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July 20 2020

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32 The Journal of Commerce | July 20 2020 Government GLOBAL REGULATORS ARE failing to keep the container shipping industry in check, allowing carriers to wield disproportionate levels of power over service providers and shippers, argues Olaf Merk of the International Trade Forum (ITF). The need for amended regula- tion to curb carriers' power is made clear by the industry's exemption from antitrust law in Europe, said Merk, the ports and shipping expert at the ITF, an inter-governmental organization within the Organiza- tion for Economic Co-operation and Development (OECD). Merk, a vocal opponent of the consortia block exemption regulation (CBER), points to the way European carriers can jointly contract with port providers, manage capacity together, and freely share operational information. His comments come as carriers have boosted profitability by better controlling capacity in the face of falling demand, partly thanks to rapid consolidation. If carriers can maintain capacity discipline and first-half rate levels for the rest of the year, the industry stands to see profits of $9 billion, Lars Jensen, CEO of SeaIntelligence Analysis, said in a LinkedIn post earlier this month. But Merk told The Journal of Com- merce in an interview that container shipping profits are a reflection not of carriers' ability to provide added value to customers, but rather of what he called "monopoly rents." "The current situation — higher carrier profits but no service improve- ments — should be a reason for concern for competition authorities," he said. Carriers have been swift to justify the need for blank sailings on the major trades, with Rolf Habben Jan - sen, CEO of Hapag-Lloyd; Rodolphe Saadé, chairman and CEO of CMA CGM Group; and Jeremy Nixon, CEO of Ocean Network Express, all point- ing out on episodes of JOC Uncharted last month that demand has fallen significantly and the carriers have no option but to cut costs. Asleep at the helm? In a recent ITF Transport Policy Matters report, Merk envisioned a future for container shipping with regionalized trade, smaller firms, smaller ships, more direct port calls, more real competition, independent regulators, and firms with local roots that create local value, care for their local environments, and pay taxes. He said with many world leaders calling for greater regional sourcing to cut carbon dioxide (CO2) emissions and avoid supply chain disruption caused by global issues such as the coronavirus disease 2019 (COVID-19), long-range containerized trans- port might be less inevitable than previously thought, opening the pos- sibility of fundamental change. In the Transport Policy Matters report, Merk even questioned the economies of scale approach that dominates the container carriers' strategy and is achieved through unit cost reductions, ever-larger ships, and industry consolidation. "The large majority of the goods we consume are now moved by a handful of very large global shipping companies that source their work- force from developing countries and register their ships in tax havens," he noted in the report. "These compa- nies have accumulated as much debt as a mid-size country, they emit as much CO2 as a big country, and have difficulties to be profitable except in the most bullish of times." Regulators, Merk says, are not properly overseeing the container shipping industry, allowing ambi- guity about acceptable industry practices, with the coordinated nature of the blank sailings among carrier alliances a case in point. "The experience so far in 2020 shows that carriers have collectively been able to withdraw enough ship capacity — i.e., create scarcity — to push up freight rates," he said, adding that competition regulators did not appear to be interested in probing the blank sailings. "Various competition authorities do not regularly monitor develop - ments in liner shipping, but look into it when there are complaints," he said. "We understand that the European Commission has suggested various stakeholders file complaints on these various issues, so we suppose this is what will happen fairly soon." Asked whether blank sailings by alliances violate any anti-competitive regulations in the EU, a spokesperson for the European Commission said, "We have no specific comment." Merk's criticism of container shipping is from the perspective of customers of the carriers, but he is not convinced by the argument that the profitability levels being enjoyed by carriers will ultimately benefit the larger supply chain through improved service levels. "There is no perfect competi - tion in container shipping," he said. "There are oligopolies, and on some routes monopolies, so profits are not reflections of being great at providing added value to customers, but rather of monopoly rents. "Market research shows that around half of the customers would be willing to pay more if carriers would provide better service," Merk added. "So carriers could be more profitable if they would tap into that market and provide the services that these customers want." JOC email: twitter: @greg_knowler Falling short Global regulators failing to protect competition in container shipping: ITF's Merk By Greg Knowler Container carriers could pull in $9 billion in profits in 2020 thanks to shrewd capacity management amid plummeting demand. International | Washington | Customs | Security | Regulation

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