Article

by Laurence A.J. Bacon

In 1875, a number of British cargo carriers agreed to form the Calcutta Steam Traffic Conference, and since then shipping conferences have been an ever-present feature of international trade. They gained in popularity and grew to cover many of the major trading routes worldwide. This was particularly the case with the advent of containerized shipping pioneered by Sealand in the 1960s, which soon enveloped the globe. The standardization of shipping units (containers) allowed for a direct comparison on price and service between containerized shipping services on the same trade route/s.

Although, by definition, the conferences were recognized as oligopolistic, exemptions from the EC's treaty ban on "restrictive practices" were granted to liner conferences from the outset. These exemptions were granted in recognition of the advantages the conferences provided. However, these exemptions have now been scrapped under an EU law which came into effect on 18 October 2008.

Competitiveness

EU Commissioner Charlie McCreevy said: "The European shipping industry will benefit from the more competitive market that will result from the repeal of the block exemption, and the EU economy as a whole stands to benefit from lower transport prices and more competitive exports." The Commission is of the view that conferences reduce competition between their members and lead to higher prices for users. It also claims that price fixing in the conferences distorts the market and that its removal will result in lower prices.

These opinions may appear to be soundly based, but I do not feel that they are as clear cut as the Commission would have us believe. Since the future competitiveness of the EU is at stake, this is not something with which to gamble.

Lessons from other industries

When the Commission talks about conferences, they only speak of the perceived disadvantages and ignore the advantages. One hardly needs to point out to bankers and stockbrokers that volatility in the markets is largely attributable to a lack of confidence. One of the advantages of conferences is that they provide a general stability of pricing. To remove that stability is to invite a freefor- all in the market.

For most exporters, a lead time of three to six months is necessary, from quoting for business to delivery. Transport is one of the key costs in preparing the quotations. If the exporter has no confidence in the stability of transport costs, what can he do? If he wants to be competitive, he must take a risk, but the nature of risk is such that the more often one takes a risk, the more likely he will suffer. If he decides to minimize the risk by adding in a percentage to cover estimated fluctuations in the shipping rates in the subsequent six months, he risks losing the business, since his prospective buyer may view this as deliberate over-pricing. Moreover, his competitors may come from parts of the world where there are no bans on liner conferences, and may obtain fixed rates for six months at a time.

Conference fixed prices necessitated a pricing structure based on commodities or tariff classification. Conferences also had a stabilizing effect on prices through their policy of quoting prices in a single currency for all of Europe, which created an even-handed and transparent approach to pricing per commodity. The absence of conferences removes this need and, in my view, will lead to more seasonal and ad hoc fluctuations and greater instability in pricing.

In the present economic climate, there is currently no dearth of shipping capacity. In fact, shipping lines have had to employ radical measures to counter the fall in demand, such as dry docking and drastically reducing their prices. The fall in demand in the motor industry has led to ships being used for storage purposes as conventional storage areas became full and shipping lines needed a source of revenue for minimal outlay. Similarly, there has been a drop in new orders for ships. In my view, within two years, there will be a sufficient upturn in worldwide economies to warrant an increase in shipping demand. It is difficult to say whether there will be sufficient latent capacity to cover this demand.

Many years ago, I monitored the movement of large volumes of exports from Europe by container. Occasionally, the quantity of containers available through one carrier was insufficient to meet my needs, but when that occurred I could approach the conference secretariat and request their intervention to coordinate supplies of units to meet my needs, without any variation in the cost per unit. Compare that with the current conference ban, and it is clear that the task for the exporter in securing capacity will be harder, and he will be at greater risk in meeting planned costs.

Monopoly v. oligopoly

During all the years where there were conferences, there were also nonconference lines. This disproves the notion that conferences tend to lead to monopolies. In fact, conferences led to higher standards of service and, if non-conferences lines wanted to compete, they also had to raise their standards and compete on pricing. At that time, competitiveness tended to depend on the differences between conference and non-conference lines. The non-conference lines had to be strong in order to compete. Since conference line prices were fixed, each conference line operator could have confidence in the operational viability of its line and was less prone to takeovers.

I believe the destruction of conferences will lead to more chaotic competition. The lines which can compete, based on economies of scale, will tend to squeeze out or buy out the smaller operators, leading ultimately to near monopolies, the opposite of the legislation's intent.

In place of conference lines, the Commission is trying to promote associations or agreements between lines, to standardize intervals between sailing dates, etc., but it has no powers to do so. The commercial reality is that some lines may make these agreements in the short term, but as soon as they see competitive advantage in moving away from them, they will do so. Other lines are likely to take the view that there is no competitive advantage in forming associations. This, in turn, will lead to a deterioration in the standards of service - good news for non-EU competitors.

In other industries where monopoly controls are in place, interested parties may be tempted to arrange cartels, but they must do so subversively. This can have a tendency to criminalize those who would not ordinarily operate outside of the law. One possible consequence is that, in the long term, criminal elements will have a greater influence in the industry. In my opinion, the lesser of two evils is to have transparency by permitting conferences, rather than to encourage covert deals.

L/C business

Many European cities are global headquarters for multinational corporations which control movements of goods outside of the EU. Linked to a corporation's decision on where to locate is the accessibility of major banks handling L/C business. However, L/Cs covering these movements may call for conference line certificates and, under current legislation, the certificates may not be permitted. The result could be that L/C business will move out of the EU, or that extra costs will be involved in circumventing these problems.

Odd one out?

Conferences have been around for many years without being banned anywhere in the world. The EU contends that only good will come of banning them. If so, why is the EU the only region to do so and why did it take over 50 years to come to this conclusion? With no power to enforce a ban on other countries, the EU will be at a competitive disadvantage visà- vis the rest of the world. Since a ban has never been attempted before, the ultimate outcome is not so predictable. Without being dogmatic about it, my view is that the outcome will not be as certain or as positive as the EU would have us believe.

Laurence A.J. Bacon's e-mail is lb@exportbureaux.com