose a danger for competition.


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Evaluation of "other proposed activities”

787. Now we look at features of the ELAA Proposal with a more institutional character. Again, the potential collusion effects are balanced against the potential efficiency effects and, finally, each of the following elements will be assessed.

7. Discussions and evaluations in trade committees

788. The ELAA proposal suggests an "overarching" trade association. The trade association is an umbrella organisation incorporating a number of different trade committees with own statutes, one committee per trade.

789. Furthermore, the committee members will meet after the release of a monthly report produced by the data service body. In the meetings members are supposed to discuss and better understand supply and demand developments, interpret the capacity utilisation and market size data provided by a monthly briefing, in combination with public source information available. However, members are not supposed to coordinate, consult or discuss on matters that are to be decided at individual company or consortium level.

790. Trade committees will produce a forecast report on trade size, capacity deployed and commodity-specific volumes. It should provide an informed view of the market development. The agreement on the forecast report will be reached by a closed vote by committee members. Its contents could be reported to shippers and the wider public through quarterly press releases (that is, with a time lag).

791. Caveats: The monthly briefing might contain more detailed and complete information than the forecast report.

Potential collusion effects

792. Collusion requires the organisation of information exchange and coordinating the decision processes. The design of these elements is partly determined by the institutional framework and has a considerable impact on the transaction costs of collusion. Low transaction costs and enhanced communication support successful collusion.

793. Face-to-face meetings and discussions reduce transaction costs of collusion and, therefore, ease collusion. Furthermore, if such meetings were accepted by competition authorities, it is difficult to effectively control meetings in order to prevent discussions, consulting, and coordination between carriers. Individuals are normally very creative in finding different ways for coordination and communication that are hard to detect. Furthermore, the "police" in this instance is the trade association’s own lawyers, for the most part.

794. With respect to the votes on a forecast report we are also very sceptical. The capacity deployed is under perfect control of carriers. Therefore, votes on future capacity, e.g., on a trade, are in fact agreements between carriers on the development of market


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capacity. Votes could be used to restrict capacity on a market in order, by implication, to raise prices above competitive levels. On the other hand, the trade size and commodity-specific volumes depend on prices. Hence, votes on this means to indirectly vote on prices. Furthermore, the trade association represents type of a “conference of conferences” which in fact extends the scope of collusion to a global scale.

795. The monthly meetings may be viewed with suspicion in that the "forecasting" procedure may be in reality a "goal-setting" procedure, managing collective capacity on a route to maintain prices, at shippers’ expense. Since the liner industry has been doing exactly that for more than a century, or at least trying, sceptics may plausibly point out that it will be hard for them to change their behaviour in future.

796. For these reasons we consider discussions and evaluations of the above types of sensitive information, with-in trade committees, under the aegis of the over-arching trade association, and the voting on a forecast report, to be effectively an organisational mechanism designed to support collusion in the liner industry.


797. The ELAA claims that a joint analysis in the framework of the trade committees is required in order to establish a better understanding for the underlying market trends than each carrier could develop separately. Furthermore, it is supposed to enable each carrier to make optimal individual decisions.

798. However, it is questionable whether discussions and evaluations within trade committees will effectively contribute to individual decision making since carrier discussions on a consortia or alliance level is possible.

Assessment

799. The system of trade committees plus trade association is considered to be a threat for competition in the liner industry. Additionally, votes on a forecast report are in fact agreements on common business goals. In contrast, the benefits of a joint analysis that are claimed by the ELAA are questionable.

800. For these reasons, on competitive grounds, the trade committees within the context of the trade association, and the votes on a forecast report as proposed by the ELAA, appears objectionable. As proposed by the ELAA, combination as a whole is conducive to collusion.

801. It does not seem necessary to have all this elaborate organisation and procedural machinery in order to simply convey information to individual carriers, to facilitate their independent competitive decision making. All that needs happen is that they receive the data.


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8. Degree of independence of the IES institution

802. Description: The ELAA proposes to collect and process IES data by a professional “independent data service (IDS)”, as a special staff of the Trade Association. In the original proposal of August 6, 2004 the ELAA describes it as an “industry body”.

803. Caveat: In view of its affiliation to the carriers’ association the degree of independence of the “independent data service” remains unclear. If the liner's association is paying the staff, it seems likely that they will answer to that organisations explicit and implicit directive.

Potential collusion effect

804. The proposed IES requires sensitive business information of carriers. Particularly if based on the bill of lading this information contains a great potential of misuse for collusion or price discrimination against the interests of shippers. The institutional setting should therefore guarantee that no part of this information except the regular statistics will leak out. This calls for the highest possible level of independency in order to prevent misuse.


805. Theoretically, one could conceive of certain instances where an industry body releases particular pieces of information (other than the regular statistics) that help make a good decision. However, irregular treatment of sensitive information is more likely to undermine reputation. Carriers themselves will be reluctant to join an IES if there is danger that individual information might leak out to a competitor in an uncontrolled way. Therefore, even on efficiency grounds, the highest possible level of independency is advisable.

Assessment

806. An IES should be carried out by an institution with the highest possible level of independency. It seems likely that such an organisation should be independent of any conference-like liner organisations, or any liner carrier advocacy organisations.

807. Note that in the United States, PIERS data, analogous to much of the data to be output by the proposed IDS, is produced by independent contractors who obtain the data from the government under the freed of information act and supply it on a commercial, for profit basis. Whatever might be said of PIERS, there is little or no suspicion that we are aware of, that it is a tool for anti-competitive collusion.

9. Publication of data exchanged by carriers

808. Business information is sensitive if it allows drawing conclusions on the economic performance of individual carriers. In principal it is not in the interest of carriers to provide such data to the whole public. Obligatory publication might therefore be a


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valid check for a sufficient level of data aggregation in order to avoid collusion putting it on a similar footing as the data available in the U.S.

Assessment

809. Publication of all data provided to carriers by the system of information exchange is helpful to avoid collusion. Additionally, it might provide valuable information for shippers and other interested parties. Therefore, publication of all data that is provided within the framework of the system of information exchange should be encouraged.

10. Common formulae for surcharges and ancillary charges

810. Description: The ELAA proposes that surcharges and ancillary charges of carriers are commonly based on publicly available and transparent formulae.

811. Caveat: The notion of “publicly available and transparent formulae” suggests that the formulae only depend on variables which are objective and publicly available. In practice, however, one can expect that the formulae will also depend on data that is not easily verified by shippers. It may also depend on statistics issued by the IDS of the liner trade association, which are the outcomes of carriers’ discussions.

Potential collusion effects

812. The common formulae are an element of price setting or price signalling that would extend the tradition of conferences into the future. It requires, as a prerequisite, discussions among carriers, which are problem on their own (see point 7. above). It has been proposed that shippers may also attend the discussions, however, the way this would be done and what the impact of shippers’ opinions would be have not been worked out in detail129.

813. The common formulae therefore contain a clear element of collusion. Note that, to institute an effective raise of the overall level of prices it is sufficient to collude on an important component element of the rates, i.e., one of the surcharges.

Potential efficiency effect

814. The ELAA argues that absence of a common formula individual contracting (by lines or shippers) would result in uncertainty and larger transaction costs. However, carriers can still apply individual formulae to calculate charges for their customers. Thus, it is unlikely that a common formulae created by carriers and applied by all carriers adds significant benefit.

815. Or, another independent mechanism could arise. Fuel surcharges could simply be tied in contracts to an independently published index, as might currency surcharges.

129 In Australia, in the Productivity Commissions review of maritime liner block exemptions, it was concluded that the requirement that carriers "confer" with shippers in no way mitigated carrier control of the price-setting process, and that this requirement did not mitigate the damage caused by price fixing.


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816. In setting prices, carriers will take account of all their cost elements – like fuel, crew, port charges, and so on – as well as demand. In general, there is no use of making part of this calculation transparent to shippers and others not. Shippers and carriers are usually only interested in the sum of all payments.

817. There are only two instances where transparency would matter. First, price component are interesting if they are tied to components of the good that can be chosen by a customer (like a sunroof for a car); this is not the case with surcharges and ancillary charges. Second, in a long-term contract between a carrier and a shipper, the parties may want to shift risks among each other by making the price depend on certain volatile supply or demand conditions (which have to be publicly observable). This may call for a distinction of price elements in individual contracts, but not for common charges set by carrier organisations.

Assessment

818. Common formulae for surcharges and ancillary charges pose a considerable danger for competition without contributing to efficiency. The danger is compounded if they are unilaterally created and imposed by carriers acting collectively. Therefore they should not be allowed, permitting other mechanisms to arise.

Evaluation of the overall effects of the whole ELAA Proposal


819. The discussions plus votes on a forecast report, in combination with the provision of credible information on individual market shares and common formulae for surcharges and ancillary charges pose a threat to competition. Each of these elements would by itself be a potential threat to competition. However, their combination strongly raises the potential of carriers to effectively collude. Moreover, the existence of a trade association might allow carriers to extend collusion to a global scale.

820. The pure information exchange part (on trade size, capacity utilisation, and prices) proposed by the ELAA would provide for very detailed and timely information about markets which would itself, in this complete combination it would provide a reliable data bases for optimising and stabilising collusive agreements.


821. The ELAA claims that the main benefit of the Proposal is that it provides for a continued stability of supply, i.e. the provision of reliable, adequate and efficient liner shipping services at all times and to all destinations. Clearly, it cannot be doubted that detailed information will be useful for planning purposes in various ways.

822. Furthermore, the ELAA states that each element of information exchange and cooperation in the Proposal is necessary to obtain stability of supply by providing the ability to accurately estimate the evolution of demand. In contrast, in Chapter V we


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found that a repeal of the Block Exemption Regulation for conferences will not reduce the stability of supply but rather helps to improve stability. As a consequence, we do not believe that the main benefit of the proposal is a guarantee to continued stability of supply.

Assessment

823. From an economic and common sense point of view it appears that the ELAA proposal, taken as a whole without any modifications or amendments, cannot be justified as an economic benefit to the consumer. It carries with it too many dangers for fostering collusion that are not outweighed by the potential efficiency gains.

Conclusion

824. The trade association concept for all European carriers by itself would seem to pose little risk of anti-competitive effect, particularly if it behaved like "any other trade association" and avoided all discussion of sensitive topics. After all, most industries have trade associations of one kind or another. They have legitimate common interests.

825. The information exchange concept by itself would appear to have possible benefits in terms of efficiency. By itself, a "pure" information exchange mechanism would appear to pose a manageable risk in terms of promoting collusion.

826. However, the mix of sensitive information produced currently and frequently, and discussed by liner managers in special private trade-route forums, complete with a regular goal-formulation and market management procedure, seems to offer quite a risk of collusion. All the elements are there; lines would find it very easy to occasionally if not regularly step over the line of permissible behaviour, and collude.

827. The concept of uniting of trade committees under an umbrella organisation would appear to enhance the capability of individual committees to possibly coordinate the management of liner markets in an anti-competitive fashion. It appears to be a "super-conference;" it is hard to see how it might enhance competition.

828. Forecasts suggest that within a few years, one carrier will operate a quarter of global liner capacity, and half a dozen carriers (mostly European) will dominate the world fleet. While strong competitors are emerging, the danger and ease of effective liner collusion is growing. It is important not to provide the industry with a forum that could support and indeed encourage collusion. The industry has changed, and changed forever. The industry is healthy, and growing. The time has come to hold the industry to the highest standard of competitive behaviour.

829. It is recommended that elements of the ELAA proposal be taken under consideration by the appropriate authorities, such as those promoting the fair dissemination of useful information that promotes efficiency, and the concept of a liner trade association to undertake legitimate industry activities.


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830. The entire ELAA package should certainly not be accepted "as is". As a package, the set-up and procedures constitute an invitation to collude that would be hard for many in the industry to resist, at least on occasion, to the detriment of shippers (consumers). In particular, the trade committee concept would seem difficult to defend in competition terms in current circumstances.


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VIII. Stakeholders’ Views

A. Views and Statements of Leading Organisations

831. There are two basic opinions regarding the market power of conferences, namely that of shippers related organisations such as the European Shippers Council, OECD, Australian Competition and Consumer Commission (ACCC) and others, all of them voting for abolition, or at least a reduction of conference power. Contrary to these there are the shipping company associations - World Shipping Council (USA)130 and ELAA, which are in favour of maintaining the present status of conferences as stabilising factor for freight rates and liner market.

832. The World Shipping Council (2003) fully agrees with the findings of HARALAMBIDES (2003) with respect to freight rate stability and related topics which concludes that liner shipping conferences :

1. Are not price setting cartels;

2. Play a complex role against the background of difficult competitive conditions inherent in liner shipping;

3. Function as a platform to discuss prices and related cost levels;

4. Have virtually no ability to collectively raise rates, and may even foster more competitive pricing in the market as a whole, and

5. Reduce freight rate volatility.

833. The European Liner Affairs Association advocates the traditional carrier position, and currently represents the carriers in this particular policy debate over the future of the maritime block exemption regulation permitting the liner conference system. The ELAA comprises 24 members, including most large carriers serving the EU. This industry group appears to have been formed largely as a response to the move to end conferences in Europe. Its purpose is to lobby for either keeping block exemptions, or for similar arrangements called variously discussion or information sharing arrangements. It appears to aspire to becoming a full-fledged European carrier/liner trade association with a role and status enshrined in regulation under a new regime. The detailed position of ELAA with respect to block exemptions will be discussed in Chapter VI in the necessary depth. The ELAA approach and the documents it has produced are very legalistic in nature.

130 World Shipping Council: European Commission Review of International Liner Shipping and Regulation, Washington D.C., Nov. 26, 2003.


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834. Organisation for Economic Cooperation and Development – Starting in 1998 and for the next several years, the OECD has turned its attention to the need for increased competition in liner shipping.131 In an OECD Report (2002) effects of regulatory regimes on liner shipping were analysed, this in the light of excess supply:132

1. positive and negative effects of common price setting under exemptions from competition rules;

2. effects of conferences, discussion and stabilisation agreements on shipping companies and shippers;

3. effects of an abolishment of the anti-trust exemptions for liner shipping.

835. Given excess supply, especially in 2001/2002 the study comes to the result that each attempt to judge the influence of an abolishment of agreements must remain spec. OECD gave the following recommendations:

1. Permit individual service contracts without limitations or restrictions;

2. Confidentiality - ensure the privacy of individual service contracts;

3. Permit operational cooperation between shipping companies for the sake of higher efficiency and capacity arrangements.

4. The most important factual findings of the OECD-study are as follows. At that time:

5. There was a trend toward decreasing freight rates and higher service quality;

6. Deregulation would lead to lower freight rates;

7. Under the old conference regime, few benefits were passed on to customers despite excess supply;

8. Conferences were not necessarily a condition for regular, efficient and lasting liner services;

9. Competition effects of alliances on service and price competitions are comparable to conferences (capacity supply, price agreements, and sanctions).

836. In its Final Report of Competition Policy in Liner Shipping, April 2002, the OECD called upon member states to "...review…[and] … seriously consider removing anti-trust exemptions for price-fixing and rate discussions." It further stated that "anti-trust exemption for conference price fixing no longer served their stated purpose" [of ensuring stability].

131 See for example Liner Shipping Competition Policy, OECD, April 2002, and numerous other publications and statements on the OECD website www.oecd.org under 'maritime'. 132 OECD Report: Regulatory Issues in International Maritime Transport, Paris, April 16, 2002.


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837. The European Shippers Council (2004)133 first stated its strong support for an EU review of the block exemption and its desire that the block exemption be ended. The ESC has also stated its opinion concerning the ELAA proposal on the introduction of an information exchange system134 and a few months later concerning the White Paper on Regulation 4056/86 (EU Competition Rules).135 The ESC is opposed to the information exchange system, and to carrier discussion forums generally, and calls for competition.

838. The ESC early supported the OECD calls for an end to block exemptions protecting conference price fixing and capacity management. In the ESC view, these actually give rise to rate instability (rather than preventing it), mistrust between customers and providers, reduced incentives for increased efficiency and performance, lack of transparency in costs, lack of service differentiation, a barrier to customer-provider partnerships, and lack of service innovation. The ESC favours exploring avenues of carrier cooperation that do not involve price fixing or setting surcharges, and carrier alliances of an operational character. "Discussion agreements" are little different from conferences and encourage collusion, in the ESC view. The ESC calls for open competition.

839. The Council mentions the necessity of new client relationships between shipping companies and shippers, namely:

1. strategic partnership to realise supply chain solutions;

2. stronger customer orientation;

3. just in time distribution and more flexibility;

4. information on quality management.

840. The Council is of the opinion that:

1. interpretation and analysis of information within alliances and consortia to be sufficient;

2. the benefits of a price index (by trade and box type) is not evident whereas the risks of collusion it could generate is real;

3. there is no reason for the definition of common levels/formulae for ancillary charges and surcharges, but that these should be part of a single sea freight rate to be negotiated (like THC).

841. With respect to the conference system, the Council gave the following statements:

1. Trade liberalisation would have brought a decrease of transport prices by 9% and the prohibition of agreements among carriers by another 25%;

133 See on the DG COMP (EU) website: "The European Shipper's Council submission to DG Competition of the European Commission ON THE REVIEW OF COUNCIL REGULATION 4056/86" 134 European Shippers Council: What Shippers Require from Liner Shipping in the Future and Why (Position Paper), Brussels, Sept. 2004. 135 European Shippers Council: Observations to the EU Commission in Response to the White Paper on the Review of Regulation 4056/86 Applying the EC Competition Rules to Maritime Transport, Brussels, Dec. 2004.


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2. Rate-binding conferences had a strong influence on freight rates, also to be observed with cooperative working agreements, but less strongly and not always statistically significant.

842. DYNAMAR - On Dec. 13, 2004 DYNAMAR released a statement on the Review of Regulation 4056/86 (DG Competition of the EU) based upon market observations backed by their own data base. The respective topics may be summarised as follows:

1. Freight rates are not sufficiently available because liner conferences publish them only sporadically and probably biased, and freight rates and volumes of non-conference firms are not present at all.

2. Reliable information for the demand side as well as for current capacity utilisation is missing because of incorrect data on freight rates, understatements of capacities, and under estimation of expected freight volumes.

3. Better information would help in decision making in particular for smaller shipping companies and potential new competitors.

4. The publication of historical freight rates could help smaller shippers in their negotiations with carriers, serving as benchmarks.

5. Common patterns for the competition of surcharges are in the interest of both liner companies and shippers.

6. Exemptions for liner companies competition regime (different forms of horizontal and vertical cooperation) outside the conference system to be sufficient;

7. Alliances and consortia have a positive standing in the view of shippers;

8. Shippers Council argues that conferences increase freight rate fluctuations rather than absorb them;

9. According to the Council, the present information is sufficient given the existing market structure; in a deregulated market, the introduction of an appropriate IES might be meaningful.

843. ACCC - In a most recent study, ACCC (2004) dealt with competition restrictions on the Australia-North East-Asia route.136 They used data for the period April 2003-February 2004, a phase with strongly rising freight rates. The data set contained freight rates (confidential and official), liner services, trade flows, imbalances, capacity utilisation, market power, vessel operating port, service quality by means of frequency and delays, respectively.137 The following results may be summarised given excess demand and little competition by fringe carriers:

1. According to ACCC, larger benefits for shippers if discussion agreement would not have existed;

2. Freight rate stability during excess supply (2001- early 2003);

136 Australian Competition and Consumer Commission (ACCC): Asia-Australia Discussion Agreement, Position Paper, April 2004. 137 There are good reason to use a respective data file for the intended own empirical tests.


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High price setting power by discussion agreements during excess demand (April 2003-Febr. 2004).

B. Shippers Interviews

844. According to the ELAA, the views presented in its proposal represent the views of all carriers. For that reason, the ELAA encouraged the study team not to conduct additional interviews with carriers.

Shippers views on the current system Conferences

845. The shippers are outspoken on this issue. Shippers as a group wish to see the end of the conference system, and they do not in general wish it to be replaced by “discussion groups”.

Competition

846. The present system is considered by all as restricting competition as Conferences act

as price leaders and independent carriers merely apply the same tariff base, especially as far as surcharges are concerned. As long as there is a conference system in place, non-conference carriers do not have to have their own specific pricing strategy, but can merely follow the pricing actions decided by the conferences. No individual independent line has significant market power when compared with the collective market power of the liner conference concerned.

Reliability

847. The fact that a liner operator is reliable or not is not relevant to its belonging to a

Conference. Shippers believe that conferences do not guarantee the level of service, this being a factor for each individual line and to day there is no difference anymore between conference members and independents as far as reliability is considered.

Quality of Service

848. There again, shippers are of opinion that the quality of service is highly variable

among the member of the same conference. This means that conferences have no positive impact on the quality of service provided by their members. It is also considered that quality standards have generally decreased in the recent years as carriers seem to be more concerned by optimising their vessels loading factors than by delivering an acceptable service to shippers. For some shippers, independents carriers are providing a better quality of services than their conference counterparts.


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Pricing

849. Conference pricing is not considered as fair by interviewees and they are especially adamant at the increased weight of surcharges which in some cases represent 50 to 60 per cent of the freight. In their opinion, conference tariffs are reflecting the costs of the most inefficient member lines.

850. Moreover, they firmly reject the way conferences introduce surcharges and General

Rate Increases without negotiation, thus generating permanent conflicts with customers.

851. Shippers insist that in many occasions their business has suffered from the inability of

conferences to provide long term rate stability and of the application of sudden and repeated increases of surcharges.

852. Independents prices are often considered as lower than those of conference members

although the difference is decreasing. Most big shippers mention that they are negotiating all in rates with both independents and conference members every time they have the opportunity to do so.

Surcharges (CAF, BAF, THC's)

853. Surcharges are strongly rejected by the majority of shippers: their calculation is not

considered transparent, and shippers feel they are systematically overcharged for these types of charges. This is because surcharges are collectively set by the conferences and so do not reflect the costs of any individual line. The formulae used are also difficult to understand and change from one conference to another.

854. THC's (which are not a surcharge but an individual service) are obviously not

connected to actual costs as they differ per trade lane in the same port/terminal (e.g. in the US ports, the THC's for the Mediterranean and North Continent trades are different) Also the fact that THC's are more or less fixed and treated as pass on costs does not help innovation, quality and cost control.

855. Some surcharges like ISPS should not be considered as a surcharge at all, as they are

neither variable nor temporary. Those should be included in THC's and ocean freight. Surcharges like Congestion surcharges are even counter productive. The shipper gets less service for more money, and there is less incentive to solve the real problem. The independents carriers are said to apply surcharges at levels similar to conference lines although some big shippers indicate they can obtain all-in rates.

Innovation

856. The conferences are not generally considered generating innovations in the interest of

shippers. In shippers view, shipping lines are focusing on themselves rather than on their customers. Therefore, any innovation is going to be for the benefit of the lines not the customer. For example, whether customers will benefit in terms of service from the deployment of bigger ships can be questioned.

857. The fact that the liner industry offers services to all markets, makes innovations and

improvements in service and new investment at the levels needed to keep up with


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expanding demand for services has nothing to do with the existence of the conference system.

858. Conferences have been unable to put in place innovations such as a "grey box" system

to allow for a more efficient use of containers and a reduction of imbalances or the possibility for a shipper to load its cargo on any member line of a conference.

Shippers views on the Information Exchange System proposed by ELAA

Capacity forecasting

859. Some information exchange on volumes and capacity may be permitted under strict conditions as for other industries. These should fall into EU Competition Laws and not be subject to any exemption. It would be only acceptable if performed by a third party truly independent from the lines.

Price index

860. This proposal is strongly rejected by all interviewees as they are of opinion it would

only serve the purpose of collusive rate making by the carriers.

Changes of regime

861. Does it matter that there is no conference since 2004 on Europe-East Coast South America? No interviewee had suffered (or in many cases even noticed) from the Conference demise. There are still services being offered without any loss in quality.

What was the impact of liberalisation on the Transatlantic route (OSRA)?

862. OSRA was welcome as it provided shippers with the possibility to have individual and

confidential service contracts and it has brought some competition among the carriers. But there are still GRIs, surcharges, same old conditions on the B/L. There has not been a change to the conference mind set in this sense. Some shippers would prefer no specific system and consider OSRA regulations as hampering business.

Proposed alternatives

863. Present system is rejected as obsolete and not responding to customers needs. ESC

proposal to repeal Regulation 4056/86 and apply Regulation 823/2000 is fully supported by interviewees as being the way to a more stable commercial environment and a better balance between shippers and shipowners. One shipper proposes to have joint trade committees between carriers and shippers to discuss commodity trends, quality of service and demand forecast.


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IX. CONCLUSIONS

The Global Container Market

864. Globalisation of international production and the international division of labour has impacted container trade resulting in a massive growth in deep sea volumes. Annual growth rates of container trade were two to five times as high as the annual growth rates of the real world gross domestic product. With average growth rates of world total container trade close to 8% during the last ten years, container transport has more than doubled.

865. European carriers have successfully increased their market share: European

carriers have a growing share of the consolidating world fleet. Firstly, they have successfully managed to increase market share from 40% in 2000 to 46% in 2005. Secondly, their operating profit margins were competitive during the last years when compared to Asian and other carriers. In a few years, the three largest carriers, all European, will control more than one third of world capacity. The five largest (of which four are European) will control about half the fleet, the top fifteen 86 percent, and the top twenty 96 percent of capacity. The three largest non-European carriers are East Asian. There have been waves of consolidation, and big carriers have appeared. The consolidation is characterised by the fact that highly profitable carriers are buying lower profit carriers. Consolidation is linked to market forces and not to the regulatory environment.

866. Carriers are consolidating and vertically integrating: The large carriers are

increasingly moving to support consolidated logistics solutions, offering frequent service on many routes. Carriers are consolidating and vertically integrating, offering their customers door-to-door service anywhere, to the extent that this is possible. New service patterns are emerging, such as hub-and-spoke, which mean new operating patterns and growth of volume at large and small ports. Pricing strategies are changing, with growth in “all-in” service contracts, and less traditional pricing of the kind once controlled by conferences.

867. Modern pricing strategies: Some of the global lines have adopted the airlines pricing

strategy of yield management which focuses on the revenue generation per container rather than the traditional voyage calculation. This has significantly altered the pricing structure of the market creating increased price competition as every line has differing cost structures. Traditional conference pricing is incompatible with modern pricing strategies. In this environment, the number of traditional conferences has declined, and their market share on most routes has also declined. Various vessel operating agreements have increased, which are primarily service oriented. This has effectively weakened the conference system.

868. Chartering has grown as the fleet has grown, to about half the fleet in the past four

years. In general chartering increases flexibility as operational capacity can be deployed more rapidly on routes when needed in times of normal supply/demand. For carriers, chartering reduces the capital required, and lease-backs are common as a tool of accounting and asset play.


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869. UNCTAD code for liner shipping conferences failed: The UNCTAD code did not successfully reserve market share for national fleets of developing countries, and most national carriers that were established under the umbrella of the Liner Code have disappeared. For developing countries, access to world markets is vital, as the best strategy for economic development has proven to be trade-lead growth. Strategies of reserving cargoes for national lines as promoted by UNCTAD Liner Code not only failed as it did not apply to independents, but impeded growth and raised transportation costs. As seen in the East Coast South America trade, the disappearance of the national lines as well as the conference has not been detrimental to the stability of supply and freight costs.

870. Existing empirical studies do not provide a solid basis: There have been a number

of empirical quantitative studies of the maritime cargo markets such as the ICF study, the Erasmus study, and the Charles River Associates study. They do not span the entire market for a long period of time and do not provide a valid basis for predicting what might happen if the entire market regime changed, changing the entire statistical process and relationships (i.e., a shift from conferences to fully free liner markets.) Data availability and consistency is a problem, especially freight rates, because carriers are making price data only selectively available to consultants that are working on behalf of the industry, such as Charles River Associates. The empirical and theoretical analysis of this study is intended to address these issues.

Theoretical Model Applied to the Liner Market

871. The ELAA claims that liner markets are “inherently unstable” if unregulated. It views conferences (or an information exchange system) as an indispensable means of stabilising markets (by self-regulation). It was our task to assess these claims by the ELAA.

872. The theoretical and empirical analysis on the liner shipping market is often based

on the “theory of the core”, a market with an empty core is said to be “inherently unstable”.

873. ”The theory of the core” cannot be applied to liner shipping: This study found that

the “theory of the core” cannot be applied to liner shipping. In order to show that the liner market is indeed suffering from an empty core the theoretical literature normally comes up with idealised market scenarios. However, these scenarios normally do not fit very well with regular liner shipping. A basic problem with the theory-of-the-core approach is that it does not take due account of the working of competition and competition policy. The assumption that individuals can coalesce in any form is unrealistic and grossly violates competition laws. Moreover, it is not explained how conferences would be able to overcome the supposed “instability problem” of the market. In particular, the potential anticompetitive side-effects of such collusion have never thoroughly been addressed in this literature.

874. New model has been developed: The study’s new theoretical model of the liner market addresses all the particular features of the liner market that are claimed to be sources for an “inherent instability”. Furthermore, we fully took into account the contestability of the liner market since there are always carriers “ready” to enter the market if it is worth doing so.


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875. The analysis of our theoretical model shows the following results:

6. Conferences lead to excess capacity (over-investment) or excess pricing and endanger service reliability. The latter effect is due to a possible instability with respect to market participation and conference membership which gives rise to constant moves in and out of the market, as well as in and out of the conference.

7. In the short run, the withdrawal of the conferences system will always lead to lower prices.

8. In the long run a prohibition of conferences will remove excess capacity. As a consequence, the long-run prices can be higher or lower after the repeal of a block exemption. In any case, social welfare will always be higher. Furthermore, taking into account that enhanced competition between carriers can reduce market entry costs in the long run by fostering innovation and efficiency, a repeal of conferences can promote further downward pressure on market prices.

9. We did not find any indication for the fact that competition between carriers leads to an “inherent instability”. Moreover, the potential instability with respect to market participation and conference membership is removed. Therefore, our theoretical results indicate that repeal of conferences will enhance stability of supply.

10. With or without conferences, there can be price volatility. Without conferences, price volatility is due to price-mixing behaviour which is normal activity similar to other industries. With conferences, the source of price volatility comes from the structural instability of market participation and conference membership. This can be a fundamental and wasteful problem, if alone because market entry and exit can be associated with transaction and investment costs.

Empirical Assessment of the impact of conferences on Europe’s Liner Trades

876. A review was conducted of six major European deep Sea trade routes and one

European short Sea route (North Europe - Mediterranean), which together carry most European trade, and their conferences. While conference influence is generally declining on the observed trades, the following results are noteworthy:

• The conferences on the West and Southern Africa routes, as well as the Indian

Sub Continent route, still look and act much like traditional conferences. • On the East Coast South America route, the conference disappeared in 2004,

with little or no impact. 877. Conferences still set various surcharges and ancillary charges, which are generally

also applied by non-conference lines. On average, surcharges and ancillary charges make up to 30 percent of the total freight cost on a port to port basis thereby retaining a significant degree of market price fixing. They are a bone of contention as they are collectively fixed, and are not transparent nor directly related to costs. Conference-set surcharges are effectively conference price-fixing. Other means could be used to set them.


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878. Conferences continue to influence freight rates: Based on the trade route review, the survey of shippers, the analysis of earlier liberalisations, and the review of the data and trends and the technical literature, the study team concluded that liner conferences continue at minimum to have an influence on freight rates through the announcements of GRIs. GRIs have the effect of providing a market price guideline for all carriers, not just the conference lines. The conferences no longer manage capacity on routes.

Impact of Repealing the Block Exemption

879. What would happen if conferences ceased to exist in Europe? We base the following expectations on the results of our trade route evaluation, based on our empirical data, the U.S. experience in transportation reform, and the theoretical model of conferences in the liner industry.

880. Impact on Ocean Rates: Moderate Price Declines – At present conferences do have

an impact on rates. The annual rate guidance may influence rate negotiations, and the fact that conference members assemble and exchange views may have some influence on rate levels. Thus, we expect the ocean rate impact to be moderate, but with some declines. Moreover, increased competition puts further pressure on carriers to innovate and improve performance which is the basis for stronger rate reductions in the future.

881. Impact on Ancillary Charges and Surcharges: Reductions expected. Surcharges

are under criticism for their size, and how they are determined. In the absence of conference setting, the united front by conference and non-conference carriers on surcharges will weaken, lowering overall rates. Note that carriers can still apply individual formulae to calculate surcharges for their customers or move farther towards „all-in rates“ for the sake of simplicity. However, we do not expect that in the absence of conferences shippers will be forced to individually negotiate THCs with the terminal operator.

882. Total transport prices will decline: The cumulative effect of moderate reductions in

ocean rates and a significant decrease of surcharges and ancillary charges will result in a decline of total transport prices for maritime container transport.

883. Positive Impact on Service Reliability on deep Sea and short Sea trades –

Theoretical insights and recent experiences, e.g. the West African trade, show that conferences are likely to have de-stabilising effects on liner markets. On the other hand, there is no indication that the loss of the conference on the South America East Coast trade had a negative effect on the stability of supply. Therefore, due to the experiences from other industries, our theoretical results, and our trade route analysis, we expect that service reliability could improve but definitely will not be reduced if conferences are abolished. This applies to all trades – thin versus thick, North – South versus East – West and deep Sea and short Sea.

884. Positive impact on developing countries: The Repeal of the block exemption could

lead to improvement in service reliability on the thin North –South trades (see West Africa example). Furthermore, in particular the African trades suffer from high transport prices which directly cut into the developing countries’ GDP growth. The expected transport price reductions will benefit African countries. Exports from these countries, i.e. low-value commodities with a relatively high transport cost share, could become cheaper on the world market which may contribute to GDP growth.


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885. Impact on service quality and innovation is expected to be positive due to increased

liberalisation of the market similar to the airline industry, but this will depend on the individual carriers’ investment policies.


firms are doing well in terms of profitability and capacity share and in a more competitive environment they should be able to compete and grow.

887. Positive impact on Small carriers: None of carriers are actually small by the

European definition. Liberalisation gives small carriers the opportunity to grow fast if they follow an innovative business model (for instance the Ryanair example in the airline industry). The success of small carriers depends on their ability to adapt to a competitive environment and not on their actual size. Small carriers may join alliances or find niche markets in a liberalised environment.

888. No impact on investment in capacity: Vessel ownership is a normal business risk.

Carriers will continue to invest in container capacity. Investment decisions are taken by individual lines and are based on long term strategies. The chartering market offers some operational flexibility and it can also offer lines the option of separating some of the risk of ship ownership from the risks of liner operations.

889. No impact on market concentration: Concentration is a process independent of the

repeal of the block exemption regulation. Carriers are integrating horizontally and vertically (buying terminals), a trend reacting to customer demand for door-to-door services. Vertical integration provides greater reliability to the Carrier to provide such services if they control all the key elements of the transportation chain.



891. No or positive impact on EU trade: Transport prices for maritime containers are

expected to drop. Sea container trade account for about 40% of EU external trade. Therefore, a drop of transport prices is likely to have, at least marginally, a positive effect on EU external trade.

892. No impact on employment: No impact on investment in vessels and no impact on

reliability of services is foreseen, therefore there will also be no impact on employment neither on vessels nor in ports.

893. Other Cooperative Arrangements May Increase – Without the minimum amount of

industry-wide cooperation that conferences provide, joint ventures, consortia and alliances are likely to increase in scope. The trend is there anyway, as conferences have declined.

894. Other Sources of Information Will Emerge – The functions of the conferences in

terms of representing carrier views on trends, seeking and providing information, setting surcharges, and responding to policy issues, are all legitimate functions which will migrate to other organizations in the absence of conferences.


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Impact of the ELAA Information Exchange System

895. One useful way of dividing activities undertaken by the "system" as proposed by the ELAA is to distinguish between proposed "pure information exchange" activities versus "other" proposed activities. While ELAA calls their regime an "information exchange system", it is clearly much more than just that.

896. Pure information exchange activities: The ELAA proposal consists of exchange (in

various ways) of the following types of data:

a) Trade size and capacity utilisation b) Commodity developments c) Capacity developments (including number of sailings) d) Price indices e) Liners’ own market shares f) Other relevant developments on trade

897. Other proposed activities:

g) Discussions and evaluations of the above information (except own market shares) in trade committees, including "forecasting"

h) An Independent Data Service (IDS) as institution carrying out information exchange

i) Publication of certain data exchanged by carriers j) Common formulae for surcharges and ancillary charges

898. The ELAA asserts that its proposed system of carrier coordination is necessary to

prevent instability in the liner shipping market. The system they propose is far more than just pure information exchange between otherwise independent carriers. It binds trade committees together under an umbrella organisation, provides a professional staff to process business-sensitive information, and provides for a coordination meeting at the trade route level complete with a capacity planning agenda. The ELAA stresses that prices for services will never be discussed.

899. ELAA proposal entails carriers making up over 70% of world capacity: What

makes the ELAA proposal unique in information terms is that it entails conference and non-conference carriers, making up over 70 percent of the global capacity, pooling their business sensitive operating information, sharing information with each other and discussing it on a monthly basis.

900. Shippers are critical: The study team asked shippers about the proposed ELAA

information exchange system. They propose that data exchange on volumes and capacity should be permitted only under strict conditions by a truly independent third party. They also fear that rate indexes as proposed would just be a collusive ‘signal’.

901. Pure information exchange: Taking a closer look at the elements of the ELAA

proposal, the pure information exchange system would consist of collecting and processing information on trade size and capacity utilisation, commodity and capacity developments (including number of sailings), and prices. The justification is that this


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information is useful for capacity and equipment deployment decisions, as well as for other planning purposes. This can be accepted in principle. Sharing information can have benign operational benefits. But, such shared information can also be the basis for collusive behaviour intended to manage supply and capacity.

902. Pure information exchange - Opportunities for collusive behaviour: Collusion

requires good and reliable market information. The totality of the envisioned information exchange system, with its quite disaggregated, timely and frequent supply of data would open up opportunities for collusive behaviour. Most of the claimed efficiency gains could also be realised with more aggregated and less frequent information.

903. Pure information exchange - Market share information: Dangers of collusion are

particularly high, and efficiency gains particularly low, in the case of private, but credible information on carriers’ own market shares. In contrast, providing information on other relevant developments on trade (like port congestion) would be just a usual service of a trade association that should not be objected to.

904. Other activities - Trade Committees: Monthly discussions of market developments

in trade committees in combination with votes on a forecast report can lead to collusion. That type of meeting is difficult to control even if shippers or the Commission would be allowed to participate and, hence, there is no guarantee that it will not be misused in order to collude. In any event, the ELAA also proposes to set or suggest common formulae surcharges; this is a clear attempt to continue the present system of price-fixing.

905. Apart from the issue of common discussions and evaluations, some other

organisational forms have also been investigated. Given that the information exchange should be designed carefully with respect to type of data, level of detail/aggregation, historic delay and frequency of information, the institutional setting should have the highest possible degree of independency and credibility. A manipulative system, i.e. where a carrier can decide by itself which information to submit to independent body, would be useless for efficiency, and in some instances supportive of collusion (for its potential use as a coordination device). All information that has been gathered and processed by a truly independent data service should be made available to the shippers as well (i.e., publicised), as it can be helpful for both sides of the market.

906. There are some good points about the ELAA proposal. The global trade association

makes a lot of sense, most industries have them, and they fulfill a legitimate role (in principle it already exists in the liner shipping industry in the form of the Box Club). A truly independent information exchange system could bring benefits.


X-1

X. ANNEXES

A. Mathematical Description of our Theoretical Model

1. We consider a run from one port to the other.

Demand

2. The demand depends on the price for transport. If all carriers charge the total price p for the full capacity of a vessel then there exists a total demand D(p) for capacity in the market. This demand is assumed to decrease linearly with the price,

( ) ,b

pa=pD2−

for positive parameters a and b and 0 ≤ p ≤ a. For p > a we have D(p) = 0.

3. We remark that it is straightforward to define the demand function relative to a single container. If a ship has a capacity of N containers and the price for a single container is p' then the demand function in terms of single containers is given by

( ) ,bpa=pD

2'''' −

where a’ = N ⋅ a.

Supply

4. All vessels are assumed to be equal. The fix cost F > 0 for deploying a vessel is constant for all companies. The capacity of a vessel is normalised to be equal to 1.

5. Every carrier company can enter the market and deploy a vessel for fix cost F. Or the company stays outside and has not costs. Marginal costs are equal to zero. A company cannot deploy more than one vessel.

6. If a company enters the market then it has to set a price for the capacity of its vessel. The revenue of a company in the market is proportional to its sold capacity, i.e. if only half the capacity is sold then only half the price can be charged. The profit of a company is the revenue minus the cost.


X-2

Allocation of Capacity to the Demand Side

7. We order the companies with increasing prices p1, p2,… The company with the lowest price p1 sells the capacity c1 = min (D(p1),1). The minimum function is necessary because of the capacity restriction. The demand for the second lowest priced vessel is min (D(p2) – c1,1). And so on. If several companies charge the same price then the demand is distributed evenly among the companies.

Elasticity

8. The price elasticity of demand ε at the price p is given by

pap−

−=ε

if the capacity restriction is not binding. This term can be written as

pbDp−

−=)0(2

ε .

9. Here, we can observe that for a given maximal demand D(0) at zero price the elasticity decreases (in absolute values) as b increases. Hence, an inelastic market is described by a relatively high parameter b. We have chosen a relatively high value for b because most of the publications on liner shipping claim the market to be inelastic.

Diagrams

10. The diagrams are plotted for a total market size D(0) that varies between 6 and 8.5 (on the x-axis). The y-axis always starts at zero. Furthermore, it always holds that b = 4 and F = 10. Note that for these values, mixed Nash equilibrium does not exit.

11. One of the most characteristic features of these are the “jumps”. The number of ships, the prices, and so on do vary continuously for most of the time when D(0) varies. But at discrete positions the functions change abruptly. This behaviour is due to the lumpy supply of capacity. At these positions a new company enters the market and increases the available capacity in the market by a full ship and therefore the situation changes abruptly.

Selected Mathematical Results

12. We describe the price setting strategies of the Nash equilibrium for the three regimes.

No-Conference regime If F > 2b then no mixed Nash equilibrium appears. For b/2 < F < 2b a mixed equilibrium can appear. For F < b/2 only mixed equilibrium appear. We remark that we have chosen b = 4 and F = 10 for our diagrams and therefore only pure equilibrium appear. The probability function for pricing in a mixed strategy is given by


X-3

( )( )

( )( )

11

812 2 −

⎟⎟⎟⎟

⎠

⎞

⎜⎜⎜⎜

⎝

⎛

−

−−− n

pDnpbnbap

on the interval (a – 2b (n – 1))2 / (8b) ≤ p ≤ (a – 2b (n – 1 ))/2 where n is the number of market participants.

In a pure equilibrium, the carriers set the market clearing price a – 2bn where n is the number of market participants. The equilibrium number n of market participants can be computed as follows. Let η = D(0) – ⎣D(0)⎦ then

⎡ ⎤

⎣ ⎦

⎣ ⎦

2)1(

2)1()(

2)0(

2)0(

2

2

2

2

+

⎪⎪⎪

⎩

⎪⎪⎪

⎨

⎧

+>

≤<

≤

=η

η

η

η

b

bFifFD

FbifD

bFifD

n .

In the first and the second case the players use a mixed pricing strategy if the number of carriers in the market is greater than or equal to two. If only a single carrier is in the market then he sets the price a/2 in the first and the second case. In the third case the carriers set the market clearing price which is given by a – 2b⎣D(F)⎦. Conference-Independents regime If the number n of carriers in the market is fixed then we have a competition Nash equilibrium as described above. Furthermore, we have a conference equilibrium where the number of conference participants is given by

( )( ) ⎟⎠⎞⎜

⎝⎛ − 110 2

1 ++nDn,min=c .

The number of independents is therefore z = n – c1. The conference price is given by half the market clearing price for the aggregate capacity of the independent carriers, namely (a – 2bz)/2. The individual revenue of conference participants is given by (a – 2b (n – c1))2/(8bc1) which can be shown to decrease strictly in n. The independents undercut the conference price marginally and sell their full capacity. No-Independents regime The monopoly price is given by a/2 as long as the capacity restriction is not binding, i.e. there are sufficiently many carriers in the market.


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B. Organisational Structure Proposed by ELAA

13. There are three key institutional features of the organisation that will house the proposed ELAA138 information exchange systems. There will be three levels of organisation.

Figure X-1 Proposed ELAA IES organisation chart

1. Trade Association – an over-arching body "similar to standard trade association(s) …in other industries", including carriers and federations like the ELAA. This organisation would " not… discuss… sensitive market information". It will discuss standards, security, policy, environment, and so forth. Membership would be by majority vote139.

2. Trade Committees – these are separate subcommittees of the Trade

Association, one for each "trade" (e.g. the Europe to Asia trade route). Members active on the trade would belong, and would be eligible to receive data140.

3. Independent Data Service - a "black box", with professional independent

staff, which would take in data in complete confidence from the individual member firms and other sources, and output accurate aggregate. This output data would only be distributed to committee members, that is, carriers active on the trade route141.

138 See pages 32 and thereafter in the ELAA proposal of March 2005. This document can be found at http://europa.eu.int/comm/competition/antitrust/review/elaa/. 139 See Annex 1 of the ELAA proposal. 140 See Annex 2, ELAA proposal. 141 See Annex 3, ELAA proposal.


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Functions of the Organisation Components

14. The Trade Association would serve as the "over-arching body" of the information exchange system. Its stated function would be "similar to trade association activities in other industries142", and would include policy and regulatory issues and lobbying. The proposal seems to emphasise that it would provide carrier members with legal counsel, for example in antitrust matters.

15. The "Trade Committees" would discuss supply and demand, receive briefings, and produce trade forecasts by confidential vote. The ELAA asserts that there would be no discussion of rates, or of individual carrier data, or of individual carrier adjustments of capacity. The claimed result would be efficient collective capacity adjustments in the short run and efficient investment in the long run, ultimately benefiting shippers. The ELAA proposal notes that the European Shippers Council has objected that this could be a mechanism which would affect short-term prices143, but ELAA discounts the ESC objection. A list of prohibited discussion topics is provided.144

16. The "Independent Data Service" (IDS) is the so-called "black box.” would take in container shipping transaction data supplied by carriers from Bills of Lading on rates, cargo and route; and vessel loadings and capacity. In addition, other sources of data would be used. There would be monthly briefings on sailings, vessel deployments, and the like. The IDS would be a centralised support function serving the deliberations of the trade committees, with a cadre of permanent professional staff.

The Information Processing Function

17. The Independent Data Service would essentially take business sensitive timely operational data already aggregated by the lines, further aggregate it, and formally present it to the trade committees monthly. The inputs would be data from Bills of Lading, and carrier-specific capacity and utilisation rates by vessel. An illustration from the ELAA proposal below depicts the IDS function.

18. The aggregate data that would be output includes: market size, capacity utilisation (on the route), market share (to each respective carrier only), "commodity developments", and a price index. The data would be aggregated over time and route, and only provided to committee members, in general with a one month lag. The price index by direction and equipment type would only be supplied with a three month lag, and would only be expressed as an average index with a base of 100. The data to be output is carefully and extensively defined.

142 See page 32, paragraph 16, and succeeding paragraphs. 143 See page 47, ELAA proposal. 144 See paragraph 69, page 49.


X-6

Figure X-2 Data inputs, processing and output of the IES IDS "black box"

19. The trade volume and operational statistics produced and presented to trade committee members would be one month old: trade size, capacity utilisation, commodity developments (i.e. trends). The latest in capacity developments would be provided, along with “other relevant developments”. A price index for freight rates would be presented that is three months old; it is specified that the actual level of past prices would not be known. Trade committee members (carriers active on the route) would access to “individualised sensitive information”, and for example would be able to calculate their own market share in confidence, by commodities and routes and ports, but not that of others.

20. The only data to be released to the public is the three month old price index.

The Trade Route Committee Function

21. The Trade Committees would host monthly meetings attended by carrier managers responsible for member carrier’s activities on the trade route. The meeting would be announced and arranged by a “facilitator” from the Trade Association. Legal counsel from the trade association would attend. DG Comp may attend “by invitation,”145 and DG Comp would be entitled to a report on the meetings “by request.”

22. Furnished with statistical information from the IDS “black box”, the trade committee would start with an IDS briefing and discuss utilisation rates, capacity, supply and demand, and a number of other specified issues.

145 ELAA Proposal, page 45, paragraph 54.


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23. The trade committee guided by the facilitator would then discuss and vote upon a specific trade route forecast of trade size (demand), capacity deployed, and commodity specific volumes. The voting procedures and so forth are specified in detail. The material would be summarised in a monthly report, distributed among committee members. DG Comp could receive a copy “upon request.”

Figure X-3 Proposed EIS Trade "Committee Forecast Voting Process"

24. There would be no discussion of prices, strategy, capacity management, or “individualised” carrier specific data. These forbidden topics are listed explicitly and would be prohibited by trade committee statute.


X-8

C. Existing Information Sources

25. First we enumerate data products and sources available, existing independent third party information. Simply put, there is quite a lot of data of all kinds already in existence. Then we discuss data “coverage”; what aspects of liner industry operations are well described by the available data. Most important activities of liner markets are well described by available data products, analyses, and publications. Then we note the key feature that distinguishes the proposed ELAA information exchange system from the information which is already available. That key feature is that the ELAA proposal would help carriers exchange information which is normally consider very business sensitive.

Data Products and Sources

26. Table 1 below lists available third party statistical data on maritime trade and shipping activity, mainly at the global level. Over twenty listed organisations are currently providing over fifty data products of a primarily statistical nature, and there are at least ten periodicals which regularly provide a significant amount of quantitative information. These are mainly independent commercial organisations, none of which can be viewed as "captive" by the industry; some are government agencies or international organisations. This list is neither exhaustive nor complete.

Table 1 Third Party Statistical data on Maritime Trade and Shipping Activity Information on Maritime Trade and Shipping Sources of Empirical Data DATA SOURCE and their DATA PRODUCTS

1. Barry Rogliano Salles (BRS):

a. Container Market, Annual Review b. Liner Shipping Newsletter (published weekly) c. Liner Shipping Report (published monthly) d. Shipping and Shipbuilding Markets 2005 (published annually) e. The Containership Market in 2004, and other years (published annually) f. The Shipbuilding Market in 2004, and other years (published annually) g. TOP 100 (published usually 2 times a year) h. BRS-Alphaliner.com, publicly available publications

2. BIMCO BIMCO Bulletins

3. CESA (Community of European Shipyards' Associations) CESA Annual Reports

4. ci-online: FREIGHTFACTS

5. Clarkson’s Research:


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a. Container Intelligence Monthly b. Shipping Review & Outlook (published 2 times a year) c. World Shipyard Monitor (published monthly)

6. Drewry Shipping Consultants a. “Drewry Insight Containers” (based on DSC’s own data banks) b. Annual Container Market Review & Forecast, several years (published

annually) c. Annual Review of Global Container Terminal Operators, several years

(published annually) d. free available publications from www.drewry.co.uk e. Investment in Ships, October 2003 (special report) f. Ship Operating Costs Annual Review & Forecast, several years (published

annually) g. Ship Operating Costs Annual Review & Forecast, several years (published

annually, partly referring to D.M. Jupe Consulting, DSC, Ensign Marine Consulting Limited, Precious Associates Limited)

7. Dynamar: a. THC Terminal Handling Charges - A bone of contention, 2003 (special report) b. Dyna Carriers Trades Review, several years (published annually) c. Dyna Carriers, weekly news summary, analysis and commentary on liner

shipping d. Feeder Trades and Top Operators, Alkmaar, July 2004 e. Feedering, Trades and Top Operators, July 2004 (special report) f. PostPanamax Terminals in the North West Europe & and the Spectre of

Congestion, March 2005 g. Top 25 (respectively 30) Container Liner Operators Trading Profiles, since

2001 (published annually) h. Top 31-60 Container Liner Operators Trading Profiles, since 2002 (published

annually) 8. Eurostat

Meta data on maritime transport (online access) 9. G. P. Wild:

Prospects for the Global Container Trades to 2014, May 2004 (special report) 10. Global Insight

WORLD TRADE SERVICE: Providing history and forecasts of international trade by commodity and shipping service

11. HARPEX Harperpetersen.com

12. Howe Robinson Diverse reports

13. Institute of Shipping Economics and Logistics: a. ISL Port Data Base (updated quarterly) b. Shipping Statistics and Market Review (published 9 times a year) c. Shipping Statistics Yearbook (published annually)

14. LLP – Lloyd's of London Press(INFORMA) a. Lloyd's List b. Lloyd's List Special Report Containerisation (2005)

15. Lloyds Register/Fairplay: a. Shipbuilding Market Forecast (published monthly) b. World Fleet Statistics c. World Shipbuilding Statistics (published quarterly)


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16. MDS a. Transmodal Data Base

17. Ocean Shipping Consultants (OSC) a. Shipping Profitability to 2015, 2004 (special report) b. World Container Port Outlook to 2015, 2003 (special report)

18. OECD: a. Ownership and Control of Ships, March 2003 (special report) b. Diverse special reports on maritime transport

19. PIERS US trade data extracted from ship manifests

20. R.S. Platou Shipbrokers The Platou Report (published annually)

21. U.S. Federal Maritime Commission (FMC) Diverse publications

22. UNCTAD a. UNTAD Transport Newsletters (published quarterly) b. UNCTAD: diverse special reports on maritime transport c. UNCTAD: Review of Maritime Transport, (published annually)

PERIODICALS Magazines and similar publications with container related statistical data of international relevance 1. ci-online Library (updated daily) 2. Containerisation International (published monthly) 3. Drewry Monthly (published monthly) 4. DVZ-Deutsche Logistik-Zeitung (published daily) 5. Fairplay (published weekly) 6. Fearnleys Monthly (published 12 times a year) 7. Lloyd's List (published 310 times a year) 8. Lloyd’s Register/Fairplay: news (updated daily) 9. Lloyd's Shipping Economist (published monthly) 10. Maritime Policy & Management (published quarterly) Source: Internet search by ISL staff and others conducted in August 2005.

27. The frequency of these publications ranges from daily to weekly to monthly to annually; and there are sporadic publications as well. Services are available on-line, as well. There is in addition a well-developed cadre of consultants serving the industry, willing to create specially tailored products. Some have impressive data bases.

28. At lower levels of aggregation, below "international", yet more data is available. Most large ports publish data on vessel calls, the characteristics of calling vessels, cargo throughput by commodity, terminal activity, and containers handled, disaggregated by type. Conferences themselves are data sources on occasion. Governments at several levels provide data and analyses.

29. This list is not exhaustive or complete. Any industry insider is likely to be able to add to the list. Yet, it proves that there is truly a lot of relevant information out there readily available on the market.


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30. At first glance then, it is clear that a lot of relevant information is available to carriers and others. The question naturally arises, what case can the ELAA make for the need for a specially created information exchange arrangement serving the European carriers? First, we evaluate the data presently available from third party sources. Then, we turn to the ELAA proposal.

Evaluation of existing data coverage

31. In this section we enumerate data available by various categories; that is, sources and information products on various aspects of container trade and liner activity. We consider all types of information required by carriers to make investment decisions and to manage capacity on routes, providing service.

32. Information on container transport demand

o For almost all important ports, data on the volumes of loaded containers are available from special data providers. Usually these are not segregated by specific commodities or origins/destinations

o The portion of transhipment respectively direct port to port transport as well as the portion of empty containers must sometimes be estimated on a non-statistical basis (see Drewry's annual reports) - except for US routes (Piers data base)

o Most common accessible data are only provided annually on a country basis partly updated quarterly; container port handling activities are generally summarised for all routes with quarterly numbers on a historical basis

o Some data providers make forecasts on a quarterly basis with the same restrictions as mentioned above.

33. Information on freight rates

Quality and scope of available data is limited, for several reasons: • Effective freight rates diverge in most cases considerably from the official tariffs

or indices published by the conferences. • Effective freight rates are not published, nor revealed by the carriers and shippers,

they are confidential • Effective door-to-door freight rates may be influenced by several tariff

components, not just ocean freight only; they usually include several surcharges • Freight Rate Indices are not always representative.

o Some indices on effective freight rates are of limited use in a global context (for example the German "Seefrachtratenindex", which has a sound methodical basis, but refers only to exports and imports from German ports).

o Some are of low quality. o Some are very broad: the most commonly used index from CI-online is

constructed from average rates for all commodities carried by major carriers on a quarterly basis and only for the main routes (eastbound


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and westbound each), however this is from a limited survey and has shortcomings.

o Some indices do not cover all charges, such as surcharges and ancillary charges as well as inland haulage charges if agreed upon.

o Some indices are not founded on a uniformly defined statistical sample.

Rate information is therefore only an indication for the trend development of real freight rates. The lack of indicators for other than the main routes can be a problem to smaller shippers, who are active on those routes, and who have not the market insight of bigger players.

34. Information on surcharges and ancillary charges

• Real developments of surcharges are only estimated on a global basis annually (for example by DVZ) or irregularly.

• Official surcharges announced by the conferences are completely available, but their real application in trade contracts remains unclear

• In general, the method of determining surcharges is not transparent. Usually no explicit mathematical definition is provided. Little information is published regarding the connection between single components of surcharges and ancillary charges and the underlying development of costs factors, most of this has to be collected from isolated studies with different scope and investigation design.

• The information available is usually not sufficient for shippers to verify the justification of changes of surcharges, announced by the conferences or demanded by non-conference carriers.

35. Information on charter rates and tenure of charter contracts

• Indexes for charter rates as well as data on the average tenure of charter contracts are published regularly with different frequency (weekly, monthly, quarterly)

• the most common indexes (Clarkson, Howe Robinson, Harpex) are provided by brokers and are available on a long-term basis for different size classes and vessel types, however they differ somewhat regarding: trend and absolute level due to differences in clients structures and estimations (that are necessary, when no or only a few contracts are reported) of the brokers

• The representative indexes are published by several sources up-to-date (with low cost accessibility).

Level and developments of charter rates are well documented with sufficient precision for long-term investment decisions. For individual contracts between ship owner and charterer the available information should give good guidance.

36. Information on the container fleet

• Ownership, registration, management, size, age, technical details etc. of vessel are very well documented for the existing fleet as well as for the order book

• There is detailed information that can be assigned to single carriers and services except for very small vessels below 100 TEU


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• Most of the data is updated on a monthly basis and can be obtained from several sources (with low cost accessibility).

For future capacity supply quite reliable forecasts can be made up to three years (mainly based on the order book). The available data seems to be sufficient for all common information needs.

37. Investment

• Investment in ships is in general well documented: capacity, numbers, technical details and values derive mainly from detailed information of order books

• Similar information is usually available for the second hand and demolition markets • Most data is available on a monthly or quarterly basis • New-building, second hand, demolition prices and investment values are partly

known for single specific vessels. They are fully available as an average for different size classes and vessel types

• Most of the aggregated data is provided quarterly or even monthly, partly with quarterly numbers and indications for a monthly trend.

Historical investment related data is therefore very well documented, timely, and readily available. Information in general is sufficient for benchmarking ship prices and the estimation of global capacity developments by vessel type and size class as well as for individual investment decisions concerning the fleet. The orderbook of forthcoming new vessels is well known.

38. Operating costs

• Estimates on operating costs are available from consultants. There are price indexes for cost factors, such are insurance, crew costs, and especially bunker prices and quality (reported daily)

• Estimates are usually global, published for different cost categories, differentiated for some vessel types and size classes, partly disaggregated for selected regions or even single countries

• The relevant data estimates may be provided only annually or through special reports (irregularly).

The available data provide only information for the assessment of global cost developments. Single carriers can use the given information for global benchmarking; they also have the experience of their own operational performance.

39. Carrier revenues and profitability

• Some carriers publish annual, half-year or quarterly reports of financial data, if they are publicly listed

• Many are closely or privately held, or are registered in jurisdictions that do not require reporting. For many small and some large carriers there is no reliable data available at all

• Publications provide estimates of carriers' revenues and operating income, mainly based on the official data for selected carriers, partly with specific information (partly estimated) for the distribution of carriers' gross revenues (ocean freight and ancillary charges) over the main routes as well as for average revenues per TEU carried (based on loaded container moves per company).


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There are the usual problems in comparing data across carriers, even if it is available. Definitions of operating income and other relevant variables is not always the same. Some figures may contain results from other activities, that are not or only little related to the (container) liner business.

40. Utilisation Rates

• Reliable public information on the degree of slot utilisation is available only as estimates for the main routes (east and westbound each).

• They sometimes do not distinguish among vessel size, classes or type. Individual carriers usually do not reveal such information. Some carriers publish this information occasionally by themselves, i.e. in annual reports. One exception seems to be US routes (Piers data base). However for vessels with cargo from multiple trade routes it is virtually impossible to ascertain the true utilisation rates

• Only one publication seems to try to provide monthly figures.

Utilisation rates can be guessed at, sometime very accurately by the well-informed, but are masked to a large degree by carrier confidentiality.

41. Market share

• Market shares of individual carriers, shippers or freight forwarders are usually not known. They are sometimes made available by conferences, but this is very unusual. (Some was especially provided to Global for this study.)

• Estimates of the aggregate fleet utilisation rate on routes or at specific ports can be made by third parties from available data.

• The utilisation rates of specific carriers on specific routes are usually masked by confidentiality, as is that of specific vessels. (Some reliable information is available for US routes via the Piers data base).

Information on market share is subject to guesswork, masked by confidentiality, except at the most aggregate level.

42. Service Quality and Reliability

• Schedules are well known. Detailed schedule data on liner services can be obtained from several commercial data providers as regards: deployed vessels with capacity, port strings, sailing frequency, total tenure and time of arrivals and departures, and sometimes more specific information

• Calls are well known. Scheduling information on vessel calls is available for the immediate past and the near future in all details weekly (Lloyd's List) and on carrier and port websites

• Service quality is harder to document. For the actual measurement of service reliability there is problem of metrics and reliable indicators. An example of a single unambiguous performance indicator is that of Lloyds Shipping Economist, which provides a measurement of schedule delays per day

• For possible indicators regarding service reliability, note that key information is not always fully available, some is anecdotal, some is carrier specific, and some is confidential:


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o Significant delays: only irregularly, published as comparison of carriers' schedule delays for selected port to port combinations

o Share of direct port calls vs. transhipment cargo: only estimate at port level o Percent of “all-in rates” versus those enumerating surcharges, or structure of freight

contracts between ocean carrier and shipper are usually treated as contractual secrets. Relevant information is not available on a statistical basis

o Duration of freight contracts: outside the USA this information is not published by carriers and no reliable statistical information is available

o Renegotiations of contracted freight rates: confidential information that is, if at all, only available by anecdotal evidence o Frequency of changes/ adjustments in surcharges and other charges: can only

be covered for official conference tariffs o Minimum capacity/volume required (that is to say the shipper is obliged to

transport a certain volume over the period for which the contract is signed): no statistical data available since this is confidential

43. Detailed information on scheduled or promised service patterns is available for all relevant liner services with sufficient precision and timeliness. In contrast, the quality of delivered services or service actually rendered can not be readily evaluated on the basis of publicly available data.

44. Shipper opinions thus remain one of the best sources available on certain dimensions of service quality and reliability.

45. The U.S. Journal of Commerce/ PIERS database stands out and deserves comment. The online data bases of PIERS are frequently updated. Most of the US related data is accessible with no more than a month delay. Weekly, monthly or quarterly standard report forms for different user needs are provided. Data elements include:

• commodity with specific description • quantity respectively weight • harmonised tariff code and estimated value of loading • vessel name and number • carrier respectively ship line and consignee/shipper where known (each with name

and addresses) • mode of transport • TEUs • arrival date for imports respectively loading date for exports • Country of origin, destination country, port of loading, ports of discharge,

transhipping ports, ultimate destination (much of this is estimated).

46. PIERS also provide special reports on ocean transportation intermediaries (OTIs) often called non vessel operating common carriers (NVOCC) with similar details. This data can provide the basis of estimates:

• reconstruction of specific trade flows by commodity, trade lane, port, region • analysis and benchmarking of market share


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• evaluation of demand-supply-price relations • Bench-marking of published freight rates (but note, little or no cargo is carried by

"filed" rates, which bear little relevance to rates actually charged.)


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D. Regression Analysis

47. In addition to descriptive time series analyses for the period 2000-2004 on a quarterly basis, the attempt is undertaken to test fundamental relationships between relevant variables by regression analysis. This is conducted for the most important trade routes Transpacific, Transatlantic and Europe-Far East. Respective data on a quarterly basis and their evaluation including weak data such as conference announcements have been added as Annex 1 (Freight Rate Developments).

48. In order to analyse the relationships between freight rates and their determinants on both the definitional aspects (transport cost = freight + THC + BAF +CAF + (annual charges + war risk surcharge etc.) and the functional dimension (cost factors, demand/supply ratio, and surcharges as well as market power of conferences), a number of variables have been defined.

49. Before going to test the influence of conferences on maritime transport costs the global interaction between freight rates and market conditions and strength will be tested.

50. Data on the quarterly development of an computed supply/demand index are available from Drewry Shipping Consultants. This index is based on the aggregate utilisation (demand in 1,000 TEU divided by capacity in 1,000 TEU) where 85 % utilisation rate has been defined as index = 100. Data published by Drewry146 are differentiated by head-haul trades and total world respectively. In the following, the head-haul supply/demand balance is used for the period 2000 – 2004 (Transpacific eastbound, Europe- Far East westbound, and Transatlantic Westbound).147

146 DREWRY Shipping Consultants Ltd: The Drewry Container Market Review – 2004/05 – ISL Calculates 2005. 147 There are some factors that affect the supply and demand indicators: Supply side: productivity, box inventory, equipment management efficiency, routings, speed, port efficiency – Demand side: incidences and weight/TEU


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Table X-1: Development of the Head-Haul Supply-Demand Balance, 2000 - 2004

Demand(1,000 TEU)

UtilisationRate (%)

Index(85%=100)

UtilisationIndex

(I2000=100)

Freight Rates

($/TEU)

Net Capacity

(1,000 TEU)

Freight Rate Index

(I/2000=100)

Ratio ofFreight Rates /

UtlisationI 2000 3,021 80.7 94.9 100.0 1,829 3,746 100.0 22.66II 2000 3,343 87.9 103.4 108.9 1,742 3,806 95.2 19.82III 2000 3,610 91.7 107.9 113.6 1,845 3,936 100.9 20.12IV 2000 3,414 84.3 99.1 104.5 1,735 4,051 94.9 20.58I 2001 3,102 75.4 88.7 93.4 1,698 4,114 92.8 22.52II 2001 3,332 80.5 94.7 99.8 1,602 4,141 87.6 19.90III 2001 3,681 85.1 100.1 105.5 1,478 4,328 80.8 17.37IV 2001 3,434 77.5 91.2 96.0 1,427 4,409 78.0 18.41I 2002 3,256 76.5 90.0 94.8 1,349 4,259 73.8 17.63II 2002 3,922 91.2 107.3 113.0 1,311 4,302 71.7 14.38III 2002 4,241 92.5 108.8 114.6 1,363 4,586 74.5 14.74IV 2002 3,960 83.4 98.1 103.3 1,428 4,726 78.1 17.12I 2003 3,889 84.2 99.1 104.3 1,466 4,618 80.2 17.41II 2003 4,306 92.0 108.3 114.0 1,632 4,680 89.2 17.74III 2003 4,501 89.2 105.0 110.5 1,836 5,045 100.4 20.58IV 2003 4,348 82.4 96.9 102.1 1,778 5,277 97.2 21.58I 2004 4,411 84.2 99.0 104.3 1,754 5,239 95.9 20.83II 2004 4,950 92.7 109.1 114.9 1,774 5,339 97.0 19.14III 2004 5,115 87.5 103.0 108.4 1,832 5,818 100.2 20.94IV 2004 4,823 86.7 102.2 107.4 1,849 5,997 101.1 21.33

Quarter /Year

Source: Drewry [2004/05] – ISL [2005].

51. Figure X-4. During Phase 1 (2000/I – 2001/II) the freight rate level was relatively high compared to the capacity utilisation (impact from conference power?), followed by Phase 2 (2001/III – 2003/II) with freight rate level quite to very low compared again by quite high rate levels in Phase 3 (2003/III – 2004/IV).

Figure X-4 Comparison of Global Liner Freight Rates and Utilisation Rate for

Head-Hauls 2000 – 2004

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2000 2001 2002 2003 2004

$/TEU

35

40

45

50

55

60

65

70

75

8085

90

95

100

105

110 %

Freight Rates(left axis)UtilisationRate (right axis)

ISL 2005


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52. As shown by the following Figure (Figure X-5), freight rates (expressed as index) showed a similar tendency during Phase 1, as utilisation of capacities, however, by a falling ratio until 2002/II. The strong increase of capacity utilisation in 2000/II lead to a steady increase of freight rates and utilisation until end 2004.

Figure X-5 Comparison of Freight Rate and Utilisation Indices 2000/I = 100 and Ratio of Freight Rates and Utilisation for Head-Hauls 2000 – 2004

40

50

60

70

80

90

100

110

120

2000 2001 2002 2003 2004

Inde

x

10

12

14

16

18

20

22

24

26

Rat

io

Utilisation Rate Index I/2000=100 (left axis)Freight Rate Index (I/2000=100) (left axis)Ratio of Freight Rates / Utlisation (right axis)

ISL 2005

53. The ratio of rates and utilisation indicates two main periods of market power with loosing strength of the shipping industry down to the midst of 2002 and then again increasing strength until the end of 2004 to similar rate levels as of the beginning of 2000. Figure X-5 shows, too, that if a downward trend is stable enough, there is no real possibility to turn it as long as there is no significant rise of capacity utilisation as in 2002/II and III. Then with a time-lag of some months, the shipping industry comes slowly in the position to regain lost territory. Since there exist long-term contracts only the new contracts in addition to surcharges mostly proposed by the conferences and followed by their members and other companies bring the freight rates step-by-step towards the high rates, as long as utilisation rates remain on a high level on average as in 2003 and 2004.

54. Which role the conferences have been played in this different process can hardly be quantified. It seems, however, that the rates are somewhat different compared with a situation without conferences. Given the fact that larger and larger container vessels are employed on Transpacific and Europe-Far East, the recent rate level is surely higher than required by the large ocean carriers in order to at least cover cost.

55. The impact of conferences is backed by the fact that during the down-swing of freight rates in the year 2001 and first quarter of 2002 there was no serious announcement given by conferences on rate increases nor on surcharges. In the bottom phase of


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freight rates, however, along with substantially higher utilisation, the Transpacific Stabilisation Agreement (TSA) started to give advice to increase rates and surcharges by $ 300 each. These recommendations were followed by a number of others which lead after a slight stabilisation during the first part of this phase finally to a high level. Obviously the conference system works if there is a stable up-swing of rates accompanied by a high utilisation level. Statistical analysis found a small correlation between freight rates and determinants of only R² = 0.14.

Trade Route Related Freight Rates and Supply/Demand Ratios

56. Since there are several conference systems in operation and the strengths of trade routes are different, in addition to head-haul route analysis also considerations for individual markets have been done. As described in detail in Annex 1 of chapter VIII, these routes are:

Transpacific (East + West)

Europe – Far East (East + West) Transatlantic (East + West)

57. The following contains the liner freight rates for the three routes for the 1995-2004 on an annual basis, in order to show the partly rapidly changing relevance. The more or less stable route (with fluctuations are Transpacific (EB) Europe – Far East (WB) and Transatlantic (WB), while the other three have lost significance from the point of view of freight rates.

Table X-2: Indicative Freight rates in US $/TEU Including all Charges

Transpacific Europe-Asia Transatlantic Year East West East West East West

1995 1,800 1,400 1,300 1,500 1,400 1,400

1996 1,600 1,400 1,200 1,300 1,500 1,400 1997 1,400 1,300 1,000 1,200 1,500 1,300 1998 1,500 1,000 900 1,300 1,400 1,200 1999 1,900 900 700 1,500 1,100 1,100 2000 2,000 850 750 1,600 1,000 1,200 2001 1,700 800 700 1,400 900 1,250 2002 1,500 750 850 1,200 850 1,150 2003 1,800 850 750 1,600 900 1,400 2004 1,900 850 750 1,800 800 1,450

Source: DYNAMAR: DYNA Carriers Trades Review, Alkmaar, January 2005

58. For all of three routes the data on freight rates, supply/demand ratios, and the behaviour of conferences on a quarterly basis for the period 2000-2004 have been collected and evaluation. In addition, regression models have been tried to establish. In principal for all of the trades the following relationships have been tested:

freight rates = f (supply/demand, rate advice, surcharges, expectations)

Transpacific Eastbound

59. Within this trade high freight rates are paid with highest rates at the beginning of the reference period (2000) with around $ 2,000/TEU. During 2001, the rate level went


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down to about $ 1,700/TEU and even further down to $ 1,500/TEU, and then regained $ 1,800/TEU in 2003 and $ 1,900/TEU in 2004.

60. The reason for this down-swing, from 2000 to mid 2002 was less the unsatisfactory supply/demand ratio which fluctuated but did not show extraordinary negative trends, but exogenous factors.

Figure X-6 Comparison of Freight Rates and Demand/Supply Ratio on Transpacific Cap/Utilis. Eastbound 2000-2004

1,400

1,600

1,800

2,000

2,200

2,400

2000 2001 2002 2003 2004 2005

$/TE

U

70

80

90

100

Transpacific (EB) (left axis) Demand/Supply Ratio (right axis)ISL 2005

61. Despite high utilisation rates, the freight rates remained quite low in 2002, but then started to recover from beginning 2003 and continued until the end of 2004. This was accompanied by a number of TSA rate increase advices and surcharges which firstly (2. half of 2002 and first half 2003) were not very successful, then however showed substantial impacts. Total extent of recovery of rates 2004 compared to the bottom was about $ 400-500/TEU, surely contributed by TSA policy. In case of missing TSA, the freight rates might have remained on the $ 1,500/TEU level, maybe up-to 1,700/TEU. Simple regression analysis between freight rate and demand/supply ratio found a R² of 0.001 which means nothing. By applying multiple regression using demand/supply ratio(t-1), dummy expectations(t), and surcharge(t), as explaining variables, R² increased to 0.52 with secured t-values.

FR = 3,082.5 - 13.14 D/S t-1 - 357.84 Dummy(Exp.) - 256.00 PSS (5.61) (-2.01) (-3.74) (-2.87)

Transpacific Westbound

62. The liner freight rates on the opposite direction across the Pacific are relatively stable on a very low level, indicating the high share of empty boxes, also reflected in the demand/supply ratio of about 50%. The low rate level of >$ 800/TEU is a recent development, since mid 90s the level was about $ 1,400/TEU.

63. Given the even distribution of freight rates and demand/supply ratio 2000-2004 on a quarterly basis, a regression analysis is of minor benefit. The compiled R² was only 0.17.

FR = 1,016.0 - 3.27 D/S t-1 - 62.82 Dummy(Exp.) - 46.37 PSS (5.38) (-0.90) (-1.74) (-1.32)


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Figure X-7 Comparison of Freight Rates and Demand/Supply Ratio

Transpacific Westbound 2000-2004

700

800

900

1,000

2000 2001 2002 2003 2004 2005

$/TE

U

40

50

60

Transpacific (WB) (left axis) Demand/Supply Ratio (right axis) ISL 2005

Europe – Far East Westbound

64. Freight rates showed here a similar behaviour as Transpacific (EB), coming down from about $ 1,600/TEU in 2000 to $ 1,200/TEU in 2002 and then stepwise recovery to $ 1,600/TEU in 2003 and $ 1,800/TEU in 2004.

65. The reason for the cut of rates during the phase 2000-mid 2001 was partly the increasing over-tonnaging with average demand/supply ratios of 92.9% (2000), 83.2% (2001), 87.4% (2002), 95.3% (2003), and 94.8% (2004). Along with the increasing demand/supply ratio, FEFC made a number of announcements. Obviously, the conference was finally successful to stabilise the rates on a high level. It may be assumed that also capacity agreements may have played a certain role.

Figure X-8 Comparison of Freight Rates and Demand/Supply Ratio on Europe -

Far East Westbound 2000-2004

1,000

1,200

1,400

1,600

1,800

2,000

2000 2001 2002 2003 2004 2005

$/TE

U

75

80

85

90

95

100

105

Europe - Far East (WB) (left axis) Demand/Supply Ratio (right axis)ISL 2005

A linear regression function lead to the following result:

FR = - 102.6 + 17.8 D/S with R² = 0.27 (-0.17) (2.62) The conference activity was simulated in the following formula:


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FR = 23.04 + 17.43 D/S - 322.78 Dummy(Exp.) with R² = 0.65 (0.05) (3.66) (-4.54)

Europe – Far East Eastbound

66. Similar to Transpacific Westbound, here the rates are quite stable on a very low level due to a quite high share of empty containers. However the demand / supply ratio is higher than there. (About 73% during the period 2000 – 2004, while the average rate was $ 760/TEU, down from $ 1,300/TEU in 1995.)

Figure X-9 Comparison of Freight Rates and Demand/Supply Ratio on Europe

– Far East Eastbound 2000 – 2004

550

650

750

850

2000 2001 2002 2003 2004 2005

$/TE

U

60

65

70

75

80

85

Europe - Far East (EB) (left axis) Demand/Supply Ratio (right axis)ISL 2005

67. In principal, the freight rate development is similar to that of Far East westbound with two phases of freight development and an erratic development of demand/supply ratio. The conference announcements had clear impacts on the rate stabilisation on a high level after a time lag of about one year between 2002 and 2003/II. From then the rates remained on a “high” level despite smaller ratios.

The regression analysis showed the following result:

FR = 546.1 + 2.76 D/S - 47.59 Dummy(Exp.) with R² = 0.17 (2.08) (0.77) (-1.80)

Transatlantic Westbound

68. The freight rates on the transatlantic westbound trades show a quite controversial development related to the capacity utilisation indicator compared to the other head-hauls. The rate started from a low level in 2000/I, remained more or less on this level until 2003/I, and then jumped to new steady-state level on a clearly higher level which could be maintained until today, this despite a remarkable reduction of the demand/supply ratio as shown in the following figure. Without doing regression analysis, it becomes clear that there is no statistically confirmed relationship between both variables. There are signs to conclude that TACA started at the beginning of 2003 a strong conference attack which seems to having been successful.


X-24

Figure X-10 Comparison of Freight Rates and Demand/Supply Ratio on Transatlantic Westbound 2000 – 2004

1,100

1,200

1,300

1,400

1,500

1,600

2000 2001 2002 2003 2004 2005

$/TE

U

70

80

90

100

110

Transatlantic (WB) (left axis) Demand/Supply Ratio (right axis)ISL 2005

69. In this environment any regression analysis based upon freight rates and capacity utilisation must fail. Freight rates in their trade can only be explained by market power based upon cartelling.

70. On the other hand, freight rates have been surprisingly low between beginning of 2000 and end of 2002, given the high utilisation rate. Obviously, a strong reaction of TACA was outstanding. Regression analysis indicates no correlation between freight rate and capacity:

FR = 1657.8 - 3.98 D/S with R² = 0.03 (3.72) (-0.79) Transatlantic Eastbound

71. Rates in transatlantic trade from US to Europe are down from $ 1,500/TEU in 1997 to $ 1,000/TEU in 2000 and to $ 800/TEU in 2004. If adding both directions the total has come down from $ 2,800/TEU in 1997 to $ 2,200/TEU in 2000 and to $ 2,250/TEU in 2004. During the recent 2000 – 2004 period, annual average rates amounted to $ 2,200, $ 2,150, $ 2,000, $ 2,300 and $ 2,250. Regression analysis shows more or less no correlation.

FR = 649.3 + 3.98 D/S with R² = 0.03 (2.39) (0.79)


X-25

Figure X-11 Comparison of Freight Rates on demand/Supply Ratio on Transatlantic Eastbound 2000 – 2004

700

800

900

1,000

1,100

2000 2001 2002 2003 2004 2005

$/TE

U

55

60

65

70

75

Transatlantic (EB) (left axis) Demand/Supply Ratio (right axis) ISL 2005


XI-26

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