Sunday Oct 06, 2024
Sunday Oct 06, 2024
Monday, 7 July 2014 00:00 - - {{hitsCtrl.values.hits}}
The extension of the antitrust exemption, first adopted in 1995 and since extended several times, will provide legal certainty to ocean carriers regarding the compatibility of their agreements with EU competition rules, the Commission said. When consortia and alliances exceed the 30% market threshold, carriers must ensure that their agreements comply with EU rules outlawing anti-competitive behaviour.
The World Shipping Council, which represents liner shipping companies, has applauded the extension. “Vessel sharing arrangements are an established and essential part of the liner shipping networks that carry the international trade of the European Union and the rest of the world,” said Christopher Koch, the association’s President and CEO, in a written statement. “Consortia allow carriers to provide their customers with better services at lower cost, with improved environmental performances.”
The European Commission didn’t launch an investigation into the planned P3 Network between Maersk Line, Mediterranean Shipping Co and CMA CGM after the carriers said it would not violate EU competition rules. The Commission, which is currently investigating possible collusion on rates and capacity on the Asia-Europe and other trades by leading carriers, said it will continue to “closely monitor market developments and the conduct of companies to ensure that markets remain open and competitive.”
Leading shippers’ organisations, including the Global Shippers Forum and the European Shippers Council, had urged the Commission to repeal the antitrust exemption for liner consortia. (Source JOC)
Why China blocked P3
“In the case of P3, the participants integrate all of their capacity in the East-West trades through a network centre, which makes itself essentially different from traditional shipping alliances in aspects including the form of co-operation, operational management and cost sharing,” Ministry of Commerce (MofCom) in China says in the official ruling that blocked the world’s biggest container alliance.
Based on a five-point analysis, Mofcom concludes that P3 is a close-knit alliance, in contract to the loose tie-ups seen in existing practices and that it will “eliminate effective competition in the market and may further raise the entry barrier to the international liner market, which may prevent any new competitive force growing”. The analysis combs through issues in scenarios of vessel sharing and slot exchanges versus a fleet operation centre and how operational procedures, unused slots, cost sharing and port calls are decided upon in each case.
Unveiling their decision to tie up one year ago, one of the most innovative and bold ideas by Maersk Line, Mediterranean Shipping Co and CMA CGM was to set up a joint fleet operation base in London, in the form of a limited liability partnership. The operation, which could have managed 250 vessels, was to be led by Senior Maersk Line Executive, Lars Mikael Jensen. The plan naturally attracted thorough scrutiny from MofCom, which hired third party consultants and spent an extraordinary seven months to review the application.
MofCom says the Asia-Europe container shipping market will see the Herfindahl-Hirschman Index, a commonly accepted gauge for market concentration rise from 890 to 2240 after P3 is formed. MofCom says the three lines combined will retain a capacity of share of 46.7%, with Maersk Line, MSC and CMA CGM commanding 20.6%, 15.2% and 10.9% respectively. “The deal will transform Asia-Europe liner shipping market from a relatively loose one to a highly concentrated one. The market structure will change sharply,” the ruling says.
Lack of consolidation will damage container industry
In its latest note, Drewry argued that Maersk, MSC and CMA CGM would not be able to save the hundreds of millions of dollars a year envisaged through P3’s greater economies of scale and pooling of assets, “which explains why Maersk’s shares plummeted 8% just after China’s announcement, wiping $ 3.5 b off the company’s market value in a day. But Drewry believes that Maersk share drop was an over-reaction by the market. It pointed out that Maersk and CMA CGM were already industry unit cost and profit leaders without P3 and would continue to outperform others in this respect by finding new ways to reduce their operating costs and other ways of working together and with MSC.
“Maersk, MSC and CMA CGM will be allowed to continue their numerous existing bi-lateral and tri-lateral vessel sharing agreements and slot exchange agreements on the transpacific and Asia-Europe routes,” said Drewry. “They might even be allowed to form a tri-lateral consortium in the Transpacific, as their current 20% market share of effective eastbound vessel capacity to the West Coast alone is well below the G6’s 34%.” The analyst said that although competitors may see some benefits in the formation of P3 being stymied, the lack of sectoral consolidation would continue to put financial pressure on all carriers.
Rise in oil prices will affect exports from Asia
Surging oil prices could further encourage manufacturers to accelerate the near-shoring of production plants from Asia to the US to limit transport costs and risks, according to one leading supply chain executive. Rich Bolte, Chairman and CEO of BDP International, said rising oil prices were one factor driving the move towards near-shoring in the US where, as he discusses in an exclusive interview with Lloyd’s Loading List.com, cheap shale gas is now prompting many OEMs to reverse Asian outsourcing strategies.
“Customers are already factoring in price increases for air and ocean freight when doing their forward planning,” he said. “Air and ocean fuel surcharges are a significant cost in the running of any complex supply chain. By making the links of the chain shorter, a company can cushion itself from volatile spikes in the price of oil.”
He said North America was currently enjoying an “economic revolution” as energy prices fell. “Cheap energy from shale gas is creating a million new manufacturing jobs, jobs which previously would have gone to Asia,” he said. US companies are enjoying cost savings of nearly $ 12 billion annually, making the US manufacturing sector competitive again. “As manufacturing moves back to the US, there will be massive impact on the way logistics managers have to organise their supply chains.”
In the future, shale gas production could also transform Asia’s energy markets. “Asia will be the new battleground for gas suppliers around the world,” he said. “Asian gas suppliers developed their capacity to sell to the US, but as the US is now more self-sufficient, Asian manufacturers have to find new markets.
Regulators must clarify market share
With Maersk Line, Mediterranean Shipping Co and CMA CGM’s plan to form the P3 Network rejected by the Chinese Ministry of commerce, MDS Transmodal analysts Mike Garratt and Antonella Teodoro said the three carriers would not be considering new options. However, the task is made more complicated by the fact it is not clear at what level a market share becomes unacceptable to regulators.
The alliance was rejected by Beijing for a number of reasons, including concerns over market share and the amount of control the joint network operating centres would have. “The Federal Maritime Commission, the EU Commission and the Chinese Ministry of commerce should perhaps come out with some clearer and consistent indications of what is/is not acceptable for fair global competition,” the analysts said.
One option would be for MSC and CMA CGM to set up an alliance without Maersk Line. MDS Transmodal calculations show that a tie-up between MSC and CMA CGM would have a market share of 24% on the Asia-Europe trade lane, compared with the 44% share of the P3 Network. “Would this percentage be acceptable?” MDs Transmodal questioned. “Will the new generations of MSC and CMA CGM persevere with this plan and try to improve their efficiency through a redesigned alliance?”
MDS Transmodal’s model shows very similar outcomes if the analysis is made on Asia-Europe revenue instead of volume carried. “Together the three carriers generated a total revenue accounting for some 45% of the total revenue in this trade lanes, excluding Maersk Line, the percentage goes down to 25%.”
The analyst also looked at the market shares of the alliances on other trade lanes. It is estimated that the G6, including Zim, carried an estimated 37% of cargo in the Far East to US West Coast trade lane in 2013. “Albeit seen as a more traditional alliance than the P3 Network, its’ plans of expansion should not be immune from examination,” the analysts said. (JOC)
[The writer, a Maritime Economist, is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).]
