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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......................................................................................................................... 3 The early start of liner conferences .................. 9 CASE 4: SERVICE CONTRACTS ............................................................................................................................................................................................ 9 2 ................................................................................................................................................................................ 8 CASE 1: MARGINAL COST PRICES .............. 10 COMPETITION ON QUALITY OF SERVICE ......................................................... 10 References ......................................................................... 8 CASE 2: FIXED PRICES ............................................................................ 7 Figure 3 Marginal cost pricing ............................................................................................................................................................................................................................. 2 Abstract ......... 10 Table of Figures Figure1 the shipping market supply and demand model ................................ 3 Introduction .................. 5 Pricing liner services .......................................................................................................................................................................... 6 Figure 2 the freight rate mechanism ............................................................................................................................................... 9 CASE 3: PRICE DISCRIMINATION......................................................................................... 4 The freight rate mechanism ............................................................................................................................................................................ 8 Figure 4 fixed cost pricing...............................................................................Table of Contents Table of Figures........................................................................

whatever its nature.g. If ships always sailed at the same capacity. Sailing quotas are. 2009) Liner shipping contractual terms is a substantially different than other shipping contracts. Introduction Liner shipping started to be an important industry in 1870s. They may also allocate output among their members. They usually carry large number of smaller packages for a number of different shippers. the first conference was formed in 1875 it was the Calcutta conference. 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. “Members have been fined out of the membership bonds they post. 2004) The published freight tariffs must be monitored so the conference make sure that the shipping lines agencies applies the agreed upon tariff rates. In this article we introduce the early start of liner conferences. (SJOSTROM.” (Sjostrom. of lading or similar documents) whose terms and conditions any and bills are 3 . Each conference have a particular route. demonstrating the freight rate mechanism and the pricing of liner services and finally a fragment on the competition on quality services. arrive and depart the port on a scheduled time regardless of whether the ship is fully loaded or not. 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. probably easier to enforce. however. which they do not. 1975). by either cargo quotas or more commonly sailing quotas. a published freight rate.Abstract Liner conferences have been established since the 19 th century and still continuing it‟s booming. “the relationship between shippers carriers is regulated by standard printed forms of contracts ( e. cargo and sailing quotas would be identical.” (UNCTAD.

i. (Munari. as well as the tariffs that are publicly available. Munari defined the conference as” is a cartel agreement among shipping lines serving the same route. in order to rationalize the capacity and the frequency of services offered to their customers. Conference members fix and agree on schedules. 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. 2012) The early start of liner conferences Liner shipping cartels started due to the presence of “Beggar thy neighbor” policy in international trade. and normally the latter is the preferred option. 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.e. the entering and exiting the liner market is not that easy cause of the shifting cost. 2012) The oldest and most important kind of cartels is the liner shipping conference. allowing the maritime nations to extract wealth from exporting countries as well as from non-maritime economic systems served by foreign shipping lines.” (Munari. “Reference is made to the so-called consortium agreements. except as regards tariffs. and the vessel does not correspond to and much bigger than the cargo unit it carries. since the competition between liners carriers in pricing could start a rate war and the competition would be destructive. In a consortium. The liner ship owners do not have competitive market model since the fixed cost are higher than the variable costs.bulk modes of seaborne trade new forms of cooperation between liner ship owners developed.” (Munari. Port terminals used by the members are clearly the same 4 . The perfect competition model could not be implemented in the liner shipping business.directly prepared by carriers without any negotiation with their contractual counterparts. pooled vessels are normally identical. 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. 2012) After the domination of containerization over break. or consortia. its scope can encompass one or both directions of trade. which make it difficult to the carrier to adapt the offer to match the change in demand.

Fleet productivity. Sometimes joint offices are also established. (Stopford. also called cross-traders. taking into account the special needs and problems of the developing countries with respect to the activities of liner conferences serving their foreign trade. and transport costs. yet each member maintains its independency in respect of pricing and conditions of transport with clients. 2009) 5 . 40 per cent of the cargo were. the world economy. i. “Cargo carried by the conferences was allocated according to the 40:40:20 formulas. scrapping and losses. and recognize the need for a universally acceptable code of conduct for liner conferences. 1975) Chapter 2. 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. 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.” (UNCTAD. In the liner shipping business area it‟s the same but we have other factors t hat affect both the demand and the supply. 2012) The freight rate mechanism Like any business area the supply and demand is the orchestra maestro who controls the product pricing. average haul. Shipbuilding production.and often also other equipment is pooled. seaborne commodity trade. respectively. and Freight revenue.e. At the 1970s the UNCTAD published the code of conduct for liner conferences “to improve the liner conference system. 2010) And regarding the supply the five determinants for sea transport are World working fleet. ” (Munari.” (Munari. (Lai. The five determinants for sea transport demand are political factors. 2012). 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.

This freight rate 6 . It depends on the negotiations between ship owners and shippers to establish a freight rate.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.

This can be explained if we combine the demand and supply curve diagrams. On the demand side. The sea transport supply function shows the quantity of sea transport carriers would offer at each level of the freight rate. The sea transport demand function shows the quantity of sea transport shippers would purchase at each level of the freight rate. Once this freight rate is established.” (Lai. the demand function shows how shippers adjust to changes in the freight rate. (Stopford. At this point. The supply and demand curves intersect at the equilibrium price in the shipping market. The “going price” is an equilibrium value of the price. both shippers and carriers reach a mutually acceptable freight rate level. The freight rate is inversely proportional with the number of vessels in market. 2010) Figure 2 the freight rate mechanism 7 . 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. both shippers and ship owners adjust to it and eventually this brings supply and demand into balance.reveals the balance of ships and cargoes currently in the market. Figure 2 illustrates the freight rate mechanism. 2009) “The supply of sea transport is influenced by the freight rate. which determines the freight rate at which the quantity demanded by shippers for shipping services is equal to the quantity supplied by carriers. Sellers and buyers transact in the market and their supply and demand requirements cause the price to move.

Pricing liner services Due to the large amount of fixed overhead needed to operate a ship. But if the demand is high a huge profit will be gained. 2009) 8 . As shown in figure 3. CASE 1: MARGINAL COST PRICES If the ship owner decided to use the marginal cost pricing. 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. he will face a great loss if the demand is low. (Sjostrom. the pricing was not that easy to handle. And the procedure was complicated due to of its variability.

In the low demand a small loss will occur. while higher-value cargoes are charged a premium.CASE 2: FIXED PRICES In this case the ship owner must accurately decide the fixed price. Low-value cargoes are offered cheap transport to fill empty capacity. (Stopford. 2009) 9 . 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. 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. 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.

(2010). and so on. „quality variables‟ are considered to be the modern term used for such practices is market segmentation. a fourth pricing option emerged. and the need for refrigeration. K.” (HARALAMBIDES. geographical coverage and efficient response to the particular requirements of customers are the most needed services. H. Lai.“Differences in cost could arise from. Freight Rate Mechanism. The provision of information and EDI systems. Springer. insurance. better coordination and integration with inland transport companies. ownership of terminals and equipment. 10 . E. inter alia. difficulties in handling the cargo. “Nowadays. differences in density (called the stowage factor). H. In K. Yuen Ha (Venus) Lun. Shipping and Logistics management (pp. H. 2004) CASE 4: SERVICE CONTRACTS “As containerization reduced the opportunities for price discrimination. Singapore. logistical services. 2004) References HARALAMBIDES.” (Stopford. the service contract. 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. „uniform service and price leads to waste in the same way a „buffet dinner‟ does‟. DETERMINANTS OF PRICE AND PRICE STABILITY IN LINER SHIPPING. It is usually justified by arguments such as „different shippers have different needs‟. frequency of service. „quality service requires attention and customization to customer needs‟. (2004). 17-32).” (SJOSTROM. 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.

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