Practical implications for the shipping sector
The news that a US House panel was opening a major investigation into ocean carriers raised worries about the impact on the industry. Specifically, many are concerned that this move might herald a new approach to price-gouging. The congressional hearing focuses on some of the biggest names in the shipping industry, including Hapag-Lloyd, CMA CGM, and Maersk. This article explores the practical implications for the shipping sector.
Watchdog Expresses Interest In The Ocean Carrier Segment
Three major ocean carriers were summoned to an oversight hearing in the US Congress. The inspiration for this probe is the allegation that carriers had significantly increased their prices to the extent that they were now contributing to fuel inflation. The investigation will be carried out by two subcommittees under the House Committee of Oversight and Reform. The first is the Select Subcommittee on the Coronavirus Crisis and the second is the Subcommittee on Economic and Consumer Policy.
The leaders of the respective committees send letters to the heads of Hapag-Lloyd, CMA CGM, and Maersk with key information requests thought to focus on the level of rate increases. This follows reports in 2021 about high surcharges and fees in the ocean carrier segment. Implicit in these investigations is the assumption that they contribute to inflation.
Renewed Interest In The Impact of Foreign-Owned Container Ship Operators
Hapag-Lloyd, CMA CGM, and Maersk are part of the ten container ship operators that control up to 85% of capacity across the globe. The committees suggest that this market power could be abused. A direct link was made between increasing shipping rates and the inflationary pressures on the market. Indeed, the big three have been accused of raising prices faster than the increase in their own costs.
The resultant $150 billion profit has attracted congressional interest. This level of profitability is nine times greater than what the companies registered in 2020. The legislators argue that offering affordable shipping rates is essential for small and medium-sized businesses (SMEs). Otherwise, they would not be able to make a living if the costs of production far outweigh any sales revenues. Moreover, Congress is interested in ensuring that SMEs continue to offer high-quality services at reasonable prices.
Concerns About Potential Market Distortions
When writing to Hapag-Lloyd, CMA CGM, and Maersk, Raja Krishnamoorthi (D-Ill) and James Clyburn (D-S.C.) expressed concern that Hapag-Lloyd, CMA CGM, and Maersk could have engaged in predatory pricing during the Covid-19 pandemic. US consumers would feel the impact through increased prices for basic commodities. SMEs would also struggle with the increasing costs of inputs, which would be reflected in their viability and business outlook.
The congressional committees noted that Maersk is the second largest ocean carrier in the world. Whereas the company’s operating costs rose by 21% in 2021, the average increase in rates was 83%. Søren Skou (CEO, Maersk) was tasked to explain this discrepancy, particularly given that most of the price increases were hitting the USA. The costliest increases were for the trades between Asia and the USA. CMA CGM had to explain the significant gap between cost increases and profit margins.
High Prices And High Profitability During The Covid-19 Pandemic
Reports indicate that CMA CGM had record profits of more than $11 billion during the first three quarters of 2021. These earnings exceeded the company’s combined profits in the previous decade. In addressing Rodolphe Saadé (CEO, CMA CGM), the lawmakers suggested that the company had already admitted that any increments in its operating costs of 2021 had been more than covered by the increase in revenue. The upshot was that the company was more profitable than it had ever been in the previous ten years.
A similar story was told about Hapag-Lloyd, especially regarding its trans-Pacific route, the pathway for US imports from Asia. The company is reported to have increased freight rates by over 75% during the first three quarters of 2021, a remarkable figure by any standard. Therefore, it is not surprising that revenues rose by 71% during that increase. Overall profit during that period was close to $6.6 billion. For context, that profitability is a ten-fold increase in profits generated during the first nine months of 2020.
Politicians Concerned About Potential Market Abuses In Shipping
President Joe Biden has raised the issue of high profits among ocean container companies during his 2022 State of the Union address. Perhaps in a reflection of the concern within the political class, the committees have requested key documents to assist in their investigation. The deadline for compliance is March 16, 2022. The referenced information starts from the 1st of January 2020 until the present day.
Key Information That Must Be Produced For Congress
Hapag-Lloyd, CMA CGM, and Maersk are required to furnish the congressional committees with the following documents by the March 16th deadline:
- Fees and charges: A comprehensive list of price rates charged to consumers. This includes the spot rates for 20-foot and 40-foot containers. It also includes surcharges and fees connected with shipping materials along the Atlantic and trans-Pacific shipping routes. Additionally, Congress will want to see the charges for holding materials at any port.
- Documentation: Congress requires all documents (including communications with other ocean carriers) pertaining to Atlantic and trans-Pacific shipping rates. The documents include those relating to surcharges and fees. Congress also needs access to the rationale and procedure for setting those rates.
- Increment: Congress has demanded access to documents describing and rationalizing rate increases, including fees and charges. The committees want executive compensation, stock buybacks, dividends, and revenue information.
- Customers: The demand includes documents on customer communications concerning the Atlantic and trans-Pacific rates. The committees will also need a list of all multiyear contracts with customers, including the rates and durations.
- Investigations: The companies must produce a list of all US investigations relating to their Atlantic and trans-Pacific route rates. The demand includes all documents produced or shared by US law enforcement agencies as part of their investigations.
This investigation comes when there is an outcry about increasing rates and profitability for companies operating in the ocean cargo industry. President Joe Biden has already announced the federal government’s intention to crack down on companies suspected of profiteering. Recent legislative proposals have expressed an intent to strip away antitrust immunity from ocean carriers.