Transportation & Logistics Analysis

What if the container consortium block exemption was removed?

September 15 2022

Bruxelles has started consultations on the future of the exemption from EU competition laws enjoyed by the regular line shipping companies. Here, we want to try an exercise in political fiction, based on four different hypotheses.

Customers of regular line shipping companies are up in arms. Over the last two years, service quality has seriously deteriorated and freight rates have soared. A good reason for questioning the pertinence of the exemption from competition laws afforded to the shipping companies.

Could the European Commission go so far as to end or make major amendments to the exemption enjoyed by the shipping companies? This looks to us to be highly improbable, now that freight rates for goods leaving Asia have started to adjust of their own accord since the start of the summer. It is not totally out of the question, however, and, for this reason, we decided to try out different hypotheses regarding the likely impact of any such decision.

The existing rules

Article 101 of the Treaty on the Functioning of the European Union bars EU countries from using commercial practices likely to prevent, restrain or distort competition. Exemptions are possible, however, if they generate objective economic advantages which counterbalance the negative effects of the restriction of competition. It is on this basis that the shipping companies enjoy a system of exemption.

This exemption, which comes up for review every four years, enables them to jointly organise regular line services via long-term partnerships with other shipping companies. The aim is to offer clients a more comprehensive service than the shipping companies would be able to provide if they were operating alone.

The pooling of resources between shipping companies includes ships and port terminal contracts but not container fleets, which they continue to operate individually. In return for the right to pool resources, the companies must keep their commercial policies separate. In theory, moreover, no company may have a market share of more than 30% in any individual trade, so as to avoid any abuse of dominant positions. In practice, however, it is difficult to verify with any precision whether or not this condition is being respected.

The pooling of resources allows the exposure to risk of individual operators to be reduced in a sector requiring heavy investment. Within each alliance, the system allows space to be shared in line with the interests of each operator. 

The pandemic - a turning point

In 2020, when the Covid-19 pandemic was just getting under way, the European Commission decided to extend the exemption for another four years. It will expire, therefore, on 25 April 2024. At the time, this decision was greeted with astonishment by the shipping companies' clients. The argument became even more heated, however, when the commission began making preparations to "decide if the exemption rule in favour of shipping consortia should be allowed to expire or be extended again, with or without modification".

European regulations set four criteria to qualify for exemption:

  • These agreement or practices must contribute to an improvement in the production and distribution of products or promote technical or economic progress.
  • Consumers must receive an equitable share of resulting profits.
  • The restrictions must be indispensable to attaining these objectives.
  • The agreement must not give the parties an opportunity to eliminate competition for a substantial part of the products in question.

Today, the three big, global shipping alliances (2M, Ocean Alliance and THE Alliance) control 83% of shipping capacity. They were created following a major recomposition of the market following the abolition of the shipping conferences in 2008 and the process was speeded up by the collapse of Korea's Hanjin Shipping in 2016.

In 2017, when the three big shipping alliances came into being, the shipping companies' finances were in bad shape. Market concentration was pretty well at the same level it is today but the global market was suffering from overcapacity, competition was intense and freight rates were low. Even the collapse of Hanjin failed to create any inflationary pressure on rates.

It is interesting to note, therefore, that capacity concentration was not the cause of the increase in freight rates.

The reversal of the balance of power between shipping companies and shipper occurred during the Covid-19 pandemic, which reshuffled the cards by creating a sudden break in the balance between supply and demand. In short, market logic is being applied, as the US's Federal Maritime Commission admitted when it carried out an investigation into possibility anti-competitive practices.

Nevertheless, given the change in paradigm, some voices have demanded with increasing insistence that the block exemption should be reviewed or even cancelled before the April 2024 expiry date.

The system's detractors

According to the shipping companies' customers, several of the conditions set by EU regulations for the right to benefit from the exemption are no longer being fulfilled. Opponents of extending the exemption put forward the following arguments :

  • The similarity between shipping companies' rate policies and the concomitance of changes made in this area.
  • The deterioration in quality of service even though improved quality is one of the criteria which needs to be met to justify the exemption regime.
  • The virtual impossibility of commercial negotiations with the companies, which, with a few exceptions, including Japanese and French companies, have been making take-it-or-leave-it offers.
  • Unfair competition from the big shipping companies, which have been expanding into forwarding, creating the risk that they could use their power to obtain market share.

Independent terminal operators also complain that the alliances have too much negotiating power and represent too high a level of concentration.  

Parties in favour of the system

The shipping companies tend to cling to the existing regime, using the following arguments:

  • The agreements setting up the alliances are long-term ones, stretching, in the case of Ocean Alliance, to 2027. Changing the exemption regime would destroy the alliances' pool-style operating systems, weakening the alliances and creating the risk that the European companies belonging to them would be penalised.
  • Capacity would be reduced automatically on the least profitable routes if everyone had to start operating individually. Only the three or four biggest shipping could continue to offer worldwide coverage if the current system imploded and even this would be of poorer quality. Other operators would be forced to become or return to being niche operators, reducing the choice available to shippers in globalised economies.
  • Reduction of the commercial speeds of ships operating within the alliances (super slow steaming), which extends transit times, is the price the industry has to pay for greening.
  • Rates have clearly been falling since the end of spring for goods leaving Asia, particularly China, because of a supply and demand balance which is becoming much more favourable to shippers. The shipping companies consider that this trend proves that there has been no manipulation of the market on their part and that the existing system works perfectly since it follows normal, free trade logic, governed by supply and demand.

What has been left unsaid

The main arguments put forward by both sides make no mention of certain factors which will be taken into account by Brussels in assessing possible changes to the existing system:

  • The shipping companies are well able to accommodate a semi-regular shipping line regime, which, over time, puts capacity under artificial pressure.
  • Forwarders earn higher margins when freight rates are high, something which is particularly true for the biggest forwarding groups.
  • Also on the forwarding side, four big global groups account for 50% of shipping company volume. Capacity concentration should not perhaps be seen as solely a shipping alliance problem.
  • The international transport industry needs to urgently speed up its greening programme. This requirement, which falls on both shipping companies and forwarders, needs heavy investment and it is an illusion to imagine that it can be met without a contribution from the cargo side.

Brussels' options

Deciding whether or not to revise or end the exemption regime is not, therefore, a simple matter for Brussels. There are three fundamentals which are not negotiable :

  • There must be no intervention in private commercial matters
  • The shipping industry must green faster
  • Inflation must be fought

On this basis, four main models can be envisaged :

--> 1st model: maintaining the status quo

This non-interventionist model supposes that the market will rebalance naturally and trusts the shipping companies to speed up the greening of their activities. This scenario, which corresponds to the current situation, is in favour because of its liberal approach even if it runs counter to the sovereignist trend in Europe in a period of growing tension between the big power blocs. Under this model, Brussels would not change the existing system and would continue to reassess the exemption system every four years.

 --> 2nd model: making small changes

The European Commission could consider a more restrictive legal framework to ensure greater equity between vessel operating carriers and non-vessel operating carriers. The existing uncertainty can distort competition at a time when the big shipping companies are widening the scope of their transport and logistics activities beyond their core maritime business. This scenario would result in a continuation of the exemption regime but with some marginal modifications.

--> 3rd model: deliberate interventionism

The European Commission could choose to break with its long-standing, non-interventionist philosophy and listen attentively to the claims of the shipping companies' clients. This is the predominant model in the United States today. This American trend involves a strong political will to reduce retail price inflation and promote exports against a background of political and commercial tensions between the US and China. The US Department of Justice (DoJ) and the Federal Maritime Commission (FMC) currently have the legal tools to intervene in the market. 

This deliberate interventionism could give ideas to Brussels, which is just as keen to stop inflation and keep control of its trade balance. In this case, the commission could decide to completely overhaul the exemption regime.

But the situation in Europe is very different from that in the United States. The DoJ and the FMC do not have European equivalents and this policy also runs counter to the liberal school of thought still dominant in the EU. Unlike Europe, moreover, the United States has no direct interest in the big shipping companies even if this statement needs to be tempered by the fact that the American banks are very active in ship financing and that there are still many links between the US and the Maersk group, which took control of US container shipping pioneer Sealand in 1999.

--> 4th model: bringing back the conferences

In the current economic and geopolitical situation, one could imagine a return to an improved conference model. I personally consider that this model corresponds most closely to current requirements, even if would mean ditching the liberal taboo which led to the abolition of the conferences in 2008.

The cargo side needs to be guaranteed quality of service and regularity, as well as a minimum level of rate stability, to enable it to build their investment and service strategies. This model would seek to satisfy these requirements under the supervision of the relevant European authorities through the following measures:

  • The reintroduction by the alliances of common freight rates by trade, taking into account the value of the merchandise transported (Commodity Box Rates). The more valuable the merchandise, the higher the cost of transport. This would allow a certain form of rate equity to be reestablished and a better distribution of profits among the shipping companies, which bear the burden of investment, their clients and forwarders. Today, small and medium-sized forwarding companies are unable to compete with the bigger groups on rates.
  • The introduction of seasonally corrected annual rates, with minimum and maximum rates fixed by an appropriate regulatory authority. Such a system would allow all parties to work on their budgets with greater serenity for the benefit of all.

In return for this, the shipping companies would be required to regularise their services. Ad hoc European bodies would also need to sit on the boards of these conferences and have the right to give their opinions on their membership, the rate policies pursued by the alliances and the quality of service offered. Such an initiative would correspond to the defence of sovereignty approach currently advocated by Brussels. By playing an active role in the constitution of the conferences, the European authorities could if need be oppose a build-up of interests seen as hostile or contrary to the interests of the EU bloc.

This last model is the least liberal of the four. In a new era, in which the unbridled globalisation we have known for the last 30 years runs into greater criticism daily for philosophical, societal and environmental reasons, such a model could emerge if it was supported by a strong political will. But, let us admit it, such a break with established practice still seems improbable. A little more time will doubtless be required before such radical decision-making becomes possible, even if radicality is longer taboo.

Subscribe to the newsletter

Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
See all its articles