INSTITUTE OF INTERNATIONAL TRANSPORT & LOGISTICS ALEXANDRIA, EGYPT

INTRODUCTION TO LINER CONFERENCES

By Eng. Baher M. Mansour Presented to Capt. Moustafa Abd Elhafez

April 1st, 2013

Table of Contents
Table of Figures............................................................................................................................... 2 Abstract ........................................................................................................................................... 3 Introduction ..................................................................................................................................... 3 The early start of liner conferences ................................................................................................ 4 The freight rate mechanism ............................................................................................................ 5 Pricing liner services ........................................................................................................................ 8 CASE 1: MARGINAL COST PRICES ................................................................................................ 8 CASE 2: FIXED PRICES .................................................................................................................. 9 CASE 3: PRICE DISCRIMINATION.................................................................................................. 9 CASE 4: SERVICE CONTRACTS .................................................................................................... 10 COMPETITION ON QUALITY OF SERVICE ....................................................................................... 10 References ..................................................................................................................................... 10

Table of Figures
Figure1 the shipping market supply and demand model ................................................................. 6 Figure 2 the freight rate mechanism ................................................................................................ 7 Figure 3 Marginal cost pricing ........................................................................................................ 8 Figure 4 fixed cost pricing............................................................................................................... 9

Abstract Liner conferences have been established since the 19 th century and still continuing its booming. In this article we introduce the early start of liner conferences, demonstrating the freight rate mechanism and the pricing of liner services and finally a fragment on the competition on quality services. Introduction Liner shipping started to be an important industry in 1870s, the first conference was formed in 1875 it was the Calcutta conference. Liner Conference or conference is defined by a group of two or more vessel-operating carriers which provides international liner services for the carriage of cargo on a particular route or routes within specified geographical limits and which has an agreement or arrangement, whatever its nature, within the framework of which they operate under uniform or common freight rates and any other agreed conditions with respect to the provision of liner services. (UNCTAD, 1975). Each conference have a particular route, a published freight rate, arrive and depart the port on a scheduled time regardless of whether the ship is fully loaded or not. They usually carry large number of smaller packages for a number of different shippers. (SJOSTROM, 2004) The published freight tariffs must be monitored so the conference make sure that the shipping lines agencies applies the agreed upon tariff rates. Members have been fined out of the membership bonds they post. They may also allocate output among their members, by either cargo quotas or more commonly sailing quotas. If ships always sailed at the same capacity, which they do not, cargo and sailing quotas would be identical. Sailing quotas are, however, probably easier to enforce. (Sjostrom, 2009) Liner shipping contractual terms is a substantially different than other shipping contracts; the relationship between shippers carriers is regulated by standard printed forms of contracts ( e.g. of lading or similar documents) whose terms and conditions any and bills are
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directly prepared by carriers without any negotiation with their contractual counterparts, except as regards tariffs. (Munari, 2012) The early start of liner conferences Liner shipping cartels started due to the presence of Beggar thy neighbor policy in international trade, allowing the maritime nations to extract wealth from exporting countries as well as from non-maritime economic systems served by foreign shipping lines. The liner ship owners do not have competitive market model since the fixed cost are higher than the variable costs, the entering and exiting the liner market is not that easy cause of the shifting cost, and the vessel does not correspond to and much bigger than the cargo unit it carries, which make it difficult to the carrier to adapt the offer to match the change in demand. The perfect competition model could not be implemented in the liner shipping business, since the competition between liners carriers in pricing could start a rate war and the competition would be destructive. All of the above mentioned reasons along with the benefit of having reliable and constant shipping services carrying goods traded in world markets with a stable tariff made the cartelization of liner shipping accepted and welcomed too. (Munari, 2012) The oldest and most important kind of cartels is the liner shipping conference. Munari defined the conference as is a cartel agreement among shipping lines serving the same route; its scope can encompass one or both directions of trade, and normally the latter is the preferred option. Conference members fix and agree on schedules, in order to rationalize the capacity and the frequency of services offered to their customers, as well as the tariffs that are publicly available. (Munari, 2012) After the domination of containerization over break- bulk modes of seaborne trade new forms of cooperation between liner ship owners developed. Reference is made to the so-called consortium agreements, or consortia, i.e. agreements whose objective is that of rationalizing capacity on container trade and offering joint liner services organized by two or more shipping lines on the same route. In a consortium, pooled vessels are normally identical, and cross-slot charters are executed with a view to reserving for each member of the consortium a fixed portion of the capacity of all vessels used in the service. Port terminals used by the members are clearly the same
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and often also other equipment is pooled. Sometimes joint offices are also established, yet each member maintains its independency in respect of pricing and conditions of transport with clients. (Munari, 2012). At the 1970s the UNCTAD published the code of conduct for liner conferences to improve the liner conference system, and recognize the need for a universally acceptable code of conduct for liner conferences, taking into account the special needs and problems of the developing countries with respect to the activities of liner conferences serving their foreign trade. (UNCTAD, 1975) Chapter 2, Article 1 in the code of conduct for liner conferences stated that Any national shipping line shall have the right to be a full member of a conference which serves the foreign trade of its country (UNCTAD, 1975) After the publication of the code of conduct for liner conferences third world countries were able to enter the conferences and be part of it. Cargo carried by the conferences was allocated according to the 40:40:20 formulas, i.e. 40 per cent of the cargo were, respectively, allocated to the national shipping lines of the countries served by a given bilateral trade and the remaining 20 per cent was available for third country shipping lines, also called cross-traders. (Munari, 2012) The freight rate mechanism Like any business area the supply and demand is the orchestra maestro who controls the product pricing. In the liner shipping business area its the same but we have other factors t hat affect both the demand and the supply. The five determinants for sea transport demand are political factors, the world economy, seaborne commodity trade, average haul, and transport costs. (Lai, 2010) And regarding the supply the five determinants for sea transport are World working fleet, Fleet productivity, Shipbuilding production, scrapping and losses, and Freight revenue. (Stopford, 2009)

Figure1 the shipping market supply and demand model

The freight market is the middle layer that links the supply and demand as shown in figure 1. It depends on the negotiations between ship owners and shippers to establish a freight rate. This freight rate
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reveals the balance of ships and cargoes currently in the market. The freight rate is inversely proportional with the number of vessels in market. Once this freight rate is established, both shippers and ship owners adjust to it and eventually this brings supply and demand into balance. (Stopford, 2009) The supply of sea transport is influenced by the freight rate. This is a mechanism that the market uses to motivate decision makers to adjust capacity in the short term and to find ways to reduce costs in the long run. On the demand side, the demand function shows how shippers adjust to changes in the freight rate. Figure 2 illustrates the freight rate mechanism. Sellers and buyers transact in the market and their supply and demand requirements cause the price to move. The going price is an equilibrium value of the price. This can be explained if we combine the demand and supply curve diagrams. The sea transport demand function shows the quantity of sea transport shippers would purchase at each level of the freight rate. The sea transport supply function shows the quantity of sea transport carriers would offer at each level of the freight rate. The supply and demand curves intersect at the equilibrium price in the shipping market, which determines the freight rate at which the quantity demanded by shippers for shipping services is equal to the quantity supplied by carriers. At this point, both shippers and carriers reach a mutually acceptable freight rate level. (Lai, 2010)

Figure 2 the freight rate mechanism

Pricing liner services Due to the large amount of fixed overhead needed to operate a ship, the pricing was not that easy to handle. And the procedure was complicated due to of its variability.
CASE 1: MARGINAL COST PRICES

If the ship owner decided to use the marginal cost pricing, he will face a great loss if the demand is low. As shown in figure 3. But if the demand is high a huge profit will be gained.

Figure 3 Marginal cost pricing

So if the demand D1 was low and marginal cost of $400/TEU was determined when the ship is not full at point 1 assuming the average cost at 3400 TEU is $1250 the ship owner will loss a $850/TEU but if a high demand D2 with the prices jumps to $2250/TEU so if the ship is full the owner will gain a $1000/TEU more than the average cost. (Sjostrom, 2009)

CASE 2: FIXED PRICES

In this case the ship owner must accurately decide the fixed price. In the low demand a small loss will occur, and in the high demand a small profit will be gained as shown in figure 4

Figure 4 fixed cost pricing

So if the demand D1 was low and fixed price of $1250/TEU was determined when the ship is not full at point 1 assuming the average cost at 3400 TEU is $1350 the ship owner will loss a $100/TEU but if a high demand D2 with the average cost of $1150/TEU so if the ship is full the owner will gain a $100/TEU more than the average cost. (Stopford, 2009)

CASE 3: PRICE DISCRIMINATION

In this pricing option the shipper decide the price according to the value of the cargo that will be transported. Low-value cargoes are offered cheap transport to fill empty capacity, while higher-value cargoes are charged a premium. Also price discrimination could be applied in customers a special rate could be offered for a customer having large amount of cargo that will be transported. (Stopford, 2009)
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Differences in cost could arise from, inter alia, differences in density (called the stowage factor), difficulties in handling the cargo, insurance, and the need for refrigeration. (SJOSTROM, 2004)
CASE 4: SERVICE CONTRACTS

As containerization reduced the opportunities for price discrimination, a fourth pricing option emerged, the service contract. This approach builds on the fact that large shippers have as much interest in stability as the liner companies and uses a negotiated service contracts to fix price and volume guidelines. (Stopford, 2009) COMPETITION ON QUALITY OF SERVICE One of the main benefits of the conference system is limiting the price competition whish made the quality of service the only differentiation available for the liner ship owner. The provision of information and EDI systems; logistical services; better coordination and integration with inland transport companies; ownership of terminals and equipment; frequency of service; geographical coverage and efficient response to the particular requirements of customers are the most needed services. Nowadays, quality variables are considered to be the modern term used for such practices is market segmentation. It is usually justified by arguments such as different shippers have different needs, quality service requires attention and customization to customer needs, uniform service and price leads to waste in the same way a buffet dinner does, and so on. (HARALAMBIDES, 2004)

References
HARALAMBIDES, H. E. (2004). DETERMINANTS OF PRICE AND PRICE STABILITY IN LINER SHIPPING. Singapore. Lai, K. H. (2010). Freight Rate Mechanism. In K. H. Yuen Ha (Venus) Lun, Shipping and Logistics management (pp. 17-32). Springer.

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Munari, F. (2012). Competition in Liner Shipping. In The Hamburg Lectures on maritime Affairs 2009 & 2010 (pp. 3-10). Springer. Sjostrom, W. (2009). Competition and Cooperation in Liner Shipping. SJOSTROM, W. (2004, June). Ocean Shipping Cartels: A Survey. Review of Network Economics . Stopford, M. (2009). MARITIME ECONOMICS. Routledge. UNCTAD. (1975). UNCTAD Code of conduct for liner conferences Volume II. Geneva: United Nation.

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