What are vessel sharing agreements, slot charters, slot exchanges?
These are ways for different shipping companies to lawfully co-operate, provided this is done in accordance with the appropriate laws and regulatory processes (see more, below).
- Slot exchange: companies can agree to swap cargo space onboard container ships (i.e. both companies agree that they can put containers on the each other’s vessels)
- Slot chartering: companies can agree to hire cargo space onboard container ships (slot chartering; i.e. one company agrees to rent the slots on another company’s container ship)
- Vessel sharing agreements: companies can jointly operate vessels
Exactly how these forms of lawful co-operation are carried out in practice will differ according to the different laws around the world and will involve different terms and conditions. In Hong Kong, for example, container shipping companies are allowed to engage in joint operation of liner shipping services including fixing timetables, ports of call, exchange, sale or cross-chartering of space, pooling of vessels, capacity adjustments and more (1).
Given that competition law generally bans business-to-business co-operation, how is this lawful?
Anti-competitive conduct such as exclusive dealings, segmenting markets, price fixing, and business collusion, among other conduct, generally produces outcomes that are socially undesirable such as artificially high prices, lack of consumer choice, and lack of innovation and so on. So competition law around the world around the world generally bans businesses from acting in anti-competitive ways. However, competition law may allow for that kind of behaviour to lawfully occur by giving some kind of exemption.
The legal authorities and regulatory processes vary by jurisdiction. They may also vary by sector and process. For instance, the music industry obtained an authorisation from the ACCC. Container shipping in Australia is subject to a specific legislated regime called “Part X”, which can be found in Volume 3 of the Competition & Consumer Act 2010 (Cwlth). Container shipping can be granted a partial and conditional exemption from various parts of the general competition law, subject to registering a container shipping agreement with the Registrar of Liner Shipping (part of the Department of Infrastructure) and after a consultation process with shippers.
There has been discussion and exploration of moving towards creating a “class exemption”, which is an alternative method of granting exemptions from competition law to shipping companies. This is a system used both in Hong Kong. Class exemptions, or block exemptions as they can be known, usually set out a series of criteria and if the conduct falls within those criteria then it is exempt. Class exemptions are more efficient in that they do away with slow, cumbersome, administrative processes.
How is this socially / economically justified?
Some types of business-to-business co-operation can benefit end users and society generally without meaningfully lessening competition.
Consider, for example, the music-industries. Australia would be a sad and dull place without music on the TV, the radio, in our pubs, clubs or performance venues. Musical artistes and the music industry need to collect fees to be sustainable. But there are so many different people and companies playing commercially-available music in so many different ways that it would be extremely expensive and difficult to chase fees, collect the cash, and make sure it all goes to the people who should be paid. It’s generally more efficient in this industry for one person / company to do all the fee-chasing legwork. It’s beneficial to the end-user too. It’s much easier for an organisation like, say, a pub or a nightclub, to go to one music licence vendor rather than having to chase down lots of different musicians for music rights to play their music, and dealing with all the administration of that.
So, the music industry, as a group, approached the ACCC to deal collectively engage in music licensing. Then, on 10 May 2023, the Australian Competition & Consumer Commission (ACCC) authorised various music- and music festival-related companies and bodies to co-operate for the purpose of negotiating terms, conditions, and fees for music-related copyright.
How does this apply to container shipping?
Access to container shipping greatly benefits Australia. The daily combined volume and value of Australia’s seaborne import and export cargo in 2020-2021 (excluding coastal) was roughly 4.5 million tons of freight valued at $1.7 billion (2). The more container shipping connections that Australia has, then the cheaper that trade will be, the lower that costs will be, and the higher the volume that trade will be (3). Trade benefits exporters by giving Australians access to world markets. Trade also benefits importers by providing business opportunities. It benefits Australians by helping create a better economy, access to wonderful goods from around the world and jobs – about 2.8 million Australian jobs are indirectly or directly supported by global trade (4). As noted above, container shipping engages in various kinds of sharing behaviour (vessel and slot) such sharing arrangements are economically (and environmentally!) beneficial to Australia (5).
How do vessel sharing arrangements generally help create lower, more frequent, services at a lower cost?
If two (or more) companies enter into a sharing arrangement, then (depending on the jurisdiction, laws etc) they may be able to benefit from lower costs and that means either lower costs to the end user, or they could bring in larger vessels (enabling the carriage of more cargo and therefore at a cheaper costs). It may also allow the trans-shipment e.g. a ship brings cargo from country A, dropping it off at country B, where is later picked up by a different ship and delivered to country C. In Australia, that might be, say, Shanghai-Singapore-Australia. Trans-shipment can make freight carriage available that would not otherwise be available (i.e. it creates a service where none existed), and it’s a generally efficient way of moving freight (rather than a vessel going all the way from China to Australia, dropping off a few boxes, and then going to Europe, it drops off a few boxes at Singapore. Other vessels do the same until lots of Australia-destination boxes have piled up at Singapore, until another vessel comes along which sails the Singapore-Australia route and then the boxes are all taken to Australia from Singapore).
Australia is also a high-cost, small market. That’s just an observation, not a criticism. High cost, small markets are expensive to service and so small players tend to not enter small markets. Vessel sharing allows small players to join with other small players, or even large companies, and put some services into Australia. So instead of one company committing to, say, one ship once a month, there could instead be four companies committing one ship each so there are four ships a month and one of which calls every week. Vessel Sharing Arrangements (VSAs) make shipping services cheaper, and more frequent.
We saw this during the recent COVID period. When freight rates were high, it attracted small players to add vessels (and therefore capacity) to Australia. When freight rates fell, the smaller players removed capacity. Tailoring capacity levels to price and customer demand is the exactly how contested markets are supposed to work.
We can re-phrase this in econo-speak as follows: when demand for a service rises (e.g. when consumers want more stuff then the demand for shipping services increases) then demand might exceed supply. As the demand for services rises, then suppliers are likely to add increasing units of service provision (e.g. as demand rises then shipping companies are likely to respond by adding more services or add more vessels or more sailings; shipping companies that were not otherwise providing services to Australia might decide to do so). Demand and supply will change until the quantity demanded and quantity supplied reach a new equilibrium point at which a transaction between buyer and seller will occur at a new price (e.g. when demand for shipping increase, shippers outbid each other for access to shipping and freight rates will rise. Shipping companies add new services, or new companies begin providing prices, and the new market price is discovered). Then, over time, demand declines and this whole process goes into reverse with shipping companies exiting the market, or reducing services, until a new, lower, equilibrium point is found (or, to put it another way, the business cycle causes demand, supply, and prices, to rise and fall).
There is nothing new, or even remarkable in any of this. It’s all in the first chapter of the most basic economics text book.
One way for shipping companies to respond to changing markets is by entering into vessel sharing arrangements and slot sharing / chartering arrangements. Again, there is nothing unusual or in any of this. It’s just like any other business changing the volume of goods / services it offers in response to a changing market.
What about the allegation that VSAs are causing higher freight rates than would have otherwise occurred?
These allegations are unsupported by reality as freight costs are demonstrably and provably not high at the moment, according to multiple data from providers such as Drewry Shipping, the Shanghai Containerised Freight Rate Index, Xeneta, and also Freightos. The Shanghai Index is publicly available. It follows that, despite what commentators are asserting, if freight rates are low then shipping companies entering into VSAs do not push prices up. Australians cannot be experiencing artificially high prices if prices have plummeted. The two concepts are mutually exclusive.
What about the allegations that container shipping companies are colluding?
This allegation is not only without foundation but it has been comprehensively rebutted by regulatory action around the world. For instance, in 2017, the US Department of Justice dropped a major investigation into alleged collusion in international liner shipping without charges or penalties (6). Then, in 2022, Commissioner Rebecca Dye of the US Federal Maritime Commission reported in Fact Finding 29 that the current market for ocean liner services in the Trans-Pacific trade is NOT concentrated and is only minimally concentrated on the Trans-Atlantic. “Competition among ocean common carriers, among the three major alliances, and among the members in each of these alliances is vigorous” (7). Meanwhile, in September 2021, regulators from the US, EU and China determined that there was no evidence of anti-competitive behaviour in container shipping (8).
What about the allegations that VSAs result in less ships coming to Australia and that this hurts workers?
Shipping Australia notes allegations that vessel sharing agreements result in less vessels coming to Australia. This mixes up cause and effect. Shipping companies don’t do vessel sharing agreements to pull vessels out of a market; they pull vessels out of a market on an independent arm’s length basis in response to changing market dynamics. One way – not the only way, but one way – to respond is for companies to enter into a lawful Vessel Sharing Arrangement so that they can continue to provide a service of some kind to their customers at a reasonable cost. Rather than being lambasted, shipping companies should be applauded for seeking to mitigate or reduce the consequences on their customers of pulling out of a market. It’s easy to imagine the disruption, frustration, upset, and economic consequences, if shipping companies just pulled out of the Australian market without having anyway to ease the burden on their customers. Yet another reason why Australia has – and should continue to have – access to vessel sharing agreements.
Does Australia have plentiful access to container shipping?
It’s just a fact: Australia benefits from a high level of container shipping connectivity (9), from access to plentiful shipping services, and from access to a wide range of container shipping brands and services. Australia’s liner shipping connectivity is at a very high level (10). As far as we are aware, there are at least 23 different brands providing some kind of liner shipping services to Australia. Yes, some of them may be engaged in vessel sharing arrangements – but that’s to the benefit of consumers generally. And, remember too, while shipping companies may share some assets, they still compete on marketing, customer service, other products, and price. And not all shipping companies are in the same vessel sharing agreements – so there is always choice, no matter what negative commentators say to the contrary. The fact that plenty of shipping companies are serving Australia rather invalidates the Productivity Commission’s academic and theoretical comments that if a few shipping lines co-operate when there is only one route “then shipping companies may avoid fighting”. Well, yes, but please note the careful qualifying language “if”, “may”. If you conjure up a hypothetical model that lead to an undesirable outcome, but one that would only occur if exact and specific conditions, which you specify, exist, then don’t be surprised if your hypothetical model results in an undesirable outcome. The theoretical scenario described by Productivity Commission does not now exist, nor has it ever existed, and it is most unlikely to exist in the future.
We think that we can all give that particular, highly-conditional, theoretical, and, frankly, imaginary, scenario all the attention and seriousness that it deserves i.e. not much… if any at all.
Do other, important, jurisdictions around the world have competition law exemptions for shipping?
We note comments by industry detractors that “other countries” had repealed their legislation. In reality exemptions from competition law for container shipping are accepted by several jurisdictions around the world. These include Hong Kong (a big shipping administration); Singapore (another massive shipping administration); China (a country of some economic importance, you would have thought); the United States of America (a massive economy); South Korea (an economically important country); Malaysia (an economically important country); Japan (an economically important country); and New Zealand.
So, what’s the right policy?
All in all, it’s clear – and is supported by evidence – that there are lots of good reasons for vessel sharing to be allowed to continue via exemptions from competition law. And in relation to the industry-detractors who are bashing the industry with unsubstantiated allegations? Well, we ought to give them the attention they deserve, which is “not much”.
References
- See the “Decision to Vary (Renew) the Competition (Block Exemption for Vessel Sharing Agreements Order) 2017 Notice of Variation, Hong Kong Competition Commission, 7 July 2022, paragraph 12(a)
- Data derived from Bureau of Infrastructure and Transport Research Economics (BITRE) publication, Australian Sea Freight 2020-21, which reported freight volumes and values of about 1.61 billion tons valued at about $601.4 billion.
- “Traditional trade costs related to physical connectivity can still represent a significant barrier to the physical delivery of goods”. World Bank (2013b) concludes that “[m]aritime transport connectivity and logistics performance are very important determinants of bilateral trade costs: in some specifications, their combined effect is comparable to that of geographical distance”. Improved liner shipping connectivity can help reduce trade costs and has a direct, positive bearing on trade volumes. This is confirmed by numerous studies on trade, seaports and shipping networks (see Wilmsmeier et al., 2006; Sourdin and Pomfret, 2012; Wilmsmeier, 2014; Ducruet, forthcoming; Fugazza and Hoffmann, 2017; Hoffmann et al., 2017; Wilmsmeier et al., 2017” – Review of Maritime Transport, UNCTAD, 2017, chapter 6.
- It was estimated in “Australian Trade Liberalisation: analysis of the economic impacts,” 2017 Centre for International Economics Report on Australian Trade Liberalisation for the Department of Foreign Affairs and Trade, that 1-in-5 Australian jobs were related to global trade. If that ratio still holds true today, then, based on August 2023 Australian Bureau of Statistics data which shows that over 14.1 million Australians were employed, global trade supports over 2.8 million Australian jobs.
- There are many studies. See, for instance, the references made by the UNCTAD report in note 3, above. See also:
- “Vessel sharing and its impact on maritime operations and carbon emissions” https://onlinelibrary.wiley.com/doi/full/10.1111/poms.13730 “our results indicate that the maritime emissions (attributable to receiving firms) drop by 5%, on average, for each additional carrier sharing a vessel. We confirm several operational efficiencies emerging from vessel sharing, such as increased average utilization and reductions in “route redundancy.”
- “Evaluation of vessel sharing agreement effects on container lines transportation efficiency” https://stumejournals.com/journals/sbs/2018/2/66 – “Vessel Sharing Agreement application leads to higher transportation efficiency in terms of costs minimization and service reliability”
- “Are vessel sharing agreements pro-competitive?” in Economics of Transportation 2017 – “, an examination is provided of the effects on equilibrium prices, equilibrium aggregate quantities and consumer welfare of the formation and enlargement of vessel sharing agreements. A positive answer is developed to the question raised in the title of the present work” – https://www.sciencedirect.com/science/article/abs/pii/S2212012217300436
- “Vessel Sharing agreement” https://hrcak.srce.hr/file/94215 “The Vessel Sharing Agreement makes it possible for operators to operate liner shipping services with minimal capital investments and to have their own share in the joint liner service brought in line with their respective commercial positions on the market, while securing a better service to their customers.”
- US closes liner collusion investigation https://splash247.com/us-closes-liner-collusion-investigation/
- Fact Finding 29, US Federal Maritime Commission https://www.fmc.gov/fact-finding-29
- Competition authorities in the US, UK, Canada, Australia and NZ team up to investigate cartel conduct in global supply chains – Splash 24/7, 18 Feb, 2022, S.Chambers – https://splash247.com/competition-authorities-in-the-us-uk-canada-australia-and-nz-team-up-to-investigate-cartel-conduct-in-global-supply-chains/
- See: UNCTAD Liner Shipping Connectivity Index.
- As 9 above and also “Fact check: Australia benefits from plentiful container shipping” by Shipping Australia – https://www.shippingaustralia.com.au/fact-check-australia-benefits-from-plentiful-container-shipping/
