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A free-market regime for shipping to Europe

A free-market regime for shipping to Europe
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First Published: Fri, Oct 17 2008. 12 35 AM IST

Updated: Fri, Oct 17 2008. 12 35 AM IST
Today is the last day of a shipping regime called India, Pakistan, Bangladesh, Ceylon (IPBC) Conference that hauled cargo between India and Europe for close to 133 years.
A liner conference, such as the London-based IPBC Conference, is a group of container shipping firms offering freight rates, shipping practices and scheduled services between designated ports that member firms discuss, fix and enforce irrespective of market conditions.
The IPBC Conference, the only such group operating between Europe and South Asia, will cease to exist as the European Commission (EC) has decided to repeal the antitrust immunity given to such groups operating from Europe.
Liner conferences were first given antitrust immunity in the US by its Shipping Act of 1984, a law that set regulations for ocean transport. Similar laws have been enacted in other countries.
Founded in 1875 as the Calcutta Steam Traffic Conference, IPBC is considered to be the oldest shipping conference in the world. At the time of winding up, the member lines of IPBC Conference carried around 70% of the container cargo on this trade lane, which accounted for around 30% of India’s overseas trade.
India’s Competition Commission, too, prohibits shipping conferences. The Competition Act of 2002 considers price fixing and market sharing as cartels. The Act, however, does not object to consortia and alliances of shipping lines as long as they do not collude on fixing prices, sharing markets and limiting capacity, all of which are considered anti-competitive.
What does the end of the price- and surcharge-setting IPBC Conference mean for Indian exporters and importers?
For a change, starting 18 October, shipping firms that were a part of the IPBC Conference will have to stop coordinating freight rates and other supplementary charges. Instead, they will have to negotiate freight rates with individual customers based on market conditions.
Competition will ensure that shipping firms revise rates only when there is a demand-supply mismatch and not as a matter of routine, as was done during the conference regime.
So, each carrier will have different rates, both base ocean freight rates and supplementary charges, to deal with fluctuations in fuel price and currency. How they quote it to their clients will depend on negotiations. In short, it will increase the negotiating power of Indian shippers, who were so far at the mercy of these powerful business groups to move their cargo.
In no way can these rates be uniform for a set of carriers operating on a particular trade lane because it will give rise to suspicions of cartelization and subjected to probe by the antitrust regulator. Punishment can be severe — even exclusion from trade.
The arrival of the free market regime in container shipping coincides with a dramatic fall in the ocean shipping rates on the key Asia-Europe sector, even before a real oversupply has surfaced.
A rather large supply glut is expected to hit container shipping as 65 new and bigger container ships ordered with a completely different outlook on the global economy than what it is today, get ready to start operations in the next two years.
Since then, demand growth has slowed due to catastrophic events in Western economies and falling rates have hit the shipping industry, leading many to believe that owners, who sunk billions of dollars to acquire new ships, may resort to a rate war to find sensible and effective employment for their ships.
In a conference system, this would have been an ideal setting for shipping firms to get together and find a way out. But now, the lines cannot talk on tariffs, scheduling, determining or limiting capacity on a particular trade route, as this would be considered unlawful.
As a result, pricing will be one of the most complicated things for shipping lines now. And for a change, shippers will now have the last laugh unless, of course, shipowners devise new ways to circumvent the new regime and retain their upper hand over cargo owners.
However, this looks unlikely because the EC has drafted a new regulation that sets out the conditions under which shipping alliances or consortia will be entitled to operate. The draft rules cover key issues such as market share calculations, capacity management, vessel sharing and coordinated port calls.
Europe’s antitrust regulator has said in a technical paper that “any severe restriction on competition, such as an output limitation in any form, is explicitly prohibited”.
In India, the Competition Commission should become fully functional at the earliest so that it can initiate enforcement activities and dispose off cases in the shortest possible time.
Indian shippers could not expect a better deal in a post-conference world.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at allaboveboard@livemint.com
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First Published: Fri, Oct 17 2008. 12 35 AM IST