Times of crisis call for creative solutions and the maritime transport industry has honored this tradition. Shippers that were once fierce competitors now work hand in hand in an enclosed amount of strategic alliances that have redifined the market’s current landscape.
Only five years ago there were dozens of shipping lines competing for cargo and routes all over the world, and now four large conglomerates work side by side to salvage what little business is left from the ‘good old days’ of half a decade ago.
According to the article “The puzzle of shipping alliances in July 2016”, by Ricardo Sánchez and Lara Mouftier for PortEconomics, almost 25 years ago the shipping market was comprised of about thirty companies that represented 63% of the global fleet. As shipping lines began adopting economies of scale to reduce costs and mitigate competitive threats, alliances began to surface. By 1998, 50% of the global fleet was part of six alliances and during the first decade of the 21st century the number of alliances shrunk by half, competing directly with the larger carriers that managed to maintain their operational independence.
The current landscape shows an even more reduced number of alliances, where only four groups concentrate over 70% of global operations.
Concentration v/s market power
Economist Ricardo Sánchez, Officer in Charge of the Natural Resources and Infrastructure Division ECLAC, explains in an exclusive interview to MundoMaritimo that the current operation concentration is a reaction to the imbalance between oversupply/low demand and the low freight rates. However, the expert claims that the shippin concentration trend –by mergers or acquisitions- is not necessarily always a reaction to a crisis, but rather a proactive action in market conditions that allow it.
These actions serve carriers’ specific goals, such as resource optimization, bailing out of complex financial situations, accesing new trade routes/markets, etc. Currently there are four major alliances, but it is important not to mistake operational concentration with market power.
In order for market concetration to turn into market power there has to be a detrimental condition for users, which usually translates into handling prices and available stock. The current alliance concentration is not yet at its peak, as spot rates continue trying to stabilize and competitive conditions are still stable.
“There is evidence that shows that market concentration poses clear risks of market power, but that is not the case in the current scenario”, the ECLAC specialist highlights.
But, which are the warning signs to look out for to prevent market power? Sánchez explains that there is no exact way to predict when a market concentration condition could give way to market power, because results are always post facto. The lack of international imparcial regulation difficults the task of monitoring handling of prices and the effects can only be seen once the damage has already been done. The only actors relevant enough to impose rules are those with commercial influencue large enough such as China, the European Union and the United States, all of which handle the main global trade routes. However, in smaller markets, like the case of the West Coast South America trade route, there is not a powerful enough representative able to influence how the industry regulates itself.
“There is an insufficient international governance facing this issue, only large economies such as USA, China and Europe are powerful enough to veto initiatives. Smaller countries don’t have this power”, the economist says.
Constant price monitoring is the only way for early detection of market power. Once freight rates stabilize –for example, to pre-crisis amounts- there has to be a year of constant demand growth to determine if there are indications of market power. In the current situation, Sánchez highlights that the possibility of market power is still far away because the competitive conditions are stable. As long as competition is secure there is no risk of market power.
Regulation: pending issue
Many industries have price regualtion mechanisms to ensure fair competitive conditions. However, the maritime transport industry does not have an impartial international organism that regulates the general market interests and fair-play rules. Regulatory power is handled by a handful of economic giants that set the playing field for the rest of the industry.
From a certain point of view it makes sense: if those who control 70% of the market decide for the remaining 30% it can’t be that bad, right? The problem is that not all trade routes and not all regioal markets have the same needs, and if general rules only satisfy the large players’ necessities, then who looks out for the smaller players’ interests? It all comes down to demand: high demand=high influence power v/s low demand=low influence power.
According to Sánchez, the problem is that “this is not in anyone’s agenda. No one is discussing this. It is necessary to have international institutions dedicated to ‘defending’ each market, no matter what their size”, the expert explains. It is important to begin debating this issue before it becomes a problem and the market suffers, because there is still time to avoid a new future crisis.
TOC Américas 2017 - Lima, Perú
Organiza TOC Events Worldwide