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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

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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

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Abstract

Liner conferences have been established since the 19th

century and

still continuing it‟s 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 any

other shipping contracts; “the relationship between shippers and

carriers is regulated by standard printed forms of contracts (e.g. bills

of lading or similar documents) whose terms and conditions 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 it‟s the same but we have other factors that 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)

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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

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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)

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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.