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Liner shipping – a tragedy of the commons?

Liner shipping – a tragedy of the commons?

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I could have called this The Emperor’s Got No Clothes, but I will go with Charlton Heston’s line from the 1968 film, Planet of the Apes, “You maniacs! You blew it up!

Only the bosses of the great liner shipping companies of today could have been stupid enough to respond to falling freight rates by building strings of much bigger ships.

Yes, we know that the cost per slot is less on a bigger ship. We also know that responding to an excess of something – in this case slot capacity on the major trades – by making a lot more of it is not a way to get the price back up.

So why are the grown men in charge of liner shipping – men entrusted with billions of dollars’ worth of investments and on whom thousands depend for their livelihoods – so terminally stupid?

Two quotations are pertinent:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

That is the most quoted line – the one that everyone knows – in Adam Smith’s Wealth of Nations.

“Freedom in a commons brings ruin to all.”

Garrett Harding, a slightly less well known, but much respected, economist, in his article The Tragedy of the Commons, in “Science” in 1968.

Both of these statements are true.

Customers, and in recent times governments, prefer the first, the people of the same trade or profession prefer the second.

Oversupply of liner shipping is a tragedy, or more precisely, a dilemma, of the commons, a concept much studied in modern game theory. The over exploitation of a finite resource which is shared in common, be it public grazing land or, as in this case, people who want to move finished and part finished goods by water – by people acting in self-interest, be they cattle owners or, as in this case, shipowning liner companies, chasing cargo, leads to the destruction of the resource, in this case destruction of the possibility of covering your costs in the market by overtonnaging.

The really sad thing is that there is nothing new here – very far from it.

The very earliest liner steamship owners – back in the 1870s and 1880s – did just the same thing, for just the same reasons. They bankrupted each other. A solution was found – the liner shipping conference – and for almost a hundred years liner shipping was efficient and moderately profitable.

In two nations – Britain and Japan – the liner conferences actually received the blessing of the exporters and importers of liner cargo, but over time the voices of the Cargo Interest grew ever louder, the voices of the shipowners grew weaker and the most important conference of them all – the Far East Freight Conference – closed its doors in 2008, when the EU, under pressure from shippers and importers and succumbing to a dose of theory, which it is prone to, as it is run by civil servants with little knowledge of real life, abolished the exemption of liner conferences from EU competition law .

Here’s a thing – all the giant containerlines of today, from the big blue one on down, and including the new grey and green one, were not, in the beginning, full members of conferences – they were all ‘tolerated outsiders’, benefitting from conference rates without contributing to the work of maintaining those rates. Nobody in the boardroom of a major liner company outside Japan has been inside a conference. They have all risen to corporate power outside the conference system.

They all thought, like the bankers 10 years ago, that the rules have changed, and that eternal verities ceased to apply just because of new technology – the computer and the grey box carrying Freight All Kinds. They were wrong.

None of them have a clue.

And they blew it up.

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Andrew Craig-Bennett

Andrew Craig-Bennett works for a well known Asian shipowner. Previous employers include Wallem, China Navigation, Charles Taylor Consulting and Swire Pacific Offshore. Andrew was also a columnist for Lloyd's List for a decade.

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5 Comments

  1. Anil Sharma
    March 17, 2016 at 4:45 am

    @Andrew Craig-Bennett, absolutely spot on. Just because shipping is lifeline of world trade and helps move 90% cargo does not mean that they will be profitable! I have seen that these instances of herd mentality are repeating and no one taking any lessons. I think this time it will reach the depths unheard off.

  2. ginckels
    March 17, 2016 at 9:42 am

    Good to learn some history of conferences and sure Japan en the U.K. have never recovered from losing their monopoly position in the EUR/Asia/ EUR trades. Fact is that under the umbrella of the FEFC they became complacent resulting that they (Mitsui, K-Line, P&O etc…) are today no longer players in the market. When paraphrasing great contributors to our historical heritage we cannot overlook Darwin. His analysis in the “Origin of Species” where he concludes the “Survival of the fittest” was to mean “better designed for an immediate, local environment”. It takes two to tango and let’s see whether shippers can survive when the fittest shipping lines survive and start to call for “payback time”.

  3. Martyn Benson
    March 17, 2016 at 10:32 am

    Was it a strategy of Maersk right from the very beginning of the “space race” with the Triple E’s to eliminate weaker competitors, thinking that they would be more effective in a shorter space of time ……….it’s just that the megalomania has taken longer than they imagined and has done more damage.

  4. Gopal Sethi
    March 17, 2016 at 1:40 pm

    I read the other day a Study-Megaships not good for Economies of Scale
    http://gcaptain.com/study-megaships-not-good-for-economies-of-scale/#.VugLODCehVk.linkedin
    and it made me wonder “ Did it really require a study by Drewry to arrive at this conclusion?”

    On the flip side there is an interesting recent article on the Mckinsey website titled “Container shipping: The untapped value of customer engagement”
    http://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/container-shipping-the-untapped-value-of-customer-engagement

    the article speaks amongst others about “incentive for shippers to switch to faster carriers” and I wondered not too long ago Liner pundits were preaching about slow-steaming; when bunker prices were a major concern .

    We have a well written opinion here by Andrew with some great comments like “herd mentality” by Anil Sharma which I agree is a disease which the maritime industry professionals suffer from. This is not limited only to owners when it comes to ordering tonnage but also to Liner organizations who try and emulate or model themselves on the big blue after spending huge sums on consultants! never once wondering that the brigade running the show for them were at the big blue not so long ago and if they had done really great then why were they allowed to move on.

    The state of the maritime industry in general brings to my mind the following lyrics form a Kenny Rogers song:
    “You’ve got to know when to hold them
    Know when to fold them
    Know when to walk away
    And know when to run…”

  5. Robin Kirkpatrick
    March 20, 2016 at 2:19 am

    Hard hitting comment that is sure to ruffle a few feathers, almost certainly as it gets right to the core of the present malaise.

    Parallels can be drawn with almost anything afloat these days which makes the challenges posed in this article even more relevant and appropriate.

    The maritime industry is in re-calibration mode and rightly so as recent behaviours were so obviously unsustainable.

    Behaviours can be modified and even changed fairly quickly but can the culture behind behaviour change? I fear not.

    History is arguably one of the best sources of ‘lessons learned’, unfortunately history and the repetitive nature of present ‘mistakes’ has been ignored meaning few people of corporations win.

    There is no single solution to address the malaise but in all the chaos opportunity exists. It will be interesting to see who grasps the opportunity.