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Liner shipping vs EU - Business Times Singapore

22nd October 2008

Once more, the industry is having to defend beneficial commercial practices from bureaucratic meddling By DAVID HUGHES

I understand there was quite some party thrown in London last Friday night as the staff of the main liner conferences ‘celebrated’ losing their jobs. The conferences became illegal within the European Union on the stroke of midnight Saturday, ending some 130 years of collective tariff setting on the world’s trade routes. The conference secretariats that until the very end issued all those terminal charge and currency and adjustment factor changes - and, of course, freight rate ‘restorations’ - no longer exist.

There may well have been some formidable hangovers on Saturday morning. They will have gone by now but shipping’s hangover is just beginning as it copes with trying to run liner shipping without the main mechanism that has ensured stability since steam took over from sail - albeit a mechanism that has been allowed to only half work in recent years.

Following the EU’s lead

Of course, the shippers' organisations are very happy, having campaigned for years to get the conferences abolished. Peter Quantrill, director-general of the British International Freight Association (BIFA), said: ‘No one can know for certain what the impact of the demise of liner conferences in the EU will be and many of our members are understandably sceptical about the potential benefits. However, if we look at what has happened in the airline industry since deregulation, one can reasonably expect some form of additional restructuring in the sector over the medium term and impetus to new business models and innovation.’

He is probably right in seeing the conference system disappearing worldwide. He said: ‘One can reasonably assume that this development in Europe will not have been lost on governments in other parts of the world, some of which are already considering whether to follow the EU’s lead. The abolition of liner conferences in Europe may prove the catalyst for a wider shake-up in the international shipping industry, in respect of the deep sea movement of unitised cargo.’

Mr Quantrill did, however, appear to concede that the end of conferences could lead to fewer carriers, saying: ‘It could lead to greater market transparency and possibly to more mergers and acquisitions, especially given the prospect of a new regulatory environment at a time when a record number of high-capacity ‘new build’ vessels are coming up for delivery, against the backdrop of high fuel costs, the failure of the Doha Round of world trade talks, global economic downturn and changing patterns of trade.’

That is an interesting comment, seeing that - at least I naively thought - the objective of the exercise was to increase competition. Apparently, Brussels is doing that, at the behest of the shippers, by ensuring there will be just a few, very large and powerful survivors among the container lines. A brilliant strategy!

For the shipping lines, however, the focus is now on how much freedom they will have to work together in consortia and alliances. As I wrote in this column a couple of weeks ago, consortia, alliances, vessel-sharing agreements and joint services are now widespread within the liner shipping industry for the very good reason that they make sound commercial sense - allowing lines to offer much more extensive and more frequent services, and at lower cost than they could individually.

However, these arrangements are something of a nightmare for competition watchdogs. By definition, collective decisions have to be made on capacity - how many ships you decide to put on a service and what size they should be. And controlling capacity was always the key to the success of the conferences until the mid-1970s. Rate setting could only be done effectively on the back of capacity management.

It looks very much as though Brussels may have decided it is better to meddle with consortia and similar arrangements, and so potentially reduce the benefits to shippers, than run the risk that some sort of stability and rational utilisation of assets and even, heaven forbid, reasonable returns on investment could return to the liner shipping industry.

Speaking at the European Shippers Council’s Shipper’s Forum in Oslo last week (in the lions’ den, as it were), European Liner Affairs Association (ELAA) executive director Chris Bourne said that consortia were essential. He argued this was especially the case when, as now, lines have to manage their resources and cargo-carrying capacities in a market environment that has experienced double-digit growth in demand over the last five years, and is now, ‘at best flat’. He said in such circumstances, the benefits of operational consortia in maintaining a level of service from the perspective of both regularity and spread of ports are ‘clearer than ever’.

He noted: ‘The EC's Directorate of Competition (DG Comp) is currently reviewing the Block Exemption Regulation (BER) that expires in 2010 and currently defines how liner consortia operate within EU competition law.’

Nasty surprise

Mr Bourne stressed: ‘These consortia are crucial to the efficient provision of competitive shipping services to industry and retail markets throughout Europe. Any revision of the regulation must be well-advised and take care to safeguard the benefits the system brings to all users of European shipping services.’

Brussels has, however, just handed the liner shipping industry a nasty surprise. He explained: ‘We knew a review was in the offing but had been assured by administrators within DG Comp that the consortia’s BER, up for renewal in April 2010, would be maintained. However, we are now presented by DG Comp with a new draft BER for consortia that looks very different from the existing one . . . and we are allowed just one month's consultation period.’

Without going into details, DG Comp appears to be working on the basis that members of alliances worked as single entities with no competition between them. That is simply wrong. Apart from anything else, EU law leaves the lines no option but to compete on price.

Mr Bourne stressed: 'The lines will not stand idly by in such difficult commercial times and see the most effective tool for reducing shipping costs for all be rendered impotent.'

Or, in other words, here we go again. The liner shipping industry is again having to defend commercial practices that work to everybody's benefit from bureaucratic meddling.

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