June 2016 Newsletter

Jun 19, 2016 | Member Newsletters

In this month’s newsletter we include a link to a Member Survey, which we ask all NZSC members to complete and return as per the instructions on the form. Your responses will help us to compile an accurate profile of the membership, for use in our external communications. Commercially sensitive information is not required.

New Container Weight Rules in Effect Today – Are You Ready?

Shippers should now be well-prepared for the implementation of the SOLAS Verified Gross Mass (VGM) requirements. The IMO’s new regulations, which require a shipper exporting a container to provide its VGM before loading onto an international vessel, take effect from 1 July. In order to ensure that vessels transiting during that period are not delayed due to a lack of VGM information, the NZ Ports Working Group requires that changes in process to ensure compliance must be operating by 15 June. From today all containers must have a VGM before they will be allowed to enter a container terminal.

While some markets would still appear to be grappling with how the compulsory weight regulation will work, planning for the new regime in New Zealand has been underway for some time through an industry steering committee. This committee is made up of representatives of ICLC,CBAFF, NRC, Ports Working Group and NZSC, and has focused on identifying and resolving potential issues so that a consistent process can be implemented nationally.

The Ports Working Group has advised that online portals for each port are now available for shippers to provide the VGM of their containers. Business-to-business EDI services are also available for shippers who prefer to send VGM information in this manner.

Detailed information on the VGM rules can be found on the Maritime NZ website.  This information includes the port companies’ Preparing for VGM advisory to shippers and shipping lines that spells out how the rules will apply in NZ, including the “No VGM, no entry to port ruling”.

Containers bound for the Pacific Islands

Please be aware that Pacific Island carriers using multi-cargo wharves have certain specific VGM requirements. If you are not already up to speed with these requirements you are advised to contact your carrier.

Transhipments – 3 Month grace period for containers loaded before 1 July and then Transhipped

Container Liner Consolidation – Mergers and Mega Alliances

The shakeup of carrier partnerships has dominated shipping news in recent months, with new alliances emerging in reaction to recent merger and acquisition activity. It is the latest step in an industry reorganisation that is divvying up the global business into partnerships to save costs.

The latest round of consolidation amongst container lines began in late 2015 with CMA CGM announcing its intention to purchase Singapore’s Neptune Orient Line (NOL).  Just one week later the merger between China’s two largest carriers, Cosco and China Shipping, was announced (regarded as the greatest shakeup since Maersk Line bought P&O Nedlloyd in 2005).

These moves had implications for three of the (then) four alliances – O3, G6 and CKYHE, which have subsequently consolidated in a “mega alliance musical chairs”, leaving only the dominant 2M Alliance of Maersk and MSC intact.

In the 2M Alliance, Denmark’s Maersk Line, the world’s biggest container line by capacity, is teamed up with the second largest carrier, the Swiss-Italian Mediterranean Shipping Co. Together these two carriers hold about 28% of the world’s container-ship capacity, according to industry data firm Alphaliner, although only specific ships and trade circuits are included in the alliance agreements.

In late April France’s CMA CGM and China’s COSCO Container Lines (the world’s third- and fourth-largest lines by capacity), Taiwan’s Evergreen Line and Hong Kong’s Orient Overseas Container Line formed the Ocean Alliance, launching a new round of deals to share vessel space The move unraveled other pacts, triggering a new round of deal-making.

Early May saw the announcement of the THE Alliance, between:

Hapag-Lloyd, Taiwan’s Yang Ming, South Korean Hanjin and the Japanese trio of K Line, NYK and MOL. This grouping has signed an initial five-year agreement, which, subject to regulatory approval will take effect in April 2017.

THE Alliance is expected to add a seventh member due to ongoing merger discussions between Hapag-Lloyd and United Arab Shipping Company (UASC).

THE Alliance includes most of the companies left out of the M2 and Ocean Alliances. It will combine around 3.5m TEU of capacity, equivalent to 18% of the global container fleet capacity, and deploy over 620 ships in total. Should the Hapag-Lloyd / UASC merger proceed, the overall capacity of THE Alliance would top 4m TEU.

In the trans-Pacific, the Ocean Alliance would have a 28.9% share, while the 2M currently controls 15.9%. It’s not yet clear what capacity THE Alliance would have on the two major trade lanes.

So what does it all mean for shippers?

Shipping alliances are essentially mega vessel sharing agreements. They involve sharing vessels and routes to save costs, and sharing assets and costs to allow better port coverages, sailing frequencies and onshore co-ordination of services. Although they co-operate operationally, alliance members still compete on price and are forbidden to market services together.

For now, shippers are taking a longer-term view as to the impacts of the new alliances. It’s clear that there won’t be any certainty until the alliance structures are confirmed – and industry commentators are watching closely to see whether the alliances receive the regulators’ blessing. Some note that because regulators consider whether alliances could cause an unreasonable decrease in service, the impact the alliances will have on port congestion will be a factor taken into consideration.

The Wall Street Journal notes that the key concern when considering carrier concentration should be the massive buying power of the new structures. Competition policy has traditionally been preoccupied with the fear that concentration would lead to higher prices. This continues to be an issue, especially when consolidation in the sector is used to harmonise rates. In practice however, ocean shipping rates are very low and going lower. Low rates are often presented as proof that the sector remains fragmented and highly competitive. But focusing on ocean freight rates gives a misleading impression of the concentration of container shipping; it ignores the enormous buying power that large container lines and their alliances have over ports, the cargo terminals and the services that they purchase. The larger the carrier or alliance, the larger the impact it can have on a port. The threat that a carrier could divert its ships means a shipping line can effectively eliminate a port’s position in global trade

Others have been quick to note that the large number of carriers in THE Alliance would make cooperation highly complex and hinder the level of agility and responsiveness to dynamic industry developments. Converting scale into absolute lowest costs will be determined by the efficiency of the overall alliance network. To truly optimise a network requires the processing of intimate cost and revenue proprietary data at an extremely granular level to determine which network structure will generate the highest yield for the alliance in totality. For reasons of confidentiality between what are essentially competitors, coupled with anti-trust scrutiny, this can never be achieved by the alliance internally. They will need to find an innovative solution to this, to realise true cost leadership

Being part of an alliance has become imperative for the industry, which is marred by a 30% oversupply of vessels in the water and rock-bottom freight rates. Ultimately alliances – or mergers – won’t reduce the container shipping industry’s fundamental problem of overcapacity. The big issue remains one of container liner profitability and exactly how the new structures will support that remains to be seen.

Maritime Law Association Conference

Charles Finny (Saunders Unsworth) attended the annual conference of the Maritime Law Association of Australia and New Zealand and spoke on a panel looking at the implications of the proposed changes to the Commerce Act to remove the exemption for cartel behavior by shipping lines.   Other speakers included David Blacktop, Senior Counsel from the Commerce Commission and Lucy Hare from Chapman Tripp.  Charles outlined our latest position as set out in the letter to Minister Goldsmith.  The view of the room was quite strongly that the exemption needed to be ended and that the proposed two year transition period appeared to be a reasonable one.  The Commerce Commission explained how the new regime would work, but pointed out that shipping lines had yet to engage (as they had been invited to many times) on the fine detail.

There were no insights on when the Commerce Act (Cartels and other matters) Amendment Bill will be passed.

International News

New Panama Canal scheduled to open June 26

The opening of the new Panama Canal remains in the shipping headlines with commentators noting that there are still too many moving parts to predict the exact impact on shipping.

The original Panama Canal was opened by Woodrow Wilson in 1913; in the 103 years since it has become an international shipping bottleneck as container ships grew too large for the locks. Pundits predict that much of that will change this year when the $US5.25 billion effort to expand the canal reaches its long delayed conclusion, allowing ships more than 2 ½ times the size of the current limit to pass through the waterway.

Many commentator believe the expanded canal will have profound effects as the cost of shipping from Asia to ports in eastern US is likely to drop significantly – bigger ships, more economically efficient, lower per unit costs – which could see a sizable loss over time for western railroads, and a predicted drop in traffic to ports at Los Angeles and Long Beach. But some industry watchers are unconvinced – even bigger ships will be going to the West Coast than through the Panama Canal.

Another predicted impact is the shift in the amount of cargo taking a one-to-two week longer trip through the Panama canal and to the East Coast, which would mean that much more cargo is at sea at any given time, and shipping companies would require more containers to maintain the flow of goods.

One of the many moving parts is future weather patterns: the canal is restricted by water levels in Lake Gatun, which are impacted by El Nino weather.


Southeast Asia has overtaken Africa as the Global Hub for Ocean Piracy

According to the 2016 Allianz reP.,ort, piracy attacks in Southeast Asia are on the rise; the region is now responsible for approximately 60% of worldwide attacks, and Vietnam a new hotspot..

The increase in Asian piracy comes as attacks off Africa’s east coast have fallen sharply as ships moving through the area have stepped up their defenses. The report notes that pirates are increasingly using high tech software to target vulnerable ships (e.g. identify target cargoes, obtain information about locations) and calls for more robust cyber technology.

Update from Global Shippers Forum

International Forum to Explore Shipping Industry Challenges

The Global Shippers’ Forum has called on the liner shipping industry to urgently address the poor quality of service afforded to shippers since the consolidation of the world’s top 20 lines into ‘super alliances’. GSF has urged the establishment of a Maritime Industries Supply Chain Forum at an international level to address the full range of challenges facing the sector.

One year on from the publication of the OECD’s International Transport Forum’s report on ‘The Impact of Mega Ships’, GSF says that there has been no serious response by the shipping industry to the issues it identified – namely the wider external costs imposed by mega ships and alliances on others in the supply chain, including shippers, port and terminal operators and governments.

European Commission Price Signalling Inquiry Leads to New Carrier Commitments

The European Commission has confirmed that the 15 shipping lines involved in a three-year inquiry into price signalling have agreed to change their future pricing regimes. This is a major victory for shippers; the FTA’s British Shippers’ Council first raised concerns about uncompetitive behaviour in 2010. The lines have agreed that they will cease to announce general rate increases and instead publish the actual prices available to customers on an individual basis.

Report from IMO -Actions on Climate Change and Energy Efficiency

GSF participated in the 69th session of the Marine Environment Protection Committee (MEPC) held at the IMO in April.

The MEPC had previously agreed to take a three-stage approach to tackling climate change – first to gather data on fuel consumption and energy efficiency; second to analyse the data; and third to consider further measures to reduce emissions.

Separately, following the Paris Climate Change agreement, several member states, shipping industry bodies and environmental NGOs submitted papers asking the MEPC to make faster progress, and to start work on developing long-term greenhouse gas reduction objectives, running parallel to the three-stage approach.

The debate on data collection was whether to collect fuel consumption information only, or whether to include robust energy efficiency data. GSF had submitted a paper reiterating its call for robust energy efficiency data to ensure that the analysis and policy development phases are able to assess the energy efficiency of the sector. Unfortunately, the consensus among member states (supported by shipping industry associations) was to collect only fuel consumption data.

The main reason given by member states was that politically, agreement on a minimal, limited system was the only way to ensure the data collection was approved. Shipping lobby groups were pleased because this means that future climate change policies are more likely to be limited to a simple ‘green levy’ on fuel, the costs of which could be passed on to customers.

GSF prefers a policy solution that would incentivise greater energy-efficiency, create the right incentives and share cost burdens. Without the collection of energy efficiency data, such a solution will be very difficult to create under the three-step process. This outcome is, therefore, disappointing from our point of view.

Debate: further IMO action on climate change

There was an open debate towards the end of the week on whether the IMO should take quick action to develop its strategy on climate change, or instead follow the process of the ‘three step approach’.

A large number of member states (primarily Europeans plus Canada, USA and several smaller Flag States amongst others), supported by shipping industry groups the ICS (International Chamber of Shipping) and WSC (World Shipping Council), proposed faster action, to determine what a greenhouse gas emissions objective could be for the maritime sector.

However, there were roughly an equal number of member states (China, Russia, India, Japan, Brazil and several African nations amongst others) that opposed quicker action. They noted the prior agreement to use the three-stage approach, and called for action to be deferred until the fuel consumption database had been launched, with sufficient data provided to enable analysis.

Although this view is understandable from the point of view of evidence-based policy making, in practice it would mean no discussion on climate change objectives or further actions until the early 2020s, when sufficient data are available to draw conclusions. GSF spoke at the plenary debate in support of the more accelerated approach, noting the crucial importance of avoiding trade disruption when setting these policies and of involving shippers in the discussions.

The plenary debate was long and rather political and legalistic, with several objections to quicker action based on considerations around the IMO role in regulating shipping, versus the UN Framework Convention of Climate Change approach of requiring action at national level. In the end the Secretary General of the IMO asked delegates to enable the debate to continue at the next MEPC meeting, and the Chair was able to reach consensus that a working group would be set up to discuss this in detail in October.

This creates an opportunity for GSF to submit a paper and speak to member states at the next MEPC in October. It will be important to build support and align with supportive governments and interest groups. This will be a key work item over the next few months.

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