View From The EU: What, Don’t You Trust Me?

Shipping is special – and not just in terms of its economic impact, colorful traditions or ability to span continents and bring together buyers and sellers that lie oceans apart – but also because, for much of its existence, the heavy hand of government regulation has largely left shipping untouched. 

This laissez-faire approach is reflected, for example, in classification societies, which are private organizations whose customers are shipowners and which have the authority to determine if a given ship is insurable or operable. It would be as if landlords had their own entity to certify that their rental units are up to code and habitable. Or take protection and indemnity (P&I) clubs, where shipowners mutually insure each other by pooling their risk (see “Dive Into the Risk Pool” in the September/October 2021 edition). 

All that being the case, shipping’s scorecard as a self-regulating sector is a relatively good one. 

Growing Scrutiny

Times are changing, however, albeit slowly. The list of new regulations applicable to shipping is getting longer: the E.U.’s CO2 tax and Sulfur Emissions Control Areas (SECAs), the Maritime Labor Convention, the Ballast Water Management Convention – all of which have been widely adopted and ratified. Even P&I Club membership was made mandatory by E.U. Directive 2009/20/EC as of January 2012.

For decades, governments have been coming for one of shipping’s most valuable remaining privileges: its exemption from antitrust rules. Take E.U. Regulation 4056/86: It entered into force October 2008 and buried the block exemption for shipping conferences. Before that, it was legal for shipping companies to act in concert and limit competitive pressure against each other. They could, for example, fix prices along certain routes or agree amongst each other that they would not compete in one another’s ports. 

This worked well in the traditionally familiar and genteel European shipping sector, which placed more value on, so to speak, “smooth sailing” than on meeting aggressive quarterly targets. But those days are in the rear-view mirror – and disappearing fast. In short-sea and coastal shipping, many of the owner-managed companies with just a few motor vessels of less than, say, 2,500 TEUs, have folded. 

In 2008, there were 509 shipping companies in Germany. By 2022, that number was down to 384. E.U. Regulation 4056/86 was designed to generate more competition, but competition doesn’t favor the weak. There wasn’t a single year in which the number of German shipping companies grew. That means 136 shipping companies exited the market – and it’s for sure they’re not coming back. Overwhelmingly, the losses are at the shallow end of the pool. Big players don’t disappear. Hamburg Süd, sold by its family owner in 2017 to Maersk, continues to live on as a brand.

The intention behind ending conferences was to generate competition between lines and drive freight rates down for customers. The success of this attempt has led to an oligopoly in the traditionally owner-diverse shipping sector. Even mid-sized actors are fighting for their lives against behemoths. Mediterranean Shipping Company (MSC) controls 74 percent of intra-European trade. The other 26 percent is run chiefly by CMA CGM and Maersk/Sealand – with scraps left over for the rest. 

Why? Years ago, I wrote that big players’ strategic and scale advantages would allow them to drive less-well-capitalized competitors out of the market. Big players are better marathon runners. They’re more capable of enduring low per-unit prices over the long term. If you no longer have the option of cooperating via conferences, why not play the hand you’ve been dealt and ruthlessly deploy any competitive advantage you have? It’s a winner-take-all situation in which there’s no incentive to take heed of others. Reaching more ports, undercutting market rates, slashing overhead and using your size to compel shipowners to accept lower charter rates are all “back on the menu, boys.”

Shipping’s Antitrust Exemption

The consolidation I predicted has now come to pass. The idea that we can still somehow protect a vibrant economic sector that’s part of our heritage and tradition is obsolete. Indeed, even the biggest family-owned German companies, like Bertram Rickmers and Hermann Ebel, went bankrupt. 

In a recent interview with German broadsheet Die Welt, President Gaby Bornheim of the German Association of Shipowners promoted an anachronistic, rose-colored view of the situation: “Particularly in German shipping, the family-led shipping company is still very widespread.” The numbers tell a different story. We live in a world of fewer companies than I have fingers on one hand controlling the market and of one German shipping company per month – voluntarily or not – being helped off the stage. 

The consolidation of ownership and market share is an antitrust issue. Generally, European rules prohibit offering below cost if the goal is to drive smaller competitors out of the market and establish a dominant market position. Further, Art. 101 Subsec. 1 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements between companies that restrict competition.

For years now, however, shipping lines have benefited from the exemption in Art. 101 Subsec. 3 TFEU, which can declare anti-competitive agreements compatible with the E.U. single market as long as they help improve the distribution of goods, afford consumers a reasonable stake in the resulting economic benefit and don’t have the effect of eliminating competition. The European Commission noted that it “had found that the Consortia Block Exemption Regulation resulted in efficiencies for carriers that could better use vessels' capacity and offer more connections.” 

The exemption for shipping was periodically scrutinized and renewed, most recently in 2020. The 2020 extension of the exemption is scheduled to sunset in April 2024. Prior to renewal, as before, the E.U. Commission solicits public comment and performs an evaluation. This upcoming evaluation, however, may not end as positively as the one before it did, which found that “costs for carriers and prices for customers” had decreased “approximately 30% and quality of service had remained stable.”

Record Profits

Shippers and consignees are both complaining and pushing for regulatory change. Record profits and freight charges (see “Mr. Container's Wild Ride” in the May/June 2021 edition) are enraging shippers and logistics companies. 

The European Association for Forwarding, Transport, Logistics and Customs Services (CLECAT) recently pointed its finger at the E.U.’s shipping antitrust exemption, asserting that it has contributed to a concentration of market power and higher prices. CLECAT Director General Nicolette van der Jagt wrote that the “block exemption for shipping consortia cannot be adjusted,” described it as “unfixable” and claimed it “no longer is able to fulfill its purpose.” 

Danish shipping line Maersk declared it had earned as much in 2021 as in the preceding nine years combined. Hapag-Lloyd, based in Hamburg, grew its profits by over 700 percent. During that time, Maersk and MSC were pooling each other’s cargo on ships that they operated along the same routes. Hapag-Lloyd enjoyed cargo-pooling alliances with Japanese shipping lines on Europe-Asia routes, among others. 

Last year, according to industry publication Deutsche Verkehrs-Zeitschrift, a mere 13 percent of global cargo capacity was not concentrated aboard ships that were sailing under the same alliance’s banner.

The most common mechanisms are slot hire charter agreements and vessel sharing agreements. The former involves a competitor leasing individual cargo spaces abroad an operator’s vessel. The competing charterer may then refrain from sailing its own vessel on that route, saving on operational costs while still allowing it to offer that service to its customers. The vessel operator benefits, too, since it can now profit from the competitor’s cargo bookings. 

Vessel sharing agreements (VSAs) are like cargo pooling but magnified: They involve multiple shipping companies running multiple vessels along an agreed-upon route, and instead of competing with each other they treat all the vessels as belonging to them together and share revenues, costs and cargo. For example, in 2014 MSC and Maersk entered into a VSA involving, respectively, 75 ships and 110 ships. 

Sharing routes and acting in concert with respect to cargo capacities drive efficiency and may even benefit the environment due to a reduction in frequencies and higher utilization. But consumers would surely prefer shipping lines be desperate to fill cavernous holds at rock bottom prices even if that means each shipping line must sail its own frequencies to the ports that customers demand.

But ironically, it wasn’t the big companies’ anti-competitive efforts that triggered 2021’s mad profits. Vincent Stamer of the Kiel Institute for the World Economy argued persuasively that market power “does not show why the freight rates from China to Europe are at $14,000 per container and only $1,000 in the opposite direction. The market power is the same for both routes.” 

Likely, it was the COVID-19 lockdowns imposed by governments across the world and their many restrictions, bureaucratic hurdles and obstacles to changing crews and moving goods that are to blame. This would explain why the China-Europe routes, still severely impacted by such policies, are so costly.

Less Special?

Of course, such analysis offers no comfort to suffering businesses. They’re too exhausted and cash-strapped to spend time thinking about cause and effect. Perhaps this world of runaway inflation, supply disruptions and high interest rates is simply ready for shipping to be a little less special? 

Erik Kravets is a founding partner of Kravets & Kravets, a maritime and admiralty law firm providing bespoke solutions to clients navigating the North Sea and beyond. Clients involved in ship brokering and management, offshore, towage and salvage, vessel chartering, cargo handling/stevedoring and carriage of goods by sea come to Mr. Kravets for representation.