A U.S. Justice Department ruling into allegations of price fixing among the globe’s largest container shipping lines has been dropped, with consequences for shippers and the industry.

The Wall Street Journal reported this week (Paid subscription required or metered view) that an ongoing two-year investigation concerning alleged rate fixing among global ocean container alliance networks has been closed without filing charges or imposing fines. The news came with several carriers notifying the publication  that they were informed of such closing. Maersk Line

News of this probe surfaced in March 2017 when federal agents interrupted a meeting of the industry’s 20 largest shipping lines and issued subpoenas to certain top executives.

Industry leader A.P. Moeller Maersk provided a statement indicating pleasure that the Justice Department released the carrier from any obligations under Grand Jury subpoenas. A separate reported statement indicated that now the “global container industry has been fully investigated and exonerated.

In 2017, the industry began forming and operating alliance networks focused on major shipping lanes, eventually serving nearly all manufactured goods across the globe’s major trade routes. Alliance networks allow carriers to leverage multiple carrier ship capacity, thus a single vessel can transport containers tendered in any alliance carrier. The alliance gains added efficiency in that before the alliance, each carrier shis would sail at partial capacity. The arrangement helps with carrier return-on-assets but the tradeoff came to be shipping schedules and transit times.

The result of these alliance networks has been industry consolidation which has  whittled down influence of smaller carriers.

As our readers are acutely aware, shipping rates since the consolidation have not tended to follow classic supply and demand characteristics. For instance, rates on the Asia to Europe trade lane, where shipping capacity is high and where vessel size skews toward mega-ships, have averaged lower than break-even cost. In contrast, rates on the Asia to North America trade lane are higher, and especially high during peak shipping periods. Citing brokers and shipping executives, the WSJ indicated that there is about 15 percent more shipping capacity than demand in most existing trade routes.

 

Supply Chain Matters Perspective

From our lens, this week’s development has consequences for shippers and for the industry as a whole.

We have consistently expressed our view that prevailing global shipping consortiums serve to optimize needs for carrier efficiency and financial goal fulfillment at the expense of shipper needs for on-time reliability, consistent rates and more modernized information technology capabilities. The industry continues to attempt to manage fleet overcapacity, introducing larger mega-ships that require major ports and their quasi-public agencies to have to invest in added infrastructure and logistics efficiencies. A current trend in declining global trade volumes and meager growth forecasts for this year and perhaps beyond, compound the cost imbalance.

The industry additionally needs to finally address global environmental emission standards for individual vessels which will add further expense. Industry practice is to recover such expenses in either increased surcharges or rates. Further, as noted in prior commentary, the largest ocean container carriers are now actively pursuing strategies to eventually offer more one-stop services for port to customer logistics and transportation services. That requires investment as well.

Manufacturers, retailers and businesses that make up the global supply chain now find themselves in a position to have to mitigate exploding transportation and logistics costs, many of which are impacting product margins and bottom-line financial results. Throw in a heightened geo-political trade environment and punitive tariff actions and it becomes abundantly clear that business as usual no longer applies.

Industry supply chain and procurement management executives and their respective organizations must now deal with new realities and changed thinking. This week’s development adds to such realities.

While global ocean container line executives can breathe a sigh of relief in perhaps dodging expensive fines and restitution, multi-industry shippers cannot afford to accept business as usual. Thus, the winds of a brewing storm in the form of changed production sourcing, transportation practices and more leveraged use of disruptive technology are in the forecast.

 

Bob Ferrari

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