FMC onboard for Biden’s ocean carrier ‘crackdown’

Date: Friday, July 9th, 2021
Source: FreightWaves

Federal Maritime Commission Chairman Daniel Maffei has welcomed a White House executive order calling on the Justice Department to help the FMC investigate and potentially fine ocean carriers charging shippers unreasonable rates and fees.

President Joe Biden’s executive order, scheduled to be announced on Friday, also urges the Surface Transportation Board to allow shippers to challenge inflated rates more easily when there’s no competition between routes.

The White House issued a fact sheet on Friday morning summarizing the order, which is part of a broader order that includes 72 initiatives by more than 12 federal agencies to promote competition across the U.S. economy.

“A lot of American companies rely on railroads to ship their goods domestically and ocean carriers to ship their goods internationally. Both these industries have grown more concentrated over time,” said White House Press Secretary Jen Psaki at a press conference on Thursday.

Psaki added that three global ocean carrier alliances now control more than 80% of the container market. “That concentration has contributed to a spike in shipping costs and fees during the pandemic. The executive order calls on the Federal Maritime Commission to crack down on unjust and unreasonable fees and work with the Justice Department to investigate and punish anticompetitive conduct.”

In responding to the order, Maffei said that because the FMC is an independent agency, it technically is not subject to presidential executive orders. “However, I very much intend to cooperate with it,” he told FreightWaves, citing the agency’s ongoing investigation into ocean shipping practices. “The President is saying all hands on deck, which we appreciate.”

Excessive fees charged to U.S. importers and exporters for failing to expeditiously move containers off docks and container terminals – known as detention and demurrage – “is a huge issue we’re working on and it’s important to get to the bottom of it because it’s unfair to shippers,” Maffei said. “If those practices are abused it tends to decrease capacity, which makes things worse.”

John Butler, president and CEO of the World Shipping Council, which represents 90% of the global container trade, declined to comment until details of the order were released.

Industry consolidation not the problem?
Wall Street questioned the move by the White House, pointing out that a surge in demand – not industry consolidation – has caused rates to climb. The issue, according to an equity note published by investment firm Stifel, “has little to do with consolidation and everything to do with weak demand pre-pandemic not incentivizing building new ships. Given its low barriers to entry, the implications to the shipping market are virtually nonexistent.”

Maffei acknowledged that the current demand for imports is unprecedented. “That’s the lion’s share of this current crisis,” he said. However, he pushed back on the argument that a lack of competition is not at least part of the problem.

“When you have a demand spike and there is full competition – meaning anyone can come in and satisfy that demand immediately with more capacity – there is not an issue,” he said.

But that is not the case in the container shipping and rail sectors, Maffei pointed out.

“Railroads have to lay track, container carriers have to build ships, and that takes time. So by having a more consolidated industry, you set the stage for some of the price increases that we’ve seen. They’re not due directly to a lack of competition, but they’re related to it.”

Potential for added rail merger scrutiny
Stifel also noted that the railroads were more at risk to potential regulatory action, particularly given the proposed merger between Canadian National Railway and Kansas City Southern. “While we expect this executive order may not turn back time and split up the current rails, it could be a major roadblock” for a KCS acquisition, the firm stated.

STB officials were not immediately available to comment as to how much the lack of competition was affecting rates and service and whether the order would place greater scrutiny over the CN-KCS merger. Stocks of the major Class I railroads were down 5-6% on news of the order.

In May, however, the American Chemistry Council (ACC) sent a letter to the STB asking the agency to look into why chemical shippers are experiencing poor rail service.

“Current rail service challenges are harming ACC member companies, disrupting supply chains, restricting manufacturing, increasing costs and preventing companies from meeting customer expectations,” ACC President and CEO Chris Jahn wrote. In addition to addressing service disruptions, the group asked the STB to accelerate efforts to promote rail-to-rail competition through reciprocal switching, which would give shippers captive to a single railroad access to a competing rail line.

“Competition remains fierce across freight providers, and any proposal mandating forced switching would put railroads – an environmentally friendly option that invests $25 billion annually in infrastructure – at an untold disadvantage,” said Association of American Railroads President and CEO Ian Jefferies, commenting on Thursday.

“Such a rule would roll back the foundational market-driven principle that keeps the industry viable, reduce network fluidity, and ultimately undermine railroads ability to serve customers at a time when freight demands have dramatically increased.”


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