Various commentators like to beat on the shipping industry with calls for the repeal of Part X, which is a bit of law that gives various exemptions to liner shipping companies from normal competition law.
Here’s a SHOCKER for you… most shipping lines would largely be OK with a repeal of Part X, provided that there is a block exemption instead.
So, why does shipping need an exemption from competition law?
Well, shipping doesn’t.
Shippers, however, very much do.
Financial exemptions are unwanted and un-needed
Part X (which is a pretty bureaucratic and expensive way to provide an exemption) basically allows ocean carriers to work co-operatively in a range of situations.
Some of those situations are financial in nature and in theory allow the sharing of profits and the like.
It is those financial provisions that get shippers hot under the collar, leading them to accuse “collusion!”, during times of high freight rates. But the truth of it is that freight rates are high because of supply and demand. And a further truth is that ocean shipping lines serving Australia don’t use these financial exemptions anyway. You can read all about the shipping industry’s stance on the Part X financial exemptions to competition law in our submission to the ACCC.
We’ll save you a bit of bother though. The ocean shipping industry in Australia doesn’t use these financial exemptions, doesn’t want these financial exemptions and would be pleased to see the back of them.
Operational matters are wanted, needed and competition-boosting
However, shipping companies do very much use the other exemptions from competition law on operational matters such as jointly fixing sailing timetables and port calls; exchanging, hiring, selling, leasing and sub-leasing spaces on vessels; pooling vessels; adjust capacity in response to fluctuations in supply and demand; managing capacity and so on.
Use of these exemptions does not restrict or lessen competition, instead, they boost it.
Shipping is an expensive and complicated business. One way to lessen risk and become more able to handle complexity is to co-ordinate and collaborate on services. Ultimately, this produces a more stable
service that benefits importers, exporters and the general Australian public.
Case in point: it was recently announced that a new entrant to the Australian trades had decided to commit a single vessel to “CA2”, the China Australia Service, which calls at ports in the rotation Qingdao, Ningbo, Shanghai, Nansha, Brisbane, Sydney, Melbourne on a 41-day loop (24 days from Qingdao to Brisbane; 17 days from Brisbane back to Qingdao calling at the other ports en-route).
Too small companies are too small to take part in the trade
A shipping company would be highly unlike commit one vessel to such a loop by itself without being part of a consortia. It would be far too costly, and it would be of little value to Australian importers / exporters because they would only have one opportunity every 41-days to import / export around the loop on that one-ship-loop.
If there was no operational exemption from Australian competition law then a one-ship-company simply could not offer a service in Australia. Because of the Part X exemption, the new entrant described above has the ability to slot a vessel into the service and that benefits everybody. The new entrant gets to do business with Australian shippers, the other participants in the loop have an extra vessel to provide stability and services and (presumably) extra slots etc.; Australian importers and exporters experience a boost in the reliability, resilience and frequency of calls.
It benefits everybody. But, most of all, it benefits shippers.
Counterfactual: what would happen if the operational exemption evaporated?
What would likely happen if there was no operational exemption for ocean shipping companies?
Well, conferences would have to cease to exist, obviously.
Smaller ocean shipping companies would not be able to afford to run an Australian loop by themselves and so they would likely have to pull out of the Australian trades. That would mean fewer services to / from Australia, less frequency of ship calls and a supply chain more prone to shock than than it is now. There would be less opportunity for exporters, such as farmers to get their time-sensitive stock to customers.
There would also likely be a concentration of shipping services in Australia. Remember: despite what the naysayers claim, Australia benefits from plentiful container shipping. Liner shipping connectivity has never been higher. We have at least 23 competing container shipping companies calling at Australia and there are also shipping companies (break bulk operators and PCTC operators) that can take containers. Ocean shipping is competitive in Australia and shippers have a wide choice of operators.
But back to the counterfactual. If the operational exemptions to competition law evaporate, the smaller companies would have to pull out of the Australia trade, leading to fewer operators in this market.
We can’t know for sure what would happen in this hypothetical situation, and we don’t discuss matters such as pricing with our members, but basic supply and demand theory would suggest that if there is less supply serving Australia then freight rates would probably increase.
If the bigger companies decided to cover the gaps caused by an exodus of smaller operators, they’d have to deploy more assets, burn more fuel and their costs would generally increase. It makes sense then, that they might increase their rates to cover their increased costs.
So the counterfactual suggests that Australia would have fewer services of lesser quality at a higher price. All importers would be harmed by that. All exporters would be harmed by that. Given that 1-in-5 jobs in Australia are supported by international trade and given that about 35% of our economy (GDP) is supported by merchandise trade, then all Australians would be harmed by that too.
And that’s why Australian shippers and the Australian general public needs an exemption for operational co-operation in container shipping.
Replacing Part X with a block exemption
Part X has the advantage that everyone knows how it works. There are no nasty surprises with that legislation because it is pretty old by now. But, it’s also really cumbersome and is generally a real pain to administer. No-one really likes it very much. Many people would be glad to see the back of it if possible.
Australia’s ocean shipping industry would support reform that preserves the operational exemptions in the current Part X and which does away with the burdens of registration and administration. There’s a fairly simple tool for this: the block exemption.
Simply put, the regulator (in this case the ACCC) writes up a series of conditions that would result in an exemption to competition law. If the regulated entities (in this case, ocean shipping companies) meet those conditions then they’re entitled to – and benefit from – the block exemption. Done. No need for registration, administration, hiring consultants, or consulting with third parties who are not directly involved in the business.
Meanwhile, there is nothing to stop shippers from reporting any competition concerns to the ACCC, or, indeed, from the ACCC using its extensive investigation, compliance and enforcement powers to make sure everyone sticks to the law.
Replacement of Part X with a good quality block exemption boosts competition, boosts the service to shippers, lowers costs, benefits Australians and saves time, money and effort.
And that’s something that all right-thinking people ought to welcome.
