September 15, 2021

Freight rates are high because of normal free-market activity; Shipping Australia welcomes ACCC probe

Pictured: Australian Competition and Consumer Commission chairman Rod Sims. Mr Sims has announced in the media that the ACCC is carrying out a probe into the shipping industry. Photo credit: ACCC.

Shipping Australia notes that the Australian Competition and Consumer Commission will be investigating the current shipping environment.

“We welcome the investigation as it will show that the current issues are caused by normal market mechanisms and by bottlenecks in the supply chain,” said Shipping Australia CEO, Melwyn Noronha.

As far as we are aware, and to the best of our knowledge and belief, each ocean container shipping company makes its commercial decisions individually and in line with free market principles.

Shipping Australia acknowledges that there has been an increase in the cost of containerised freight in recent months. This increase has happened because of normal and well-understood market mechanisms. However, there are other supply chain-related issues that need to be examined.

Myth-busting: there a lot of shipping services and companies

Firstly, ocean shipping is not a concentrated market. There are many shipping services to / from Australia. Shippers have choice. We have fact checked this before: Australia benefits from plentiful container shipping. The World Shipping Council has busted this myth too.

Market concentration has not led to high freight rates

It is true that, since 2008, there has been rationalisation in the international ocean shipping markets. Yet container shipping had very low freight rates from 2008 to the end of the second quarter in 2020. According to internationally respected shipping analysts, Alphaliner, container shipping rates have been so low that the average ocean-going carrier had an operating margin of minus 2.9% in the six years following the 2008 financial crisis. Eight of the major ocean shipping companies recorded an aggregate net loss of more than US$2.5 billion in the five years prior to 2020 despite generating over USD$350 billion in revenues.

Prior to COVID, freight rates were bumping around the US$1,200 to US$1,400 rate for a forty-foot shipping container, according to Freightos. Rates only really started to rise from late May to early July 2020 i.e. shortly after the onset of the COVID pandemic. But there has been no consolidation among the major mainline international ocean-going shipping companies since early 2020. In fact, Australia has since attracted new services i.e. levels of market diversification have increased.

Given that rates were incredibly low for years from 2008 onwards (a time when there were corporate consolidations) and given that rates only increased after the start of the pandemic (a time when shipping consolidations did not happen) there seems to be little evidence to suspect or conclude that market concentration led to an increase in freight rates from mid-2020.

The market concentration argument simply doesn’t stand up to scrutiny.

High demand levels have helped induce the current freight rates

Owing to lockdowns, populations around the world have had less opportunity to spend money on activities such as holidays and socialising. The consensus is that people have re-directed their expenditure to consumer goods. Trade in goods has increased, according to WTO and UNCTAD data. The demand for goods, and therefore the demand for the transport of containerised goods, has outstripped the supply of shipping services. It is a basic principle of economics that where demand outpaces supply then there will be upward price pressure.

Shipping companies have expanded shipping capacity

Shipping companies have expanded the supply of shipping capacity. The ship demolition market has reduced activity. The previously-idled fleet has been put back to work. Non-specialist multi-purpose ships and even capesize bulkers have been hired to carry containers. Ocean shipping has invested billions of dollars in massive orders for new ships. There are over 300 new ship orders with capacity to carry millions of containers. Massive orders for new containers have been placed too.

Extra supply is wasted by port congestion

Many container ships are stuck in ship queues off the coast of the USA and China. Some ports have queues of up to 40 or 50 ships. There have been well-reported problems of ships being stuck for many days at Auckland. There have been reports in Australia of a lag-time of up to nine or ten days (although this figure changes frequently) from the time a ship arrives at port to being berthed for cargo operations. Such incredibly bad congestion wastes the supply of shipping capacity.

What’s the solution? And when?

In the next couple of years, the ongoing roll-out of the vaccine, and the restoration of the freedom of global populations to go on holiday, eat out, and engage in social activities will likely see consumer spending re-directed away from the consumption of goods. In the same period, as the new ship orderbook is at a high, a massive volume of new containerships will be built. These ships will hit the water over the next couple of years.

“We anticipate that a decrease in demand for, and a surge in the supply of, containerised transport will likely alleviate market conditions,” said Shipping Australia CEO Melwyn Noronha.

Government regulation; regulatory action

The current market environment was created by an external shock – COVID. Once the effect of that shock works its way through the system, we will likely see a return to normality. There is no need for government or regulatory intervention in the free-market shipping industries. However, port congestion and related landside supply issues need to be tackled – either by ports or by regulators.

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