What Shippers Want

I’ve read several articles on H.R. 6167, the House bill designed to re-regulate the ocean carrier industry. The Journal of Commerce in October conducted a Webcast with proponents and opponents sharing their views. And the World Shipping Council has developed and circulated an official response. Needless to say, H.R. 6167 is getting its share of attention.

As most pundits have indicated, there’s virtually no chance Congress will deal with the bill this year. As also noted, however, there are serious issues all shipping interests should consider carefully. Each entity in this matter has its own ax to grind, and H.R. 6167 firmly reflects the shippers’ side. It’s more than slanted. I’ve already heard from some shipper circles that they don’t believe they’ll get what they’re asking for, that they’ll have to give something back.

Let’s examine that. The most obvious potential “giveback,” according to these theorists, regards alliances. They point to the outcome in Europe’s 2008 elimination of antitrust immunity for carriers as the real objective. I don’t buy it, and believe the bill as written is exactly what shippers want: allow alliances to continue but don’t allow carriers within them to decide how they operate.

Shippers want to have their cake (alliances and all the benefits shippers derive from them) and eat it, too (preventing alliances from reducing capacity during seasonable lulls).

Is it reasonable? From the shippers’ perspective, why not? They’ve already gained tremendous ground in having direct access to carriers in service contract pricing. They’ve expanded to any number of markets they’d never be able to serve without alliances and the multitude of carriers alliances offer.

The last leg of that stool is preventing alliances from reducing capacity. Ever.

As global carriers were losing more than $15 billion collectively last year, they removed capacity because global trade collapsed. Continuing to run all their vessels would have added billions to the losses. Carriers also found a new way to slash costs by slow-steaming and super-slow-steaming, allowing them to return some anchored ships to service.

Did this benefit shippers? Not really; it made them adjust their planning to accommodate extended transit times, adding to their inventories. Shippers today don’t like inventory. By attacking alliances’ ability to adjust capacity, shippers in essence are saying they don’t want to deal with the variable transit times slow-steaming creates. It’s all about capacity, and shippers want it.

It’s a somewhat convoluted argument, I know, but, to me, the entire intent of H.R. 6167, as written, is convoluted. Here’s why: Regulatory oversight of an industry with antitrust immunity from price-fixing deserves oversight. Remove the immunity from price-fixing and what’s really left? The operating agreements!

Well, not exactly. H.R. 6167 would introduce regulatory oversight of service contracts — the very devices cargo interests wanted so badly before passage of the Ocean Shipping Reform Act in 1998. Such a system, they said, reflected what happens in their world: one-on-one negotiations with service providers leading to an agreement on price and service. In their world, shippers deal with whom they want and how they want, with the only oversight provided by the legal system if one of the parties believes a contract’s terms were breached.

So why the difference here?

Add it up: Take away antitrust immunity for price discussions, take away the ability to adjust capacity to market conditions, and give oversight of service contracts to a government agency. If successful, shippers will have turned the ocean carrier industry into a virtual utility without the built-in profitability afforded to public utilities.

Way-out thinking? I don’t think so. Over the past year, shippers watched an industry seemingly transform itself from a giveaway mentality to a resolve to survive by making tough decisions and sticking to them. For years up until 1998, ocean carriers had a license to steal under the old conference system with total antitrust immunity from price-fixing, and never took advantage of it. It took near catastrophic financial results for them to wake up to reality, and shippers don’t like what they see: an industry in survival mode making tough business decisions.

So, cargo interests are taking steps, not to level the playing field, but to protect themselves. Carrier moves to curtail capacity, stabilize and ultimately raise rates this year to roughly 2008 levels caused shippers to consider how they could get back to unstable markets, how they could get supply-demand ratios back in their favor. H.R. 6167, that’s how.

To reiterate, H.R. 6167 is going nowhere this year, but it will be back in the hopper in 2011, and 2012, if necessary. If, through the process, the current language is changed to reflect Europe’s regulations, it will only be a matter of time before another piece of legislation is sought to, in essence, try to ensure that supply can’t be manipulated so as to create a stable environment — or if it is, there will be regulatory oversight to ensure carrier profits are minimized.

It may not make it to the final draft and presentation to Congress, but it’s the objective.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at ferrullig@mindspring.com.
 

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