2023 JPJC J2 H2 EC Prelim P1 QP [Final]

Question 1: A balancing act in the container shipping industries Container shipping services is a mode of transportation used by shippers to transport their cargo from the seaport to the destination through contain er carriers. Container carriers are exclusive asset class owned by container shipping companies because they require significant capital and expertise to acquire and operate. Moreover, the con tainer shipping industry is highly regulated, with strict safety, security, and environmental protection requirements. Figure 1: Global shipping freight rates Source: www.statista.com, May 2023 Extract 1: Container shipping in times of Covid-19 At the start of the coronavirus disease of 2019 pandemic, expectations were that seaborne trade, including containerised trade, would experience a s trong downturn. However, changes in consumption and shopping patterns triggered by the pandemic, including a surge in electronic commerce and lockdown measures, have led to increas ed import demand for manufactured consumer goods. As of the third quarter of 2020, le ssening of lockdown measures and varying speeds of recovery worldwide, as well as stimulus p ackages supporting consumer demand and inventory-building in anticipation of new waves of the pandemic, contributed to a further increase in containerised trade flows. The increase in demand was more substantial than expected and not met with a sufficient supply of container shipping capacity. Empty containers to move exports from China to destinations abroad became unavailable. The reasons for this shortage were manifold. Empty containers were left in places where they were not needed, and repo sitioning had not been planned for. Consequently, the mismatch between demand and supply for empty containers was exacerbated. Source: UNCTAD, 2021

2 Extract 2: Container shipping companies face losses post-Covid After almost two years of skyrocketing freight rate s that offered container shipping companies some respite in a pandemic-disrupted maritime suppl y chain, current freight rates sunk beyond the comfort threshold where they are now counting losses. As global trade continues to decline due to the Russia-Ukraine war shocks, freight rates continue to decrease. In the second half of 2022, cargo tran sportation in container carriers has dwindled by 20% to 50%. With reduced cargo volume, many cont ainer carriers transport less than their total carrying capacity, while some are forced to stay anchored with no shipment deals. As a result, container shipping companies find themselves counti ng losses in operating their container carriers. In addition, increased operating costs from the lab our shortage and pursuit of decarbonisation, further swelled by the fuel-oil price hike, kept the container shipping companies from hitting profit. If this situation continues, they will have to stop operations. Source: Hellenic Shipping News, January 2023 Table 1: Market Share of Container Shipping Companies Global Alliances Market Share Container Shipping Companies 2M 33.9% MSC, Maersk Ocean Alliance 30.0% COSCO Group, CMA-CGM, Evergreen THE Alliance 18.2% Hapag-Lloyd, ONE, HMM, Yang Ming Not part of any alliances 17.9% Wan Hai Lines and 9 others Source: www.statista.com, 2022 Extract 3: Consolidation and competition in container shipping Alliances have become a dominant feature of contain er shipping. All major container shipping companies are now involved in one of the three glob al alliances: 2M, Ocean Alliance and THE Alliance. Consolidation activity reflects the container shipp ing industry's efforts to cope with the difficult market conditions faced since the 2008 global financial crisis. For many years, container shipping companies struggled with low freight rates and dwin dling earnings. Over the past decade, the container shipping industry has worked with a chron ic supply and demand imbalance that undermined profitability, reduced freight rates and compressed earnings. By consolidating, container shipping companies can improve freight rates and earnings. This becomes possible as they can achieve the following: streamline operations by combining

3 operations, improve supply management, and fleet utilisation, pool cargo, leverage economies of scale, reduce operating costs and share resources a nd networks. By increasing their size, they can offer a broader range of services and invest in technological upgrading. Container shipping companies, not members of the al liances will find competing increasingly difficult. Some argue that they will be forced to j oin one of the major strategic players. Others contend that small container shipping companies wil l continue to operate in niche markets. However, evidence suggests that smaller container s hipping companies operating in niche markets are already losing ground to mega alliances. Consolidation offers certain benefits for shippers as well. These include less fluctuation in freight rates, more efficient and extensive services provided by container shipping companies and lower freight rates if cost savings are effectively passed on to shippers. However, there is a concern that markets will becom e more concentrated, resulting in reduced competition, constrained supply, market power abuse and higher freight rates. Relevant regulatory and competition authorities must regular ly monitor market concentration levels and large container shipping companies' potential for m arket power abuse. They should investigate the related impact on smaller players and potential implications regarding freight rates and other costs to shippers and trade. Source: UNCTAD, 2022 Extract 4: When competition law and green drive collide The container shipping industry faces increasing pr essure to reduce its carbon footprint and decarbonise its operations. Despite some efforts fr om companies and organisations, overall emissions from the sector have continued to rise in recent years. One reason is the high cost of decarbonisation, more than $1 trillion of investment would be required to decarbonise the shipping industry by 2050. Currently, most carriers operate on fossil fuels; container shipping companies must replace them with new carriers equipped to accommodate sustainable fuels and propulsion technologies. To overcome the high cost of decarbonisation, container shipping companies must work together. But competition laws are in place to prevent allian ces that threaten to shoulder shippers with higher freight rates. Regulators will face a balancing act, weighing the benefits of tackling greenhouse gas reductions with the need to protect shippers from market collusion. Container shipping companies are asking the European Commission to renew the Consortia Bloc k Exemption Regulation (CBER) that allows many container shipping companies to coopera te through the formation of alliances to provide joint services when it expires on 25 April 2024. They pointed to International Maritime Organisation data showing larger container carriers result in “vastly lower” CO2 output than smaller container carriers. Since the CBER exemption enables alliances to operate larger container carriers than they could viably operate alone, they are indispensable to the European Union’s fight against climate change. Yet the effort to renew the exemption faces heavy p ushback from shippers and competition regulators as they question the claim efficiency ga ins and express concern about market concentration. The growing market concentration and increased cooperation among container

4 shipping companies stifle innovation and have yet to lead to significant reinvestment of profits into sustainability. There are concerns that the CBER exemption regulati on can hamper sustainability instead of reducing environmental impact, and container ship