HAPPY BIRTHDAY, OCEAN SHIPPING REFORM ACT

HAPPY BIRTHDAY, OCEAN SHIPPING REFORM ACT

Monday marked the first birthday of the Ocean Shipping Reform Act of 1998, which took effect May 1, 1999. It's been quite a year.

Despite the common use of the term ''deregulation,'' OSRA did not deregulate the liner shipping industry. Rather, deregulation occurred with passage of the Shipping Act of 1984 - legislation more memorable for the freedom it gave customers and vendors to establish rates without prior regulatory review and approval, through service contracts and the right of independent action.The shipping industry, from 1984 up through 1999, differed from other deregulated transportation modes because, while it allowed freedom to establish rates, it offered no opportunity for confidential contracts. OSRA eliminated this problem - and confidentiality made the difference.

OSRA completed the transition of ocean shipping from common carriage to contract carriage. Publicly available - and enforced - tariffs were mostly replaced with confidential contracts.

One year is a short time, especially for a notoriously slow-moving industry like ocean shipping. Still, we may be able to detect some results from OSRA, and by doing so, possibly predict some future trends.

The introduction of confidentiality carried with it immense implications. Carrier rate conferences could not survive the market forces it unleashed.

Suddenly, carriers and customers were able to conduct one-on-one negotiations. Shipper executives, used to having contract information on rates paid by their industry competitors, had to work harder to arrive at terms favorable to their employers.

The ability to conduct contract carriage has helped many shippers. Some that were well prepared seem to have realized savings. Conversely, other shippers that were accustomed to being accommodated due to their size found they could be disadvantaged overnight to smaller - but smarter - competitors.

Some small shippers, unable to achieve the same level of savings on their own, banded together into shippers' associations to aggregate their volume.

The only group that seems not to have benefited has been the small intermediaries. This may simply be coincidence. The rise of globalization has resulted in mergers in all industries. In today's economy, small companies operating in global businesses are at a disadvantage.

Let's briefly compare April of 1999 to April 2000.

Last year, when OSRA took effect, the industry was largely plagued by inertia. Although the rules had changed, many traditional practices persisted.

While conferences disappeared, negotiating practices remained basically unchanged. Price was the focal point and volume was the leverage agent.

More important, there was still group discipline in the ''voluntary'' guidelines established by the discussion agreements. The Trans-Pacific Stabilization Agreement enforced discipline until Day One of OSRA. Most Pacific import contracts took effect the same day as the law, so lines actually worked under the old law while negotiating contracts to operate under the new law.

Ocean carriers, recovering from the Asian economic flu, enjoyed a rate windfall. There was very little deviation from the voluntary guidelines. As recent financial results show, lines are able to make more money in an imbalanced import-export market than they were able to in a relatively balanced import-export market.

During the last year, shippers have found ways to overcome TSA's monolithic pricing presence. By the end of the year, shippers were finding ways to reduce rates and other surcharges as volume abated somewhat.

Some shippers also moved the contract start dates away from May 1 so that they could negotiate better on their own - avoiding the potential impact of other contracts.

Contract results this year will be drastically different. Although TSA has issued voluntary guidelines, there appears to be less adherence to them. Discussions with industry leaders indicate that many lines caved in on rates during the last 10 days of April, leaving a lot of money on the negotiating table.

Part of the reason for TSA's silence may be the regulatory scrutiny to which discussion agreements are being subjected by governments and regulatory organizations around the world. No group wants to appear blatantly anti-competitive when it is being investigated for exactly that.

Lines may also be positioning themselves for the impending wave of new vessels being built. Almost every carrier has committed to significant capacity expansion in the next 12 to 18 months. One or two years of profitability seems to have inspired a vessel-ordering binge and service-expansion bubble.

At least for the next several years, capacity expansion will be greater than the growth of trade. Thus, growth will only come from acquiring another competitor's business.

Such a business environment puts a premium on retaining customers. No one wants to risk losing a big account now when he will be begging for even more business in less than a year.

This sounds like the beginnings of a free market - which was, after all, the intended goal of OSRA.