REVOKING CONSORTIA BLOCK EXEMPTION REGULATION (CBER)

 In 2005, we had warned the European Commission (see Erasmus Report) that the prohibition of conferences from European trades was a big mistake. Its consequences, we claimed, would be stronger and fewer alliances, i.e., more concentration and opportunities for its abuse. They did not listen. Dressed to kill, hand-in-glove with shippers (the European Shippers' Council), they forbode liner conferences and we have all seen the results of this, which are exactly as we predicted in 2005. But the Commission, it seems, does not learn from its mistakes and is bound to make an even bigger mistake which will lead to mergers, acquisitions and hostile takeovers. In the end, the shipper will pay again through fewer services and heightened unreliability. 

The Commission claims that CBER does not promote competition anymore. It blatantly fails to understand, however, that more competition was never the intention of CBER. Instead, following the prohibition of conferences, the Regulation was affording carriers some 'self-regulatory' discretion because, in industries such as liner shipping, outright competition on marginal cost becomes destructive.

The right step, therefore would have been better regulatory surveillance, instead of expecting the carrier to prove himself that he is not an elephant. This is exactly what President Biden asked FMC to do (better regulatory work) a few months back. Following its review, the latter (FMC) decreed that there is nothing 'sinister' behind alliances and the astronomical profits of the covid-19 period were nothing more that the effects of a supply and demand imbalance. Indeed, if one observes today's precipitous drop in freight rates, one and only one conclusion can be drawn: even if carriers had some degree of monopoly power, they have never been able to make it work.-

HH

Lack of Slack? Risk mitigation in service industries: A research agenda on container shipping

LACK OF SLACK?

Our results show that it is the ‘unexpected’ and ‘unanticipated’ -e.g., a natural disaster; a war; a tsunami; or COVID19-that poses the greatest risk to carriers: Intense competition amongst them, geared to short-term profit maximization, coupled with the fine-tuning of capacity management within alliances, does not allow them the luxury of affording built-in buffers, or slacks, that could ‘absorb’ the unexpected. Not unexpectedly therefore, COVID19 has been the greatest risk factor of all times, mitigated –quite profitably one should add—by the joint capacity management of global shipping alliances. (Open Access: https://lnkd.in/dV9mkY7Y)

MEL SPECIAL ISSUE: PORT-CITY SYMBIOSIS

 

Before, ports used to be ‘city ports’, particularly in cities blessed with a river. Growth in trade and ship sizes eventually obliged them to move downstream, in river estuaries, where more space was available. Cities thus became ‘port cities’. Of recent, we observe port activity returning back to the hinterland in the form of inland terminals and dry-ports. However, the relationship between the port and its city, or vice versa, has never been easy. The port needs autonomy, the city requires ‘control’.

 Moreover, both port and city need to develop their port and urban plans, and this requires land which can be demanded and contested by both. Can a city and a port coexist in harmony? Carola and Maurice try to answer this through the compilation of eight excellent papers in this new MEL Special Issue. Congratulations and thanks to both guest editors and all the contributors to this new MEL milestone.

 HH

PUBLIC TENDERS IN PORTS: COMPETITION ‘IN’ OR ‘FOR’ THE MARKET?

I have written on this issue before but, again, here is an excerpt from my new work, to appear shortly.

The type of competition we choose to adopt among our concessionaires is important. In many submissions to the European Commission, I have favoured competition ‘in’ the market, vis à vis competition ‘for’ the market, the latter being the Commission’s preference, mostly based on arguments regarding market size. 

To explain. Ports are often referred to as the classic example of the so-called natural monopoly case, whereby possible market failure can justify government intervention. Under certain conditions (level of demand, cost structures and technology), a market with two or more firms can produce sub-optimal economic outcomes (for example a certain port may be too small to have two tug operators), whereas a single firm might produce the required output more efficiently. For this reason, governments often decide to move away from a multi-firm competitive environment (competition “in” the market), towards a monopolistic, albeit regulated, situation (competition “for” the market), whereby only one concessionaire is selected through competitive public tendering.

I have always argued that such public intervention in commercial decisions is wrong. And it is wrong for two reasons.

First, the sometimes-widespread corruption in the public sector may result in ‘photographic’ tenders favouring a specific bidder (often the current incumbent), effectively shutting off international or even national competitors. Thus, it is not uncommon for public tenders to end up with only one interested bidder, while the correlation between single-bid contracts and corruption in the public domain is statistically significant[1]. Finally, the opening of the market for public contracts is one area where WTO is dragging its feet for years now, without much progress.

Second, governments, and the public administration by and large, are by far the least competent actors to decide on ‘market size’, or on the financial ramifications for private firms who would like to take calculated risks and enter a market. This is because governments lack both the information required for such decisions --a typical case of asymmetry of information[2] and the legitimization to decide themselves on the fortunes of private risk-takers. The same is true when it comes to the efficiency of the regulatory role of the public administration (port authority): often, the latter has neither the professional competence (accounting, finance, etc.) nor the information and statistics required to assess the highly complex accounts of the concessionaire; accounts that, often, are submitted in purposely complex and lengthy form, intended to confuse the assessor.  

Instead, the role of the public administration should be to set the rules of the game; to determine the conditions and quality of the services it requires (including any Public Service Obligations) and then leave it up to the private sector to decide for themselves if the market is big enough, if they see profit prospects, or if they would like to go bust. But this ought to be ‘their own’ decision, because it is ‘their own’ money, and, in the end, ‘their own’ neck on the block.

HH

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[1]The Economist (2016). Rigging the bids. Nov. 19, 2016.

[2]Akerlof, G.A. (1970). The Market for “Lemons”: Quality, Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, Volume 84, Issue 3, August 1970, Pages 488–500. https://doi.org/10.2307/1879431.

 

Carbon Emissions Trading and Shipping: A game changer

 

The inclusion of shipping in the European Union’s Emissions Trading System (ETS) is a game changer for ocean transportation.

The World Bank foresees that the Carbon Emissions Trading (CET) market may develop into the world's largest commodity trading market, expected to exceed $3 trillion in the near future. The Bank also expects CET futures, as well as the carbon finance market as a whole, to replace oil as the world's largest market.

We show that the link between carbon emissions trading and shipping is strong, particularly between CET and dry bulk shipping. The link becomes stronger during periods of external shocks, such as Brexit, Covid-19 and China-US trade frictions.

But how can our results be intelligently used by shipowners for greater profit? How can they support the environmental sustainability decisions of shipping companies? And how can governments include shipping in emissions trading systems?

This pioneering research (published Open Access in Energy Economics) took three years to complete. Sincere thanks are due to the funding organizations that allowed us to carry out the work. These were:

1. National Natural Science Foundation of China

2. The 111 Project of China

3. The Postdoctoral Research Foundation of China

4. The Liaoning Revitalization Talents Program

5. The Liaoning Natural Science Foundation

6. The Dalian Academy of Social Sciences

7. The Dalian Federation of Social Sciences (Key Project)

HH

SHIPPING ALLIANCES AND THE MAERSK-MSC 'DIVORCE': WAS THE REGULATOR RIGHT AFTER ALL?

On the left, Drewry’s World Container Index (WCI) has tumbled by 80% year-on-year, down to $2000/FEW. On the right, one sees the industry’s unprecedented, all-time-high, orderbook with deliveries coming on stream this and the next two years (with many thanks to Drewry Shipping Consultants Ltd and Alphaliner). If you look at the two graphs together, ‘one plus one makes two’, and rates are expected to fall even further going forward.

MSC’s orderbook in particular is spectacular, five times that of the more conservative Maersk Line. This explains their ‘divorce’: Maersk has decided to invest along the supply chain while Mr. Aponte (MSC) will continue doing what he, and his father before him, did best: “shipping”. In other words, the two companies decided to invest their fathomless profits of the COVID-19 years in what each was best at: Door-to-door supply chain integration for Maersk; competitive ‘port-to-port shipping’ for MSC. The two strategies are not compatible, as they lead to two different cost structures: substantial investments in a global network of sales  effort around the world, for Maersk, targeting the individual shipper, and ocean transport cost competitiveness for MSC, renowned over the years for its acquisition of new and secondhand tonnage at competitive prices.

My point here is different, though: The two graphs tell us that shipping alliances may have not been very successful, after all, in managing capacity, and regulators may be proven right in considering the (COVID19) price hikes just a “matter of demand and supply”. This could be the second reason for the Maersk-MSC divorce. Or not? 

HH