Int. J. Shipping and Transport Logistics, Vol. 5, No. 2, 2013 155

Shipping line dominance and freight rate practices on trade routes: the case of the Far East-South Africa trade

Tao Chen* and Paul Tae-Woo LeeDepartment of Logistics and Shipping Management,Kainan University,No. 1, Kainan Road, Taoyuan County, Taiwan Fax: 886-33412361 E-mail: chentao@mail.knu.edu.tw E-mail: paultwlee@mail.knu.edu.tw Corresponding author

Theo NotteboomITMMA,University of Antwerp,Kipdorp 59, 2000, Antwerp, BelgiumFax: +32-3-2655150E-mail: theo.notteboom@ua.ac.be

Abstract: This paper examines the issue of shipping line dominance, taking the Far East-South Africa trade as an example. This study has two objectives: first, to collect sea freight rates for trades in relation to South Africa (SA) so as to understand general trends in price setting by shipping lines and ship capacities on the SA routes; and second, to examine whether evidence can be found on the potential dominance of shipping lines on the SA trading routes from the Far East (FE). To achieve these two goals, this study collected freight rates from major shipping lines serving the routes of major Asian ports to SA ports and comparing the operating costs between different shipping lines by way of analysing the capacity and types of container ships deployed on FE-SA trade routes.

Keywords: shipping dominance; container shipping; South Africa; price setting.

Reference to this paper should be made as follows: Chen, T., Lee, P.T-W. and Notteboom, T. (2013) ‘Shipping line dominance and freight rate practices on trade routes: the case of the Far East-South Africa trade’, Int. J. Shipping and Transport Logistics, Vol. 5, No. 2, pp.155-173.

Biographical notes: Tao Chen is an Assistant Professor at the Department of Logistics and Shipping Management in Kainan University, Taoyuan, Taiwan. He served as a Port Chief in a container shipping line for several years. He is currently the Department Head and Secretary-General of the 2012 IAME Conference. He graduated with a PhD in Cardiff University in the UK. His current research focuses on international logistics, shipping business, and management of container terminals and ports. He has published more than ten research papers in international conferences and journals, including Transport Reviews, South African Journal o f Economics, and Journal o f the Eastern Asia Society for Transportation Studies.

Copyright © 2013 Inderscience Enterprises Ltd.

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Paul Tae-Woo Lee is a Professor at Department of Logistics and Shipping Management and Director of Shipping Management, Port and Logistics Research Centre at Kainan University in Taiwan. He is also currently holding research fellowship of Jungseok Research Institute of International Logistics and Trade at Inha University in Korea. He was a Visiting Scholar at, among others, the Faculty of Economics and Politics in Cambridge, IMS at the University of Plymouth, Hong Kong Polytechnic University, and Dalian Maritime University. He has involved in advising and consulting jobs for several governments, major shipping lines and container ports in the world, including container hub port development projects in South Africa during 2008 - 2011 .

Theo Notteboom is a President of ITMMA (an institute of the University of Antwerp), a Professor at the University of Antwerp, a part-time Professor at the Antwerp Maritime Academy, a visiting Professor at Dalian Maritime University in China and World Maritime University in Sweden and formerly holder of the MPA visiting professorship in port management at the Nanyang Technological University in Singapore. He is also a President of International Association of Maritime Economists (IAME), co-director of the PortEconomics.eu initiative and Chairman of the Board of Directors of Belgian Institute of Transport Organisers (BITO), an institute of the Belgian Federal Government. He published widely on port and maritime economics. He is an Associate Editor of the flagship journal Maritime Policy and Management and a member of the editorial boards of four other leading academic journals in the field.

1 Introduction

The market behaviour of liner shipping companies has been scrutinised by maritime and competition regulators for several decades. A lack of competition on a trade route, due to the dominant position of a shipping line or an oligopolistic market structure, can lead to overcharging strategies by shipping lines with a negative impact on a national economy.

For a long time, liner conferences played an essential role in pricing and capacity management on the major trade routes in order to tackle the problems of overtonnage, seasonality and trade imbalances. One of the major global studies on the behaviour of liner conferences was the ‘Final report on the application of competition rules to liner shipping’ presented by the European Commission on 26 October 2005 (hereinafter The EC Report). The Competition Directorate General of the EC led a review of Regulation 4056/86 which laid down the mles for the application of Article 81 and 82 EC and contained a block exemption for liner conferences. The EC Report is an important building block in the decision-making process towards the abolishment in October 2008 of the block exemption on the anti-trust mles granted to liner conferences via Regulation 4056/86 of 1986. This abolishment basically outlawed liner conferences on shipping routes in relation to European countries, leading to the disappearance of major liner conferences such as the Far Eastern Freight Conference (FEFC) and the Trans-Atlantic Conference Agreement (TACA). The consultative paper requested by Directorate-General for Competition also followed a proposal by the European Liner

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Affairs Association (ELAA) on 6 August 2004 stating that a detailed information exchange system among shipping lines would constitute a critical element for a new regulatory structure for liner services. Specifically looking at the South Africa (SA) to Europe trade lane, the EC Report concluded;

“The conference (effectively SAECS (Southern Africa Europe Container Service)) appears to play a role in managing freight rates and surcharges, as well as capacity on route. With direct competition from existing operators and indirect or implicit competition from potential entrants, and with noticeable swings in basic freight rates during times of excess supply, it appears at first glance to influence rather than rigidly control the costs shippers must pay.”

The EC case forms a good starting point for conducting research on the possible existence of noticeable distinct features of the South African liner market in terms of the dominance of shipping lines and trade agreements between them, and their impact on pricing and capacity. In so doing, this paper has two objectives: first, to explore the general trends of sea freight rate price setting and ship capacities on the SA routes; and second, to examine whether evidence can be found on potential dominance of shipping lines on the routes of SA and major container ports in the Far East (FE). To achieve the two goals, this study collects freight rates and the type and capacity of container ships from major shipping lines serving these routes. With the disappearance of most liner conferences, sea freight rates are more than ever confidential and commercially sensitive as they are negotiated behind closed doors between shippers or freight forwarders and carriers. To overcome this difficulty of data collection, this study not only relies on interviews with major shipping lines, shippers and freight forwarders, but also reviews the structure and rationale of the freight rates charged by the shipping lines on majortrade routes to make a freight rate comparison. All the above data serve as a point ofreference for the analysis of liner activity on SA trade lanes.

There are five sections in this paper. The second section reviews the literature concerning shipping dominance and resulting price setting behaviour of shipping lines and describe in detail the methodology deployed in this study. Then the third section provides an overview of container shipping between the FE and SA. Section four analyses the freight rates on a global basis and then compare their differences between the FE and SA and contains a detailed study on the price setting behaviour of major shipping lines in order to obtain an in-depth understanding of the differences in operating costs between shipping lines serving FE-SA trade routes. Section five concludes with major findings and policy recommendations.

2 Literature review and methodology

This section presents a literature review as a preparatory stage to investigate the existence of dominance and potential overcharging by shipping lines active on the SA routes. Through a review of a set of academic papers and case studies, this study draws lessons on how to identify overcharging practices and which methodologies to use in this regard.

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2.1 Literature review on shipping line dominance and overcharging practices

Holmes and Schmitz (2001) found that shipping lines used their monopoly power to charge prices significantly above competitive levels. Three features make the industry prone to develop monopolistic behaviour: the ability to create holdup points, the existence of scale economies, and extensive government regulation. Despite the fact that his context was largely focused on liner shipping in the pre-railroad era in the USA, his logic may be extended to logistics providers including contemporary container shipping services. OECD (2002) published a report on ‘Competition policy in liner shipping’, providing a comprehensive review of developments in container liner shipping and the impact of competition policy. One of the major conclusions is that:

“it is recommended that Member countries, when reviewing the application of competition policy in the liner shipping sector, should seriously consider removing antitmst exemptions for price fixing and rate discussions. Exemptions for other operational arrangements may be retained so long as these do not result in excessive market power.”

Council Regulation No. 139/2004 of the European Commission deals with competition and overcharging issues caused by mergers and acquisitions (M&A) among liner shipping companies. The regulation describes the existence of dominance of shipping lines on the basis of the market share of the undertakings concerned. In line with the general competition mles imposed by DG Market of the EC, a shipping line is considered to have a dominant position when its market share exceeds 25% of the undertakings concerned in the common market or in a substantial part of it. This means that if a company’s market share is higher than 25%, the EC assumes that the company has a dominant position in the market and can thus exert market power. While a dominant position does not necessarily lead to the abuse of market power, the danger of such abuse is higher in case of shipping line dominance.

The Global Insight Report (European Commission, 2005) presented by the EC provides a comprehensive review on previous empirical studies of the maritime shipping industry, some focusing on freight rates, but also other relevant topics such as profit/loss of liner shipping companies, and components of total ocean transport including ancillary charges as well as surcharges. The study applied both theoretical analysis using liner conference data and regression analysis with liner conference freight rates and aggregate average utilisation rate of ship capacity by major trade routes. The major findings primarily relate to role of liner conferences in determining the market price for liner shipping in the period 2000-2004. For example, the study concluded that rates recommended by the liner conferences are generally viewed as an upper bound for rates actually charged, with each shipper’s discount depending upon the outcome of private one-on-one negotiations. Also, non-conference carriers typically follow the liner conference surcharges such as the bunker adjustment factor (BAF), the currency adjustment factor (CAF) and the terminal handling charge (THC). As these constitute a large percentage of the total shipping costs, conferences thus directly set a significant portion of the price for ocean transport services.

The Federal Trade Commission’s study (Clyde and Reitzes, 1995) about the competition in liner shipping found no statistically significant relationship between freight rates and the market share of the conference serving the route, which indicates that conferences do not act as perfect cartels maximising the joint profits of their

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members. Nonetheless, it was found that the level of freight rates is significantly lower on routes where conference members are free to negotiate service contracts directly with shippers.

2.2 M ethodology to identify overcharging practices and shipping line dominance

The above literature review shows that dominant shipping lines active on certain routes are involved in price discrimination and that a relationship between market share and the freight rate has been identified. It seems that existing studies on liner dominance and anti-competitive behaviour typically fail to prove the existence of overcharging practices resulting from anti-competitive behaviour. Therefore, three methodological issues need to be addressed.

The first methodological issue relates to the price used as a basis for further analysis. The price of a product or service is determined by many economic factors, among others, demand and supply, business risk factors, reward for new investments and new market entry strategies. In particular, the ‘sea freight rate’ charged by the shipping line to the shipper consists of a range of cost items, so that to clearly identify overcharging practices based only on the sea freight rate would be extremely debatable. In every market, the basis (i.e., only the base freight rate vs. the total price including surcharges) for analysing potential overcharging is a source of contention between shipping lines and shippers. Our methodology examines sea freight rates on the SA trade routes in relation to the dominance of shipping lines on specific trade lanes, by comparing the applicable rates to the rates used on other trade lanes. This study compares the sea freight rates consisting of the base rate (BAS), BAF and CAF by major trading route to identify whether or not dominance or overcharging exists on the FE-SA route. To compare the differences among major trade routes on the same basis, the ‘unit sea freight rate per nautical mile’ (USFR/nm) charged by shipping lines is used as a measure.

Furthermore, this study takes note of a formal decision of the European Commission on the P&O Nedlloyd-Maersk merger case that surcharges and ancillary charges can make up to 40% of the freight charges. As BAF is generally applied by all carriers (Notteboom and Cariou, 2011), it can be deemed that competition for a large part of the freight charges does not exist, yet very often carriers will lump charges together. This is why BAS, BAF and CAF have been used as a reference of comparison in this paper to capture the sea freight rate charges to the shipper.

The second methodological issue is concerned with the actual measurement of overcharging practices by shipping lines. Connor (2007) suggests five different ways to measure the level of overcharging: the before or after method, the benchmark or yardstick method, the cost-based method, the econometric estimation of the effect of the cartel and oligopoly models.

Considering the restriction in collecting confidential freight rate data as described in the introduction, this study selected the benchmark or yardstick method as the method to examine the overcharging issues on the FE-SA trade. The yardstick method compares the cartel price to prices in similar markets, which are known to be cartel-free. ‘Similar markets’ can be either sectors in the same state or country that are similar in terms of demand, cost and market structure conditions, or they can be the same sectors in other states or countries. It is possible to use a generalised framework in which one tries to

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control for as much as possible observable differences across the yardstick sectors, states or countries (differences in income, capacity usage, etc.). Once again, such an approach is in principle desirable since it adds more realism, though extensions to simple models need to be motivated by economically sound reasoning.

In following the yardstick method, there are two different ways to find the level of overcharging. The overcharge is the difference between the prices achieved as a result of collusive actions and a more competitive (benchmark) price. The competitive price is a price that would exist in the market if collusion did not take place. Usually cartel overcharges are represented using a relative measure, i.e., the overcharge rate. Two relative measures are possible. The first measure (1) is a ratio of the price difference due to collusion (absolute measure) to the price during collusion. The second measure (2) is a ratio of the price difference to the benchmark price.

P - POvRate collusion benchm ark /

P - PO v R c i t C collusion benchmark

pbenchmark

The difference between the two formulae is found at the level of the denominator. Although both approaches to calculate overcharge rates are equally acceptable, the first formula has a number of advantages over the second one. First, overcharge estimates by formula (1) have an upper boundary, and the possible maximum value of cartel overcharge is 100%. Second, these overcharge estimates can be directly compared to the overcharge proxy (gain from price-fixing) established in anti-trust laws.

The last methodological issue arises out of the measurement of the dominance of a shipping line or carrier group. In our study, the 25% criterion referring to the EU Council Regulation 139/2004 is employed to identify dominant shipping lines serving the SA routes. A ‘benchmark’ price defined by Connor (2007) is applied to investigate possible overcharging practices on routes to and from SA and as a basis to find differences among shipping lines by major route in relation to SA. In doing so, a comparison is made by container unit sea freight rate per nautical mile among all of the routes operated by the same company, which draws from a calculation of (BAS+BAF+CAF)/distance of the route concerned. In other words, a hypothesis can be developed that if a company has monopoly power on a certain route, it would charge a higher unit price than the other routes operated by the same company, which is reflected in one or more than two of the sea freight rate items, i.e., BAS, BAF, and CAF. This comparative analysis among container USFR/nm on the all routes operated by the same company would contribute to identifying the existence of overcharging by shipping lines on SA routes.

3 An overview of container shipping lines serving SA

With more than 95% of SA’s seaborne trade in volume or about 80% in value terms, the country is strategically dependent upon the maritime transport industry (Jones, 2004). SA’s commercial ports and established international shipping network not only have served a strategic role of trade facilitation, but have also helped to shape the economic growth and development of the entire Southern African region. Due to SA’s geographic

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location, substantial hauls are required to link this country to its major international markets and suppliers. SA has adopted trade liberalisation as an official policy with the aim of raising economic growth and sustainable job creation through improving the country’s international competitiveness. The reduction in SA’s trade barriers suggests that transport costs may have become, by default, an increasingly important determinant of trade performance. Thus, crucial to the success of the new trade policy objectives is the restructuring of the transport sector, with particular emphasis on reducing international transaction costs of which transport costs are the largest component. The government’s renewed commitments to increase capital expenditure and improve the efficiency and effectiveness of not only SA’s ports, but the entire logistics chain is welcomed and necessary if the country is to reduce the costs of doing business in and from SA (Chasomeris, 2007). SA’s container port system, comprised of the ports of Durban, Cape Town, Ngqura and Port Elizabeth, is undergoing a transition towards an efficiency-driven gateway system to the hinterland and a hub complex for the entire Sub-Saharan Africa region (Notteboom, 2010, 2011).

There are eight major trade routes linked to SA, as shown in Table 1. Out of the eight routes between 2007 and 2008, the FE-SA trade route is the biggest one, which accounts for around 48% of total container traffic in the SA port system. Another important trade route is the Europe-SA market, with a market share of around 23% in the same period. The market share of each of the other six routes (i.e., Mediterranean-SA, USA-SA, Middle East-SA, South America-SA and East/West Africa-SA) is fairly similar at around 2% to 6%.

Table 1 Market share of major trade routes

2007 2008 Estimates

Imports(TEUs)

Exports(TEUs)

Total(TEUs)

Marketshare

Imports(TEUs)

Exports(TEUs)

Total(TEUs)

Marketshare

Europe 245,000 240,000 485,000 23% 265,000 285,000 550,000 23%Mediterranean 70,400 55,600 126,000 6% 72,000 62,000 134,000 6%USA 69,000 54,000 123,000 6% 75,000 65,000 140,000 6%FE incl. Indian Ocean

701,000 310,000 1,011,000 48% 735,000 420,000 1,155,000 48%

Middle East 58,500 65,000 123,500 6% 62,000 70,000 132,000 6%SouthAmerica

100,000 19,000 119,000 6% 110,000 25,000 135,000 6%

West Africa 6,000 88,000 94,000 4% 6,500 95,000 101,500 4%East Africa 2,500 32,500 35,000 2% 3,000 39,000 42,000 2%Total 1,252,400 864,100 2,116,500 100% 1,328,500 1,061,000 2,389,500 100%

Source: Monthly statistics of National Port Authority (NPA), SA

There are 11 core shipping lines serving the FE-SA trade. Maersk is the most important shipping line with a market share of 22% in 2006, with that share increasing to 29% in 2008. MSC is the second-largest player, with a market share over the last three years of around 19%. Both MISC and K Line have expanded their business in SA successfully since 2006. Their market shares doubled. On the contrary, the market shares of Evergreen

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and COSCO have dropped by one third since 2006. Two major shipping lines, Maersk and MSC, account for around 50% of the market share. The other nine shipping lines share the other 50% of the market. According to the EC’s definition of a ‘dominant’ shipping line, it can be said that on the FE-SA trade, Maersk is the only dominant shipping line.

At this stage, it is too early to draw a conclusion on the abuse of the dominant position by overcharging. More data are needed to examine dominance issues by comparing sea freight rates on the same route charged by conference and non-conference members. As explained in the previous section, this can be verified through a comparison of unit sea freight rate per nautical mile among all of the routes operated by the same company, which draws from a calculation of (BAS+BAF+CAF)/distance of the route concerned. To examine additional evidence of overcharging, an attempt will be made to compare overall sea freight rates of the above shipping lines to those of non-conference freights, applying the yardstick method.

4 Freight analysis in SA trade routes

4.1 Comparison o f freight rates in SA trades

The trade between the FE and SA is provided by several shipping lines. Some of these shipping lines extend the trade to the East Coast of South America (ECSA).

To compare the sea freight rates on the same basis, the sea freight rate is divided by the port-port distance; therefore, this section compares the differences between the ‘unit sea freight rate per nautical mile’ (USFR/nm) on all the major trade routes on the same basis. Two steps are followed. The first step examines the freight rates of all major SA trade routes in order to select the freight rates of relative competitive shipping lines as the benchmark and to find the differences between the freight rates among these trade routes. The second step consists of a global comparison: the freight rates of Maersk on major trade routes are used as a basis to compare with SA rates to find out any differences between them and further to examine whether overcharging exists. Based on confidential freight data on major trade routes collected from dominant shipping lines (see Appendix 1), a comparative study is made to examine the potential existence of overcharging in relation to SA trade routes. The highest unit sea freight rates are found on the Middle East-SA and the ECNA-SA trade routes. The lowest unit rates are found on three routes: the Shanghai-SA link, the Kaohsiung-SA and the Hong Kong-SA route. Table 2 shows the average unit sea freight rates on these trade routes.

The USFR/nm charged on Greater China-SA route is the lowest among all trade routes in SA. Among USFR/nm of all trade routes, the one charged in the Middle East-SA trade is the highest (i.e., 69% higher than the Greater China-SA route), ECNA-SA is the second highest; and the USFR/nm charged is 47% higher.

To find out whether shipping lines in this market overcharge on their sea freight rates, we collected the BAS, BAF and CAF of 40-foot containers on the major lines serving the FE to SA trade route, as shown in Table 3.

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Table 2 Average unit rate charged in SA trade routes - situation in 2008

Route Dominant shipping line

Unit sea freight rate (US$/FEU/n.m.)

Differences(%)

Greater China-SA Maersk 0.45 0.45 = 100%SEAsia-SA Maersk 0.70 156%ECNA-SA Maersk/Safmarine 0.56 124%

MSC 0.66 147%Med-SA MSC 0.49 109%North Europe-SA Maersk/Safmarine 0.60 133%Middle East-SA MSC 0.64 142%

Maersk/Safmarine 0.76 169%

Source: Data collected from major shipping lines and compiled by the authors

Table 3 Comparison of sea freight rates of major shipping lines on the FE to SA routes

Route Lines BAS(US$)

BAF(US$)

CAF(US$)

All-in(US$)

Ship capacity (TEUs)

Kaohsiung-Durban Maersk 2,200 880 0 3,080 4,500MOL 2,100 880 0 2,980 3,600MSC 1,900 880 0 2,780 3,000

Evergreen 2,400 880 0 3,280 2,700HK-Durban Maersk 1,950 880 0 2,830 4,500

MOL 1,900 880 0 2,780 3,600MSC 1,800 880 0 2,680 3,000

Evergreen 2,200 880 0 3,080 2,700Shanghai-Durban Maersk 2,050 880 0 2,930 4,500

MOL 2,100 880 0 2,980 3,600MSC 1,900 880 0 2,780 3,000

Evergreen 2,200 880 0 3,080 2,700Singapore-Durban Maersk 2,750 880 0 3,630 4,500

MOL 2550 880 0 3430 3600MSC 2400 880 0 3280 3000

Evergreen 2600 880 0 3480 2700

Note: 40’ Container, rates effective for the 2nd quarter, 2008.Source: Data collected from major shipping lines and compiled by the authors

As far as the sea freight rates are concerned among the routes between Shanghai, Hong Kong, Kaohsiung and Singapore to Durban Port, Evergreen’s sea freight rates are mostly higher than the other company’s rates. One interesting finding from interviews with several senior managers in Taiwan and the Greater China is that BAS charged on the routes ranges between US$2,200 and 2,400. According to the BAF data for May 2008,

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there are no differences in BAFs charged by the major shipping lines, although there are differences in port distances and the bunker consumption of the container ships deployed.

It is surprising to note that the USFR/nm charged on the South East Asia-SA route is 56% higher than that on the Greater China connection. Singapore in Southeast Asia is the last port of call on the westbound FE-SA trade route. The shipping distance to SA is around 1,600 nautical miles shorter in comparison with Kaohsiung, Shanghai and Hong Kong. But the sea freight rate, in terms of BAF, is the same with ports in the Greater China, and the BAS is even higher than for the other ports. In shipping practice, when major international forwarders negotiate with shipping lines on the basis of BAS, BAF and CAF, shipping lines are asked to offer a competitive ‘corridor freight rate’ to cover major ports in the region (for example, Greater China, and Southeast Asia). Therefore, there is no big difference between sea freight rates among the different routes.

An investigation on the slot utilisation of a container ship deployed on the westbound FE-SA trade route shows that 85% of the total carrying capacity has been assigned to Shanghai, Kaohsiung, and Hong Kong in the Greater China, while only 15% of the carrying capacity is linked to the port of Singapore. This observation could refer to a cycle effect: as fewer slots are assigned to Singapore, the port faces a higher USFR/nm on the SA route. This relative overcharging by shipping lines on the Singapore-SA route might in turn lead to an even lower demand for cargo on the Singapore-SA link and thus even fewer slots assigned to the port.

4.2 Sea fre ig h t rate vs. shipping distance analysis

As an alternative approach to answering the question of overcharging on the SA route, this sub-section presents an analysis of the co-relationship between distance and sea freight rates on the basis of collected ‘all-in’ rates and distance information of the dominant shipping line (Maersk), serving major routes in the world. The freight rates on East/West trade routes have been selected as a yard-stick to test overcharging on SA trade routes, because the East/West trade routes can be considered as the most competitive ones.

In view of finding out whether or not overcharging exists on the SA trade routes, the sea freight rates charged by Maersk on major East/West trade routes have been collected and used as a benchmark. Similar to the earlier analysis, the definition of sea freight rate includes three major components: BAS, BAF and CAF. The sea freight rates collected are related to the second quarter of 2008 (see Appendix 1). The statistics software SPSS has been used to analyse the relationship between the shipping distance and the sea freight rates.

Figure 1 shows that there is generally a strong relationship between shipping distance and sea freight rates charged by Maersk on the East/West trade routes (despite the differences in vessel sizes that might be deployed on the different routes), which will be dealt with in the next section as a yard-stick to find the differences between the sea freight rates charged on SA trade routes.

Appendix 1 compares the freight rate based on USFR/nm in greater detail. Generally speaking, the USFR/nm charged on the FE-SA and FE-Australia routes are much higher than the East-West routes. In the next section, this study examines whether this finding can be largely attributed to differences in vessel operating costs on the respective routes.

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Figure 1 Relationship between shipping distance and the sea freight rates charged on East/West routes (see online version for colours)

Sea freight rate (US$)

4000

3000

2000

Observed

Linear10004000 5000 6000 7000 8000 9000 10000 11000 12000

D istance (n .n i.)

Dependent Mth Rsq d.f. F Sigf bO blRate LIN 0.713 31 77.01 .000 792.184 0.2485

4.3 Sea freight rate vs. operating costs

The popular ship types deployed on the SA trade ranged from 2,500 to 3,500 TEU in 2008. Only Maersk and Hamburg Sud deployed Panamax vessels with a carrying capacity of 4,500-5,500 TEU. The details of the routes and ships deployed can be found in Appendix 2. The ship size deployed on the FE to SA routes varies from 2,500 TEU to 4,500 TEU. There are considerable differences in the operating costs between a 2500-TEU and a 4500-TEU ship. Meanwhile, there are other factors influencing the charter rates, for example, the ship age and the fuel consumption of the ship’s engine. This fact is well reflected in the time-charter rate of different sizes of containerships. Table 4 shows a comparison of charter rates per TEU per day by ship capacity.Table 4 Containership time charter rates (measured by US$ per TEU per day)

Ship capacity Charter rate (2nd quarter, 2007) Comparison2,000-2,299 TEU 9.80 100% (=Base)2,300-3,400 TEU 8.57 87%4,300 TEU 6.34 65%

Source: Drewry Shipping Consultants (2007)

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As shown in Table 4, the charter rate per TEU per day of a 4,300-TEU containership is much cheaper than the rate of a 2,200-TEU ship. It means that the base rate of a 4,300-TEU container ship should be much lower than the 2,200-TEU ship. However, Maersk deploys container ships with a capacity of 4,500 TEU on the FE to SA route, but still charges a higher rate than some of the other shipping lines, such as MOL and MSC deploying smaller ships on the same route. The major differences between East/West and SA trade routes are the operating costs of a container ship. A Drewry Shipping Consultants (2007) report says that the operating costs of a containership with the capacity of 4,000 TEU deployed on the FE-SA route is 60% higher than a ship with a capacity of 10,000 TEU operated on the FE-EU route, while that of a 6,000-TEU ship deployed on FE-ECNA route is 36% higher than the 10,000-TEU ship. According to our investigation of the fuel consumption of container ships deployed on the FE-SA route, there is approximately a 10% difference between the container ships with different carrying capacities.

The fuel consumption of container ships sailing at an economic speed, measured by tons per TEU per day, is reflected in the figure of the vessel deployed by Evergreen at the highest rate. In comparison, the fuel consumption of the vessel deployed by Maersk Line is about 10% lower than the Evergreen vessel, but there are no differences between the BAFs charged.

It can be concluded that the sea freight rates charged by Maersk are relatively high in terms of both BAS and BAF rates on the FE-SA route, ignoring economies of scale drawn from the larger sized container ships deployed on this route.

4.4 Discussion

The results in the previous sections show that the sea freight rates charged by shipping lines on some major trade routes in SA are higher than the sea freight rates on the East/West trade routes. There are several possible explanations for the observed differences in sea freight rates:

• from a business viewpoint, higher sea freight rates may be caused, among others, by differences in perceived business risks, cargo volume availability, the commodity mix, load factor, the imbalance factor, capital costs and the level of competition faced by shippers

• from an operational perspective, higher sea freight rates may be caused, among others, by restricted port capacity, lower operational efficiency and port congestion

• higher sea freight rates may be part of overcharging, a premium collected for business risk, and the restricted port capacity and other costs, which requires further comprehensive study.

In this study, the yardstick method is applied to find out whether or not the dominant shipping line overcharges on the FE-SA trade route. The sea freight rates on the most competitive trade route, i.e., the East-West trade route, are selected as the benchmark to quantify the rate of overcharging.

As shown in Figure 2, the sea freight rates charged by Maersk on the FE-SA trade route are located on two opposite sides. The sea freight rates charged on the Greater China-SA trade routes are located in the ‘low’ level, which implies the sea freight rates

Shipping line dominance and freight rate practices on trade routes 167

charged are similar to rates applicable on the East-West trade route. Therefore, Maersk does not overcharge on the Greater China-SA trade route.

Figure 2 The sea freight rate charged by Maersk on the FE-SA trade routes (see online version for colours)

4500

4000

' EL3000 ■ETG reater Oiina-'SA

2000

1500 10000 TEUs

1000- 4 0 0 0 TEUs

500

4000 6000 Distance (n.m.)

10000 12000

Source: Maersk Line, compiled by authors

There are two possible explanations for the high sea freight rates charged on the SE Asia-SA trade route. The first is high opportunity cost of accepting cargo from SE Asia to SA, while the second is the limited supply of space in SE Asian ports. As discussed in the previous section, around 85% of the slot space on container ships deployed on the FE-SA trade route is assigned to ports in Greater China. As a consequence, there is a smaller supply of slots for calls in SE Asian ports, like Singapore and the port of Tanjung Pelepas. As a result, sea freight rates are maintained at a higher level.

The comparison of the sea freight rates charged by major shipping lines in relation to Singapore shows there are little differences among them, which cannot be used as evidence to conclude that Maersk overcharges on the SE Asia-SA trade route.

This study also examined the differences between the USFR/nm charged by dominant carriers on major trade routes, taking the East-West trade route as the benchmark to find the rate of overcharging. As shown in Table 5, the USFR/nm charged on the Greater China-SA trade route is lower than the benchmarking rate. It can be said that the Greater China-SA trade route is the most competitive one in tenns of USFR/nm.

168 T. Chen et al.

Table 5 Comparison of unit sea freight rate of dominant carriers on major trade routes

Route Dominant shipping line

Ship size (TEU)

Unit sea freight rate (US$/n.m.)

Overcharge rate (%)

FE-WCNA1 Maersk 8,000 0.38/0.52 Benchmark = 0.52FE-North Europe2 Maersk 10,000 0.30/0.48 -8%Greater China-SA Maersk 4,500 0.45 -13%SE Asia-SA Maersk 4,500 0.70 35%

Notes: 'The unit sea freight rate on the FE-WCNA route = 0.38 * 1.36 = 0.52. Theoperating costs of a 6,000 TEU container ship are 136% of a 10,000-TEU ship.

2The unit sea freight rate on the FE-North Europe route = 0.30 * 1.60 = 0.48. The operating costs of a 4,000-TEU ship are 160% of a 10,000-TEU ship.

The yardstick method consists of comparing the market price between a monopolistic/oligopolistic market with a relatively competitive market. As one of the findings of this study, shown in Table 5, the USFR/nm charged on the East/West trade route has been considered to be the most competitive one and the lowest one. In this case, no evidence of overcharging has been found. But there are still some issues to be considered when comparing the operating costs and the items charged by dominant shipping lines. The carrying capacity of container ships deployed on the FE-SA trade route varies from 2,500 TEU to 5,500 TEU. Therefore, the operating costs per TEU per day are different by ship size. But the base rates charged by shipping lines do not reflect these differences.

Furthermore, because of the differences in the history of engine types, ship capacity and vessel speed, there must be differences between the fuel consumption of container ships. However, in practice, the BAFs charged by shipping lines are almost the same. It can be said that the sea freight rates charged by Maersk are relatively higher in terms of both the BAS and BAF rates on the FE-SA route, ignoring economies of scale drawn from the larger sized container ships deployed on this route.

Overall, this study can conclude that there is no strong evidence that Maersk is overcharging on the FE-SA trade route.

5 Conclusions

This paper examines possible overcharging practices and shipping line dominance on the FE-SA trade route. Two approaches have been applied. The first approach involved an examination of the differences between the sea freight rates charged by the dominant shipping lines. The sea freight rates charged on the East/West trade route were used as the benchmark against which to evaluate whether overcharging practices exist. The second approach encompassed a comparison of the differences in the unit sea freight rate per forty foot container per nautical mile (USFR/nm). The unit sea freight rate on the East/West trade route was used as a reference base to assess whether or not overcharging by shipping lines exists on the FE-SA route.

Shipping line dominance and freight rate practices on trade routes 169

The findings in this paper can be summarised as follows:

• There are eight major trade routes linked to SA (as shown in Table 1). Among the eight major trade routes in relation to SA, in total four companies have more than 25% of the market. From the perspective of the EC definition on dominant position, Maersk has a dominant position on five trade routes, while MSC on four trade routes, and MOL and Unicom on only one trade route, respectively.

• Out of 11 items of a sea freight rate charged by shipping lines, the base rate (BAS) and BAF account for approximately 88% of the total freight rate on the FE-SA trade route.

• In the second quarter of 2008, the sea freight rates charged on the routes between major ports in Greater China and SA ranged between US$2,800 and $3,200.The lowest unit sea freight rates are found on the Greater China-SA trade routes.

• The sea freight rate charged by Maersk are relatively higher in terms of both the BAS and BAF rates on the FE-SA route, ignoring economies of scale drawn from the larger sized container ships deployed on this route.

• From the perspective of the 25% criteria of EC regulation, no evidence could be found that the dominant shipping line is overcharging the sea freight rate on the FE-SA trade routes.

While no evidence of overcharging by the dominant shipping line has been found, there are still some issues related to the operating costs and the items charged by dominant shipping lines, which should be reflected in evaluating the effects of shipping line dominance.

The FE-SA trade route is served by 95 vessels: the capacity of 71 vessels is lower than 3,000 TEU and another 24 vessels have a capacity of 4,000 TEU. As a consequence, the sea freight rate is determined by the cost of smaller ships, which is much higher than for the vessels deployed on the major East/West trade routes. If large container ships in the medium or longer term could take up a more prominent role in this trade, then the sea freight rate is expected to decrease by economies of scale drawn from the larger sized container ships. In light of this, it is recommended that SA accelerates the establishment and promotion of a container hub port serving the entire Sub-Saharan region so that it can attract mega container ships to boost competition between carriers and to reduce the unit sea freight rates.

The present study offers room for further research in this area. The analysis presented in this paper could be further refined if an even more detailed freight structure (e.g., including container handling charges) at SA ports would be included. Also, it is worthwhile examining how shipping lines incorporate business-related and operational factors, such as business risks, cargo volume availability, commodity mix, load factor and port capacity restrictions, into their pricing strategy. A quantification of these influencing factors could render a more comprehensive picture on existing (overcharging practices.

170 T. Chen et al.

Acknowledgements

This paper builds further on economic research dealing with container port development in SA. The authors would like to thank Matthew Flynn for fruitful discussions. The authors are also grateful to Transnet for providing data on liner services in relation to SA. The views and opinions expressed by the authors do not necessarily state or reflect those of Transnet. In particular, the second author would also like to acknowledge in the process of preparation of this paper for this Journal that this work was supported by a National Research Foundation of Korea Grant which was funded by the Korean Government (MOEHRD) (NRF-2011-413-B00008).

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Shipping line dominance and freight rate practices on trade routes 171

Appendix 1

Table AÍ Sea freight rates of shipping routes (US$/FEU)

Region Routeno. Port/port Distance

(n.m) BAS BAF CAF All-in(US$).

us$/n.m.

Typicalvesselsize

FE-Australia 1 Kao_Brisbane 3,888 2,150 900 0 3,050 0.784 4,5002 HK_Brisbane 4,080 1,500 900 0 2,400 0.588 TEU

3 Sha_Brisbane 4,231 1,500 900 0 2,400 0.5674 Sha_Sydney 4,231 1,500 900 0 2,400 0.5675 Kao_Sydney 4,282 2,159 900 0 3,059 0.7146 HK_Sydney 4,511 1,500 900 0 2,400 0.5327 Kao_Melboume 4,847 2,150 900 0 3,050 0.6298 HK_Melboume 5,076 1,500 900 0 2,400 0.4739 Sha_Melboume 5,193 1,500 900 0 2,400 0.462

FE-WCNA 10 Tokyo_LA 4,854 2,200 250 0 2,450 0.505 8,00011 Kao_Seattle 5,502 2,100 250 0 2,350 0.427 TEU

12 HK_Seattle 5,742 1,675 250 0 1,925 0.33513 Yta_Seattle 5,820 1,800 250 0 2,050 0.35214 Sha_Seattle 5,096 1,800 250 0 2,050 0.40215 Kao_Vancouver 5,520 2,100 250 0 2,350 0.42616 Sha_LA 5,708 1,800 250 0 2,050 0.35917 Kao_San Francisco 5,807 2,100 250 0 2,350 0.40518 HK_San Francisco 6,044 1,675 250 0 1,925 0.31819 Kao_LA 6,117 2,100 250 0 2,350 0.38420 HK_LA 6,343 1,675 250 0 1,925 0.30321 Yantian_LA 6,463 1,800 250 0 2,050 0.31722 Sin_LA 7,669 1,800 250 0 2,050 0.267

FE-SA 23 Kao_Dbn 6,402 2,200 880 0 3,080 0.481 4,50024 HK_Cpt 6,917 1,950 880 0 2,830 0.409 TEU

25 Kao_Cpt 7,086 2,200 880 0 3,080 0.43526 Shanghai_Cpt 7,699 2,050 880 0 2,930 0.381

Note: The rates are effective on 2nd Quarter, 2008.Source: Major Shipping Line, compiled by the authors

172 T. Chen et al.

Table Al Sea freight rates of shipping routes (US$/FEU) (continued)

Region Routeno. Port/port Distance

(n.m) BAS BAF CAF All-in(US$).

us$/n.m.

Typicalvesselsize

FE-EU 27 Sin_Rotterdam 8,288 1,900 1,034 323 3,257 0.393 10,00028 HK_Rotterdam 9,742 1,700 1,034 289 3,023 0.310 TEU

29 T aipei_Rotterdam 9,903 2,300 1,034 391 3,725 0.37630 Y antian_Rotterdam 9,842 1,800 1,034 306 3,140 0.31931 Toky o_Rotterdam 11,186 1,900 1,034 323 3,257 0.29132 Kao_Rtd 9,903 2,000 1,034 340 3,374 0.34133 Shanghai_Rtd 10,519 1,800 1,034 306 3,140 0.29934 Taipei_Hmb 10,156 2,400 1,034 408 3,842 0.37835 HK_Hmb 9,995 1,700 1,034 289 3,023 0.30236 Shanghai_Hmb 10,772 1,800 1,034 306 3,140 0.29137 Kao_Hmb 10,156 2,000 1,034 340 3,374 0.33238 Sin_Hmb 8,541 1,900 1,034 323 3,257 0.38139 T aipei_Antwerp 9,908 1,950 1,034 332 3,316 0.33540 Sin_Antwerp 8,293 1,900 1,034 323 3,257 0.39341 T aipei_Southampton 9,683 2,400 1,034 408 3,842 0.39742 Shanghai_Southampton 10,299 1,800 1,034 323 3,257 0.31643 Taipei_Bremen haven 10,108 2,000 1,034 340 3,374 0.33444 HK-Bremenven 9,947 1,700 1,034 289 3,023 0.30445 Sin-Bremenhaven 8,002 1,900 1,034 323 3,257 0.40746 Shanghai-Bremenhaven 10,724 1,800 1,034 306 3,140 0.293

Note: The rates are effective on 2nd Quarter, 2008.Source: Major Shipping Line, compiled by the authors

Shipping line dominance and freight rate practices on trade routes 173

Appendix 2

Table A2 Routes and fleet deployed in FE to SA and ECSA trade of main carriers (2008)

Alliance/line Trade Service Averagecapacity

Number o f ships

Maersk+ Safmarine South Africa (SA)

SA-1 4,500^1,800 Safmarine: 4; Maersk: 3

SA SA-2 3,100^1,200 Safmarine: 3; Maersk: 4

Hamburg-Sud+Maersk SA+ECSAmer ASAS 5,500 Hamburg: 6; Maersk: 4

NYK+HMM SA+ECSAmer NEK 2,500-2,700 NYK: 8; HMM: 2

MOL+PIL EC S Amer CSW 2,600-3,600 MOL: 8; PIL: 3

MOL SA ZAX 1,600 MOL: 4EMC+COSCO EC S Amer ESA 2,300 EMC: 6;

COSCO: 3SA FAX 2,700 EMC: 5;

COSCO: 3K-Line+MISC+PIL SA ASA 3,500 K-Line: 3;

PIL: 1; MISC: 3

CMA+CSCL+Marubu SA+ECSAmer SEAS 2,500-2,800 CMA: 5; CSCL: 3; Maruba: 2

MSC SA CHEETAH 72,500-3,000 MSC: 7CSAV ECSAmer ASAX 2,500-3,100 CSAV: 9

Source: Data collected from major shipping lines and compiled by authors