The following Supply Chain Matters commentary highlights this week’s report by the U.S. Federal Maritime Commission regarding the effects of the COVID-19 pandemic on the U.S. international ocean supply chain, negating possible collusion among ocean container shipping lines.
The U.S. Federal Maritime Commission (FMC) released this week the report: Fact Finding Investigation 29- Effects of the COVID-19 Pandemic on the U.S. International Ocean supply Chain.
Unfortunately, from the lens of Supply Chain Matters, the report will provide little comfort or specific actions for U.S. businesses and industry supply chain teams to look to in the coming months without added regulatory and other legislation.
Background
In March of 2020, after the President of the United States declared a national emergency concerning widespread coronavirus outbreak, the FMC launched what was termed a Fact Finding 29 initiative, appointing a designated Fact-Finding Officer, and directing her to engage supply chain stakeholders in various discussions to identify what was termed: “ commercial solutions to certain unresolved supply chain issues that interfere with the smooth operation of the U.S. international ocean supply chain.”
Over the course of two years, this fact-finding effort produced three phases of investigation and interim reporting:
Phase One: Supply chain innovation called for teams to identify the most pressing supply chain challenges the U.S. was facing and to find commercial solutions when possible. An area that was frequently identified was an assessment of carrier services and of billing of detention and demurrage charges.
Phase Two: Information and Research was to gather appropriate information and research including discussions with U.S. importers, exporters, truckers and others.
Phase Three: Commission Action which in essence is the final report of this effort and was released for publication and consumption this week.
Overall Report Findings
Rebecca Dye, the appointed FMC Fact-Finding Officer concluded that:
“Based on information and researched gathered during this second phase, the Fact-Finding Officer has concluded that using established antitrust analytical tools also used by our sister competition agencies (the Department of Justice and the Federal Trade Commission)- and not withstanding certain misconceptions- the current market for ocean liner services in the Trans-Pacific trade is not concentrated and the Trans-Atlantic trade is only minimally concentrated.”
The report indicates that competition among ocean common carriers and among the three major global shipping alliance groups is “vigorous” particularly in the Trans-Pacific segment. The report further concludes that:
“although certain ocean transportation prices, especially spot prices, are disturbingly high by historical measures, those prices are exacerbated by the pandemic, an unexpected and unprecedented surge in consumer spending, particularly in the United States, and supply chain congestion, and the product of the market forces of supply and demand.”
Readers of Supply Chain Matters might find the above statement familiar. In postings in November of last year we observed that with supply chain management and logistics teams literally bargaining with carriers for transport services regardless of spot market pricing, there was ample opportunity for carriers to make a lot of money from chronic demand and a gross shipping supply imbalance. Reports at the time indicated that businesses were suddenly fronted with added surcharges and volume related fees not to mention higher costs related to demurrage and delays of shipments.
The notions that the chronic demand and supply imbalance stemmed from hyper consumer demand in the U.S. was the stance taken by the World Shipping Council, which represents the shipping industry’s U.S. lobbying efforts.
This week’s FMC final report includes twelve specific recommendations which readers can review.
At the same time, the final report acknowledges that the FMC lacks the regulatory tools to deal with the copious added charges that the container shipping industry imposed during the heights of the shipping crisis in 2021 thru tariff structures.
There is a further statement indicating that for some time, contracts negotiated by many U.S. importers and exporters: “lack a mutuality of understanding and obligation and are not enforceable.” Noted is that the most productive path forward for shippers and carriers would be to enter into mutually enforceable and binding service contracts that are enforceable commercial documents. Then again, is that not the core root-cause problem, unenforceable language, a lack of trust and consistent information flows across the various ocean and land-based logistics modes of ocean container transport.
Additional Thoughts
Supply chain procurement and transportation teams along with long-time industry consultants point to the shipping industry’s three global alliances as having undue influence in metering capacity for high volume transit routes, with the ability to leverage blank sailings as a means to do so. The nuance is whether such actions meet a definition of collusion.
We note the passage of reform legislation since this week’s FMC report provides little evidence that this agency has the tools and authorization to get to the root cause of a shipping industry that was able to generate more profits in 2021 than that of Apple, profits in excess of $100 billion.
There is also the political spectrum, especially as the U.S. mid-term elections draw near later this year.
In December of 2021, this blog highlighted the U.S. House of Representatives passing of legislation termed as the first U.S. shipping reform act in 20 years. That legislation, The Ocean Shipping Reform Act of 2021 addresses the modernizing of existing ocean shipping regulatory language to account for current day challenges and actions and added additional regulatory tools for the FTC in monitoring and enforcement actions.
Among a number of provisions in the House legislation was authorizing the FMC to initiate investigations of an ocean common carrier’s fees or charges and apply enforcement measures, as appropriate. It further granted authority for the FMC to issue emergency orders that require information sharing in deemed situations of a substantial adverse effect on the competitiveness and reliability of the international ocean transportation supply system. Information sharing involves ocean carriers and terminal operators to relevant shippers, rail or motor carriers related to cargo throughput and availability. This legislation has yet to be passed the U.S. Senate, which is a further frustration.
In his annual State of the Union address to Congress in March, President Joe Biden specifically called for the Congress to address existing anti-trust immunity in ocean shipping alliances. Biden had strong and pointed remarks for the global maritime industry and their “overcharging of American businesses and consumers.”
U.S. Senator Elizabeth Warren, citing a published Bloomberg News report that explored consolidation of ocean container shipping companies having contributed to surges in container rates and consequent broader global wide inflation. Senator Warren herself tied very high U.S. inflation in part on the ocean container industry’s “anti-competitive nature.”
In summary, we do not sense that this week’s FMC report represents anything final.
With consumers now throttling back on material purchases because of higher inflation, with businesses facing a reality that further price increases of goods will jeopardize demand for products, and with industry belief that additional ocean container port congestion and delays will again occur later this year in the holiday surge period, that policy makers will feel added heat to do something to curb the market and capacity metering power of the global liner industry.
Beyond additional FMC led commissions, rule-making and stalled regulatory legislation, the heat will especially increase when policy makers begin to understand the implications of global maritime companies plowing of added profits toward acquisitions of land and inter-modal logistics services firms across the globe. Maybe then, the notions of anti-trust immunity will become apparent. The again, that may be too late.
For multi-industry supply chain teams, a course of action seems to be what the FMC has hinted, namely entering into enforceable contract agreements and having a legion of attorneys or contract experts at the ready for negotiation and litigation.
Another outcome may be the container industry pulling back on capacity metering practices when the industry realizes that global wide supply chain movements are significantly reduced as businesses begin their moves to more regionally based strategic sourcing strategies for materials that favor more land-based transportation.
Ocean container carriers have to be aware of the real risks of reverting back to too much global-wide fleet capacity chasing reduced demand, as well as drawing added scrutiny of more global wide maritime regulators. This is a situation where large money interests and investment speculators once again disrupt the balance of global supply chains.
We certainly welcome reader input regarding that state of global shipping pricing power.
Bob Ferrari
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