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Fears of unintended consequences from removal of block exemption

Outcome of ending of consortia exemption regulation far from certain

Shippers have been calling for the removal of the block exemption for box shipping. But the long-term consequences remain to be seen in terms of service and costs

THE European Commission’s move to allow the consortia block exemption regulation to expire resolves a long-running dispute between carriers and their shipper and forwarder customers.

But it remains to be seen whether the result will be as positive for shippers as they had hoped for or whether the law of unintended consequences will apply.

Commission Regulation (EC) No 906/2009, commonly known as the consortia block exemption regulation, and its predecessors have provided a legal certainty that has allowed liner shipping companies to increase their service offerings and maximise their efficiency by sharing vessels.

The regulation sets a market share ceiling of 30%. Arrangements that fall within that threshold are automatically exempted from the bloc’s competition regulation if they do not collude on prices, restrict capacity except to match demand, or allocate markets and customers between each other.

The current version dates to 2009, when the commission said it recognised the benefits of consortia in liner shipping as a means to bring rationalisation and economies of scale that helped to improve both productivity and the quality of available container line shipping services.

At its peak it covered around 60 consortia serving the EU trades. That number now stands at 43 but does not include the major east-west alliances that fell out of the scope due to their size and were covered by specific competition exemptions.

But the changing nature of the container shipping sector, that has seen massive horizontal and vertical consolidation over the past decade, has raised questions over the fairness of the scheme.

The writing has been on the wall since 2020, when the commission renewed the exemption but only for four years, instead of the five years as in previous extensions.

Since then, however, the whole industry has gone through the upheaval of the pandemic that saw freight rates reach eye-watering levels as congestion drove service levels into the ground. Politically, it became difficult for carriers to claim they needed any special exemptions in a period of record profitability.

“This latest review occurred in even more febrile times with many politicians around the world looking to capitalise on the carrier bashing, which became a bigger sport in the wake of their extreme profits made during the pandemic,” said Drewry container research manager Simon Heaney.

Shipper and forwarder groups have welcomed the move.

“We are pleased that the commission has listened to the voice of the customers, freight forwarders and their shipper clients,” said Nicolette van der Jagt, director general of the European Association for Forwarding, Transport, Logistics and Customs Services (Clecat).

“For many years, we have told the European Commission that the regulation is no longer fit for purpose.”

She said the exemption in its current form provides “excessive scope” for unintended co-operation beyond that necessary for vessel sharing agreements.

British International Freight Association director-general Steve Parker even called on the UK’s Competition and Markets Authority to follow the commission’s lead in its own evaluation of liner regulation, which is ongoing.

“The commission has taken a sensible decision and the UK government should follow suit to ensure that shipping lines in future will be subject to competition law,” he said.

But it remains unclear how much will actually change, and the commission made clear that consortia agreements between carriers can still go ahead.

“Despite the attention given to the exemption, its abolition is expected to have little impact on the industry given the modest number of consortia still in operation. The Southern Africa Europe Container Service was one of a handful of groups that benefited from CBER,” Alphaliner said.

Drewry’s Heaney points out that there was never a compelling case that carriers abused their market power.

But he also suggests that the hoped-for increase in competition could be stymied by the legal uncertainty and additional bureaucracy.

“Removing the block exemption will not bar carriers from forming alliances and vessel sharing agreements, but they might not by willing to expose themselves to potential legal action,” he said.

Smaller carriers could be put off from operating in European markets due to the additional administrative burden, he added.

“By effectively coercing lines to operate independently, the logical conclusion is that each carrier will have to downsize their service portfolios in terms of frequency and connectivity,” he said.

“That would reduce, not increase, competition on a port-pair basis and push up freight rates.”

While carriers will not have to abandon their existing arrangements, they will need to ensure they are compliant with competition rules, according to Vespucci Maritime chief executive Lars Jensen.

“This is potentially the largest problem for the carriers,” he said.

“They have six months to either figure out whether their current consortia comply with the more general rules, or how to makes changes which are compliant. And this in an environment wherein the authorities have the view that the carriers do not understand the current rules.”

This may not have much impact on large carriers that can go it alone, according to Braemar container analyst Jonathan Roach, but he too warned of fewer services being available to shippers.

“If carriers are forced in the future to operate standalone services, each carrier will have to choose and operate individual services (port-pairs) on their east-west trade offerings,” he said. “Most carriers will offer less flexibility in their port pairs compared to today.”

For carriers themselves, the move comes at an awkward time. Not only is the 2M alliance between Maersk and Mediterranean Shipping Co dissolving voluntarily, but the market is suffering from one of its regular spates of overcapacity.

“With the surge in fleet renewal combined with the global economy expected to limp along for the next few years, the timing of the EU's decision is not ideal and adds to the mounting challenges for liner shipping,” Roach said.

MDS Transmodal analyst Antonella Teodoro said: “Looking at the latest strategies adopted by the lines, it would appear they are already concerned about their market shares. Capacity has not been significantly reduced despite declining demand, suggesting lines are already thinking on how to operate alone.”

This could lead to a worst-case scenario for shippers: lines, forced to act alone, fight for market share through a brutal rates war that eventually leads to a Hanjin-style collapse and further consolidation and less competition.

As always in shipping, be careful what you wish for.

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