The European legal regime that boosts competition in shipping, increases the frequency of liner shipping, increases the connectivity of port pairs and reduces freight rates will be allowed to die.
The legal instrument goes by the snappy name of the “Consortia Block Exemption Regulation,” and it will be allowed to lapse in April 2024.
Analysts are impressed and enthusiastic about this stunning and brave decision
“The new rules will reduce competition between carriers, reduce the number of services calling at smaller ports, and probably raise freight rates, as a result,” warned Philip Damas, Head of Supply Chain Advisors, at the internationally-regarded and wholly-independent shipping analyst, Drewry Shipping Consultants.
Mr Damas was backed up by his colleague, Simon Heaney, a senior manager of container research at Drewry. “This development is likely to backfire on shippers… the logical conclusion is that each carrier will have to downsize their service portfolios in terms of frequency and connectivity. That would reduce, not increase, competition on a port-pair basis and push up freight rates”.
Drewry is not alone in its reaction.
Detrimental for shippers
Mike Wackett, a well-known chartered shipbroker, shipping consultant and former director of a short-sea liner shipping company, warned that the new move could be detrimental for shippers and that it could result in more merger and acquisitions, and consolidation.
Joining in the chorus of condemnation was Adam K. Prokopowicz, an independent consultant, economist and lawyer, who argued that there is too much prohibition and regulation on maritime transportation and the new move “doesn’t help this industry”.
Also chipping in was Hercules Haralambides, distinguished Professor of Maritime Economics and Logistics at the Erasmus University of Rotterdam – and who also holds / has held similar positions at Dalian Maritime University, the University of Paris, the Texas A&M University, Singapore Management University, the National University of Singapore, the World Maritime University … and more universities besides… not to mention he was an advisor / staff member / consultant to a slew of foundations, policy advisory bodies, ports, governments and supra-national institutions.
He has written and published well over 300 scientific papers, books, reports and articles on the area of ports, maritime transport, and logistics. It’s fair to surmise that he knows a thing or two about the economic impact of shipping-related rules and policies.
They do not learn from their mistakes; they are about to make an even bigger mistake
Professor Haralambides had this to say:
“In 2005, we had warned the European Commission… that the prohibition of conferences from European trades was a big mistake. Its consequences, we had 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… they [forbid] 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.
“Following the prohibition of conferences, the [Consortia Block Exemption] Regulation was affording carriers some ‘self-regulatory’ discretion because, in industries such as liner shipping, outright competition on marginal cost becomes destructive”.
Strong words.
Who has done this foolish thing, and why?
And who has done this foolish thing that will reduce competition? It was the, er, EU Directorate General of Competition.
And why have they done foolish thing? It was an attempt to, er, boost competition.
Quick! Somebody call the producers of the TV show Utopia!
Explain like we’re five: what’s it all about?
European Union competition law (like competition laws in different countries around the world) basically follows a two-stage process. Firstly, it bans anti-competitive agreements and behaviour. But, recognising that some types of behaviour are beneficial to society, allows certain types of agreements and behaviour that would otherwise be banned.
For a long time, the European Commission created and maintained a specific legal permission – the Consortia Block Exemption Regulation – that allows container shipping companies to agree to, and engage in, collaborative behaviour that would have otherwise been banned. This included all agreements and behaviour related to the joint operation of a maritime transport service including the joint operation of liner services, the co-ordination of sailing timetables, slot charters / exchanges / sales, pooling of vessels, joint operations offices and more.
The exemption specifically continued to prohibit the fixing of prices, the limitation of capacity or sales (other than in specific situations), and the allocation of markets or customers.
Decision: do not extend
Every four years or so, the Commission reviewed this exemption and, in the most recent review, it decided on 10 October 2023 not to extend the block exemption.
The European Commission concluded that the liner shipping sector has undergone significant structural changes, such as carriers’ consolidation, global alliances and vertical integration, resulting in new market conditions. Accordingly, the Commission believes that a dedicated block exemption for shipping lines is no longer adapted to these new market conditions. “This is why we have decided not to extend the current framework and to let it expire”, said Commissioner Didier Reynders, who has temporary responsibility for the Competition portfolio.
As indicated earlier in this article, the reaction from independent shipping analysts to this stunning and brave decision was… less than enthusiastic.
So it’s all over for liner shipping exemptions from competition law, right?
Er, no.
Significant investment required
As the Commission itself noted, the provision of regular container shipping services requires significant levels of investment and so are regularly provided by several shipping companies co-operating in consortia can lead to economies of scale with a “fair share” of the benefits resulting from the efficiencies to be passed on to the users of shipping services (i.e. to shippers).
Consequently, because of the stunning and brave decision of the Commission, any carrier agreements will instead fall under the Horizontal Block Exemption / Specialisation Block Exemption Regulations.
The effect of those regulations is that container shipping companies will lawfully be able to agree to, and engage in, collaborative behaviour that would have otherwise been banned, such as vessel sharing agreements, slot charters, slot exchanges and the like.
The EU Commission spells it out: “the expiry of the CBER does not mean that cooperation between shipping lines becomes unlawful”.
Round and round and round and round
So, because the market has changed and the rules are no longer fit for current conditions, the Commission will scrap a set of rules which enable carriers to lawfully co-operate in behaviour that delivers a fair share of benefits to users.
Instead, and presumably because we are now in a changed market, the Commission has directed carriers into another, different, set of rules that are presumably fit for current conditions, the effect of which is to enable carriers to lawfully co-operate in behaviour that delivers a fair share of benefits to users.
The existing Block Exemption regulation protects agreements up to a 30% market share. The general competition rules protect carriers up to a 20% market share. However, companies that were working under some kind of co-operating agreement (such as vessel pooling) that were above a 30% share lost the benefits of the Block Exemption and fell into the protection of the general EU competition exemption rules anyway. So when the Block Exemption goes, carriers will fall into the protection of the same general EU competition-exemption rules anyway.
Truly, a stunning, and brave, decision.
And one without any foreseeable adverse consequences.
From legal clarity, to legal uncertainty
So, what’s really changed? Well, there’s a lot more legal uncertainty than before. There’s a particularly uncertain point related to market definitions in that there is a big debate about what constitutes a market in the first place, and how to go about calculating a share of that.
Internationally regarded container shipping expert Lars Jensen of Vespucci Maritime writes:
“One of the questions I have seen raised in the wake of this is quite simply: ”what is the market definition”? There is absolutely no clarity to be found in the working document from the EU Commission. In fact they [the Commission] clearly state that in the working paper they do not want to commit to a specific definition when CBER falls away… The trades used for the CBER analysis do not necessarily have anything to do with the market definition which would be used under the regular competitive regulations. The working paper does not want to provide any view on what such differences might be… The working paper uses the word “trade” frequently but does not explicitly define what they [the Commission] believe to be a trade”
It has been widely speculated that, following the decision of the EU, carriers might not want to expose themselves to the risk of regulatory action, especially given the legal uncertainty. And, really, could you blame them?
If they do decide to reduce their exposure to the new regulatory risk, then the adverse effects mentioned earlier – fewer services, fewer port pairs, less frequency, higher freight rates, could come true.
It could never happen here…
Thankfully, all of this has happened half a world away in Europe.
Fortunately, there’s nothing like this being discussed in, or advocated for, in Australia? Right?
It could never happen here… could it?
