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High container freight rates due to market dynamics

Photo: Marcus Hand Containership at sunset
The fact-finding report by US Federal Maritime Commissioner Rebecca Dye into container liner shipping during in the pandemic concludes that despite customer perceptions of collusion and lack of competition as freight rates soared neither was actually the case.

The FMC is the US overseer of matters related to liner shipping has finally released a report two years in the making, a Fact-Finding investigation, overseen by Commissioner Rebecca Dye, with the snappy title “Effects of the Covid-19 Pandemic on the U.S. International Ocean Supply Chain: Stakeholder Engagement and Possible Violations of 46 U.S.C. &41102-c”.

Shortly after the Covid-19 pandemic reached crisis proportions in the States, the FMC initiated a fact-finding investigation to identify solutions to supply chain problems. At that time, the agency created a Task Force, with the mission of coming up with specific proposals to investigate problems in the ocean carrier marketplace. With a barrage of complaints coming from cargo owners, the main items were the high costs of moving boxes, partly attributed to the “blanked” sailings of Summer, 2020, as well as issues surrounding  demurrage and detention practices - with terminals overflowing with containers unable to move being a very visible symptom.

Importantly for the carriers, the report contains a conclusion 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 minimally concentrated. Competition among ocean common carriers, among the three major alliances and among the members in each of the alliances is vigorous….” 

Further, the report recognises that high prices for moving containers are the results of market dynamics (and not collusion), with the report noting that: “The Fact Finding Officer 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 are the product of the market forces of supply and demand.”

In a continued discussion of market dynamics the report talks about the need for an improved process of contracting ocean freight. The report puts this conclusion into emphatic wording, saying: “The Fact Finding Officer further believes that the most productive path forward for shippers and ocean carriers alike would be to enter into mutually enforceable and binding service contracts- true ‘meeting of the minds’—that are enforceable commercial documents….Without enforceable contracts, shippers are unable to protect themselves from volatile shipping rates and ocean carriers have few forecasting tools to provide the shipping capacity necessary to serve their customers.”

An important concern raised relates to compliance with the FMC’s “Interpretive Rule on Demurrage and Detention”- measures aimed at “…incentivizing the movement of cargo and promoting freight fluidity,” which were enacted in Spring, 2020, as Covid-19 disruptions were raging, following an earlier FMC “Fact Finding” report. A concern is also raised regarding “the numerous new charges imposed on US shippers and truckers by ocean carriers and marine terminals though tariffs”.

Commissioner Dye’s report contains numerous suggestions and recommendations for reducing friction in the movements of cargo- and in practices related to the returns of empty containers - a complaint which has led to vociferous complaints from US agricultural exporters.

Its publication comes two months after the US Senate has passed its Ocean Shipping Reform Act of 2022. If this legislation moves successfully through the House of Representatives. as many observers expect that it will do, and is then signed into law by President Biden, FMC’s regulatory clout, including its ability to initiate investigations, would be greatly increased.

Reader resources:

https://www.fmc.gov/commissioner-dye-releases-final-report-for-fact-finding-no-29/

https://www.law.cornell.edu/uscode/text/46/41102

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