Saturday, June 30, 2012

World Shipping Council Speaks Out On Container Freight Rate Controversy

WSC Rejects Federal Maritime Commission Interference
Shipping News Feature

US – Following the Federal Maritime Commission’s (FMC) solicitation of views appertaining to the publication of an index of shipping container freight rates when dealing with agricultural exports, the World Shipping Council (WSC) has pulled no punches in its response saying such indices violate the FMC’s own current regulations and intrude upon service contract confidentiality. The WSC raises several logical questions such as whether there is a need for such an index, why only agricultural rates should be considered and one might interpret its responses to the FMC solicitation as somewhat scornful of the Government agency’s naivety.

The WSC points out that the Ocean Shipping Reform Act (OSRA) was crafted specifically to create a new and market driven structure for ocean freight carriage service aimed at producing a system of confidential contract carriage with the same kinds of freedoms and risks that exist in other cargo transportation and commercial modes. The FMC’s own report, prepared two years after the introduction of the Act, noted that the legislation had resulted in 80% of liner cargo being carried under confidential service contract conditions, a 200% increase from prior to the Act, and mainly as a result of negotiations with single carriers as opposed to with conferences or alliances.

Now it would seem the FMC desires to break the confidentiality it so cherished a decade or so ago, initially at least on one sector of trade, despite its initial insistence that such information would always remain secure and never be revealed publically by the Commission. The WSC says the FMC would exceed their brief if they stray into the area where they provide information, supplied confidentially by shipping lines and their customers. There are no equivalent rate indices for road or rail haulage, carriage by inland waterway or international bulk ocean shipping or international air cargo shipping of agricultural exports or any other commodities and the WSC continues, ‘Quite aside from the fact that the Shipping Act forbids it, there is no valid basis or reason for the FMC to create a rate index with confidentially filed contracts for ocean common carriage.’

The WSC points out there is no basis to believe that Congress intended that the FMC would intervene in the realms of cargo carriage to help financial traders create a market for shipping futures, and that there is no indication that an index would result in less market volatility. Indeed as the FMC are considering the whole idea due apparently in part to lobbying by derivative brokers looking for a new market to exploit, more volatility would suit these players much better than the current comparative stability in which they have no vested interest.

The question of why the FMC are even considering a container rating index needs to be examined in some detail. Who are the shadowy figures that are so keen on this sea change in the FMC’s approach? WSC enquiries apparently were met by an FMC spokesman’s comment that advocates included ‘a fast growing NVOCC’, in other words someone who actually had no asset investment in ocean carriage and who remains anonymous. The WSC has told the FMC very clearly it is not their business to supply information on rates, confidential or otherwise, to third parties.

The WSC also points out the naivety of the FMC with regard to its comparison of any container rate indices and the Baltic Dry Index. This argument comes up regularly by those who side with creating a ‘container shipping futures’ environment but having seen the blood red lines under many of the major ocean container carriers quarterly and annual financial reports of late it is hard to see how an index will profit anyone other than those who trade in any market created by it, thus presumably resulting in potentially increased costs for shippers.

Bulk shipping involves one factor, the cost of carrying a full complement of cargo in a vessel from one coastal point on the globe to another. The costs, both fixed and variable, for such a transaction are relatively simple to calculate leaving the only questions when arranging a consignment as the cost, plus vessel size and quality of the carrier and his crew and equipment to be judged by the shipper against the best price achievable, dependant on the state of the market with regards to availability of vessels and alternative options, by the ships owner. In hard times carriers may well run at less than cost simply to keep a vessel operational but the choice is entirely theirs.

Compared to this container transport is like neuro surgery set against removal of an ingrown toenail. The more factors involved in a movement, the more leeway a carrier has to adjust prices to produce a profit overall and therefore isolating one single facet of income is somewhat of an irrelevance. Each individual movement, let alone contract, is different and a container ship carries thousands of boxes, collected from a similar numbers of exporting points to a similar plethora of destinations via perhaps dozens of separate port calls, unloading and reloading at each. To the WSC the FMC’s proposals no doubt seem naïve to say the least when the latter uses the Bulk index as an argument for a similar market for containers.

In addition to this the FMC would be venturing to entirely different territory than that occupied by the Baltic Dry. That is a market created and populated by its participants, developed by extracting and compiling specific, actual rates from specific, actual bulk shipping contracts. The proposed container index would be an artificial creation by a Government agency dealing with many more complex factors. Put simply, if you have a sizeable agricultural or other suitable bulk dry cargo, you charter a ship. If your goods fall into the category large enough to warrant a contract container rate yet too small for bulk transport does the US Government agency charged with tallying these things really believe that any exporter worth his salt (or his forwarding agent) not check out every avenue open by dealing with all available suppliers and, if possible, setting one off against the other?

The WSC argues additionally that if the FMC creates the index for common carriers it would also need to create an NVOCC index in tandem for carrier who did not have their own vessels. The FMC would be relying on data which only covered a part of the goods exported. Anything shipped from Canada or Mexico would be excluded even if it emanated from the USA and bulk cargo, which forms a huge percentage of agricultural exports, would also be excluded.

An index might also give an advantage to non US based carriers (particularly across the Canadian border) as they could see at a glance the prices being charged and adjust rates accordingly whilst US carriers would not have a reciprocal advantage. The idea of a container index, often mooted in the past, only gives a snapshot of one product using one form of transport and the WSC uses the example of grain shipments from the Midwest shipping via containers, via barge down the Mississippi and then onto a bulk vessel, or by rail to an export port and then onto a bulk vessel. There is modal competition for shipping various agricultural commodities and the idea would only provide government sponsored rate transparency for a single mode’s rates.

In addition to all these factors is the overriding point that the FMC is not privy to specific contract information but only a part of the whole picture. The minimum volumes to be carried under contract vary enormously from shipper to shipper and have a very direct influence on the rate per box quoted, tonnages and commodity values per container vary dependant on type of cargo, some contractors end up with spare quota which they pay penalties for if unused and sell them off to redeem costs, often at a loss confusing the average price quoted to the FMC, points of collection and delivery vary with terms quoted ranging between FOB and full CIF and every other possible permutation in between, meaning someone would have to assimilate and apportion the extrapolated cost from this data to give a standard measure.

If such a measure (presumably a port to port rate) was to be agreed who would analyse the overall rates and decide the percentage which applied to that part of the transaction? If the FMC, how would they verify that their estimate was correct in every case; if the carrier, who could dispute that the figures produced were true and accurate as a percentage of each individual overall movement?

The WSC’s five well measured arguments declared in the matter of the Notice of Inquiry against the adoption of a Government sponsored index are available to read in full HERE. We await the result of this one with some interest.