Cost of Competition in Container Trade between Iceland and UK/ Continent
and ways to improve through cooperation without lessening the competition
Transportation, competition, efficiency
Progress in transportation, both technical and improved service to customer, has been the prerequisite for other economical improvements for centuries, and never more so than in the last years and decades.
Transportation cost as a proportion of the retail price has never been lower and is still decreasing. Where would China’s prosperity be today without the containerization and intensive competition which has been evident between the container carriers?
Export of fish from Iceland is now retail focused based on multiple transport options by ships as by air, where the value per shipped ton has increased significantly.
The transport business in Iceland is an oligopoly and in container shipping there are mainly two companies competing, ergo a duopoly. Oligopoly is incomplete competition.
The market share of these two competitors, Eimskip with approx. 2/3 of the market or Samskip with 1/3, is above what is considered upper threshold by international competition authorities; however, the market is so small that a new competitor with additional ships and equipment would only add total cost to the market, as the cost can only be reduced by economies of scale.
This article is about certain cooperation between shipping lines which would benefit the buyers of the services and the society as whole. It focuses only on containerized trade between Iceland and UK and the Continent.
In the autumn of 2013, The Iceland Ocean Cluster’s Transport and Port issued “Icelandic Logistics Strategy 2030”, where further discussions on logistics was recommended. This is a contribution to that discussion.
In General
The services of container lines contain many sub-services:
· Pre-carriage within the exporting country or from faraway continents and everything in between
· Provide all types of containers for FCL’s or take on and deliver other operator’s containers
· Issuance of Bill of Ladings and related documents
· Reception, warehousing and delivery of goods
· Trucking to consignee
· Handling of claims
· Invoicing and at times giving credit to customers
· Operating own ships to carry containers to and from Iceland
Of all elements mentioned above, the carriage of containers on ships to and from the country is what the customer is least exposed to.
Comparing with international markets
Competition has increased in the last two decades. Many factors have contributed to increased competition:
· European Commission’s ban of price cartels and “conferences”
· Surplus stock of ships
· Significant increases in cost of fuel
Lines have always cooperated; in pre and on-carriage, by lifting each other’s containers where one has run out of slots. Then there has been some coordination between sailing schedules.
In the recent past; new, bigger, and more economical ships have replaced smaller and less efficient ships the competition has become fiercer and the freight rates have fallen. Many of the world’s largest container lines are run at a loss.
Economies of scale has been the main driving force behind this development which has resulted in new ships which are three times bigger than the biggest ships 15 years ago. They now have an operating cost which is 50% lower than the average operating cost of ships now playing the main trade lanes measured in TEU/nautical mile based on comparable sailing speed. But these efforts would come to nothing if the ships are not fully loaded.
The response of the 19 biggest lines on the East – West trades has been to create four main mega-alliances where the lines pool their ships into sailing system initially for three main trade lines; between NE Asia and Europe, between NE Asia and USA and between Europe and USA. Load which has been sold by one line in the alliance is shipped by next ship irrespective of whether it belongs to that line, provided it is one of the alliance members. The sailing schedules have two main objectives. Firstly to optimize the use of the fleet. Secondly to give the customers the best possible service within the constraints of the market, inclusive of having as much of the containers shipped directly from the original port of loading to the intended port of discharge; where possible avoid trans-shipments.
Maersk, MSC and CMA-CGM announced in June 2013 their intention to work closer together than previous cooperation between lines. This cooperation was called P3 and was approved on both sides of the Atlantic while turned down by Chinese competition authorities. It is believed that the combined market-share especially on Asia-North Europe leg was the reason for the rejection.
Back to the drawing board, Maersk and MSC formed 2M with looser cooperation and less market-share, but still 32% of Asia-North Europe volumes. CMA-CGM joined UASC and CSCL to form Ocean Three with 19% of the market share on the lane where G6 consisting of Hapag-Lloyd, APL, NYK, OOCL, HMM and MOL has 23% share. The remaining 26% on this lane is carried by CKYHE alliance of Cosco, K Line, Yang Ming, Hanjin Shipping and Evergreen.
On the second biggest trade lane, the one between Asia and USWC, CKYHE is the market leader with 34% share, where 2M have only 15%
Such cooperation requires the lines to use the same container terminals irrespective of ownership of the terminals while especially Maersk has invested heavily in global container terminal operations and is in the top league of terminals.
This cooperation can be compared with power or telecommunication distribution grids/systems, or in essence the back-office is combined (partially as the ownership and operation of the vessels continue to rest with the respective owners) while the front offices compete.
Due to increased bunker cost, global environmental requirements and abundance of tonnage, the global container fleet is now sailing at slower speed than before. Ships use only 50% of their engine power to reduce fuel consumption. Speed is reduced by 15% when ship sails at 50% of power compared with designed speed/ power use. The Triple E ships of Maersk with 18,270 TEU capacity sail at 20 NM west bound instead of 23 NM speed and save 40% of total cost of the leg. East bound the speed is less and saving greater.
Due to competition, which is first and foremost about price and reliability, the slow steaming is now the way all lines operate which has led to 3-4 days longer total transit time from NE Asia to Europe. No-one has offered faster service[1]. The market is not willing to pay for the difference in speed.
The Icelandic scene
The fleet operated by Eimskip and Samskip in the trade-lanes between Iceland and UK Continent consist of 8 vessels with the total capacity of 7,400 TEU. Each week on average 4 ships sail from Reykjavik towards Europe. They call at in total 10 separate ports abroad one week and 11 ports the other week.
Rotterdam receives on average 4 calls a week by both Eimskip and Samskip, their vessels are berthing in adjacent docks, a stone throw away from each other.
The first vessel for Rotterdam (RTM) leaves Reykjavik in the early afternoon on Thursday and arrives in RTM on Monday. It is back in Reykjavik the following week on early Tuesday morning. Last ship of the week also leaves Reykjavik on a Thursday and is in RTM on Friday. RTM also has calls on Tuesdays and Wednesdays.
There are 3-4 calls a week in Immingham. The first two leave a day apart from Reykjavik and both call Vestmannaeyjar. Each line has vessel in Aarhus late Thursday and early Friday and both arrive in Reykjavik on Tuesdays, the faster one in the morning and the other which still is quite fast in the early afternoon.
The calls in German port do not follow the pattern of the 3 main ports mentioned above. Both lines sail to River Elba, Samskip to Cuxhaven which is a good match for a line using the Kiel Canal for passage to Kattegat and Eimskip calls Hamburg which is an international port 50 NM further up the river.
Eimskip calls Halmstad in Sweden and Samskip calls Varberg which is 72 km to the north of Halmstad, and Eimskip calls the Norwegian port of Fredrikstad every other week.
The question is: is the service pattern so different that the choice of carrier is mainly based on one schedule apart from the other? Here I may not be focusing on ports in Germany, Sweden and Norway.
Other service factors like correct invoicing, information, claims, and general service attitude probably contribute more to selection of shipping line, - of course apart from the price.
Faroes
Both lines have established themselves in the Faroes where Eimskip makes 3 calls a week and Samskip one call on the way to Iceland and have every other week another call on the way to the continent. Currently, Eimskip has a service between Torshavn and Aberdeen, which is not covered in this article.
It is likely that significant part of the containers to and from the Faroes are not originated or destined to Iceland which indicates that the capacity used between Faroes and the UK/Continent is not used between Iceland and the Faroes. The Sizing of the ships is based on the max volume of the trade, inclusive of the Faroes.
The call to the Faroes can be used to transfer containers from one service to another to reduce calls on the continent.
Coastal services
The lines have re-entered coastal service. Traditionally coastal service was considered sailings from Reykjavik to a number of coastal ports where both domestic cargo and pre and on-carriage from the continental and US service was carried and the coastal vessels did not sail outside Icelandic waters.
The new services connects 2-4 ports in Iceland with UK and the continent with fortnightly service each. As a large chunk of Iceland’s exports originate outside Reykjavik, this is good development. Same applies for the import consignments intended for the coastal regions which are being transhipped in Reykjavik for the on-carriage on this service.
Vestmannaeyjar have enjoyed direct calls on the outbound leg of the UK/ Continent vessels from almost the beginning of container service to and from Iceland. Due to construction of a large hydro- power-plant and the aluminium smelter, Reydarfjordur has had weekly calls for more than a decade.
Apart from Vestmannaeyjar and Reydarfjordur, both lines call Isafjordur and Akureyri. Samskip as well calls at Saudarkrokur. As previously mentioned, the ships continue to the continent.
What is remarkable about this otherwise good service is that both the lines call every other week and both call the same week. Therefore, there are two weeks between calls. With cooperation, without reducing the actual competition the lines, would call every other week each but the week Samskip sails they would load and carry Eimskip´s cargo and vice versa. The coastal region would enjoy weekly instead of fortnightly service. More frequent service would reduce need for trucking and increase the available loads to make it more profitable for the lines and less expensive for the shippers.
It can be argued that the current levies the trucking industry is charged for using the roads is far below the actual cost for the usage, and are actually so inexpensive that fish is carried for hundreds of kilometres from the landing port to the processing plant by road and then for export to Reykjavik also by road.
If the road levies would be based on actual axle load and aimed at covering the cost of the usage, considerable part of the heavier domestic loads would be carried by the weekly ship´s service especially if the port charges would be based on the fiscal benefits of using ships and ports wherever possible instead of heavy trucks.
To make that realistic, nothing less than weekly calls will do.
Grundartangi
Both the lines shift their ships, 3 in all, every week from Reykjavik to Grundartangi, some 12 nautical miles and back to Reykjavik to discharge and load to and from the same ports abroad.
Vestmannaeyjar again
It can be argued that the success of the fishing industry in Vestmannaeyjar is based on outstanding service offered by both the Icelandic lines.
The port restricts ships larger than the Eimskip’s new-building, Lagarfoss (equal to Arnarfell). Significant part of the exports from there are discharged in Immingham where the locks restrict the width of the ships to 26 meters, Length of 198 m and draught of 10.36 which is essence says that ship with greater capacity than 1,700 TEU cannot enter the port. In the master plan for the port it is envisaged that a new container terminal will be constructed outside the locks between 2020 and 2030 and thereby can accommodate larger ships[2].
Economies of scale and fuel consumption
All 8 ships are in fortnightly strings covering from 2,640 NM to 3,440 NM, on average 3,100 NM spending 30-40% of the time in ports.
Fixed cost is therefore relatively greater part of the total cost compared with international trade. Fuel for one thousand Nautical Miles for one slot (TEU) for the average Icelandic vessel steaming full ahead in good weather condition costs $ 52. If there was the option to sail at 14 NM speed the cost would be reduced to $ 26[3].
The fleet of both the lines sail in total 600,000 NM per annum. The difference in fuel cost between fastest speed and economical one is for the trade $ 15 million per annum based.
Economies of scale are also felt in fuel consumption. 2,478 TEU vessel can steam at 18 knots and uses much less fuel per TEU/NM than the average ship above at 14 knots.
To clarify:
18 NM speed for average ship 100
14 NM speed for average ship 50
18 NM speed for 2,500 TEU ship [4] 44
14 NM speed for 2,500 TEU ship 27
Generally these indicators are not supposed to be to the last decimal but to give good insight.
The economies of scale are also felt in the acquisition cost of the ships, 2,500 TEU geared ship with 11 DWT/TEU, (not far from the existing fleet´s DWT/TEU of 11, 4 ton) is likely to cost $ 29-31 million. Ships with optimized hull and machinery for eco sailing can be 10% more expensive and currently demand 15%+ greater charter rates. Eimskip is paying close to $ 19 million for 875 TEU vessel. It is clear that the cost per TEU slot in the larger vessel is only 60-70% of the one in the smaller one.
Cooperation and competition to achieve benefits of economies of scale and to improve services
By co-utilizing ship and ports as the alliances do while maintaining healthy competition in filling the containers and the slots as described earlier will result in significant cost-reduction for the trade.
If the two lines can form an alliance where each contributes with tonnage which would be aimed at space optimization, there would be a weekly service calling coastal ports on the way to the UK and the continent which means better service and better utilization of capacity.
This requires agreeing on one container terminal in Reykjavik, where currently each operate own terminal and there is no common user terminal in town. The terminal has to be equipped to speed up already fast turnaround of ships. It is high time to invest in larger STS gantry crane capable of handling up to at least Panamax ships. The existing gantry crane was acquired 30 years ago, then a massive and very future oriented investment, but no longer suffices for the largest vessels. Currently there are 4 Mobile Harbour Cranes in total between the two terminals. It would be a good move to shift one MHC to Grundartangi where high number of heavy boxes are currently handled with the ship´s gear. Other coastal ports could be considered for cranes made excessive with this combined terminal, which would result in faster turnaround and lower speed between the ports.
This alliance would benefit from ships with capacity of around 2,500 TEU and even larger as the market grows. Before the total number of vessels in combined operation is determined a decision on number of calls has to be clear as higher number of calls result in more ships or greater speed.
Cooperation, as described above, will result in at least 20% cost reduction with maintained or improved service.
Such cooperation requires a different mind-set, and also to assess what have been the successes and failures in current competition and cooperation.
Cost of providing service is not directly linked to what the customer is charged.
EU and EEA regulations open for dispensation from the stringiest competition measures, described in para 3 of article 53 of EEA regulation corresponding to article 81 (3) of the EC treaty, where such dispensation is allowed, provided the gains of economies of scale are shared and competition is not hindered, which includes all the usual restrictions on price consultation or cartels and sharing of any commercial information which might threaten unhindered competition.
As previously mentioned, the two lines have their own terminals in Reykjavik and, in essence, thereby ensure that any competition would have to overcome the threshold of shifting their own boxes or having someone starting from scratch on a piece of land not available.
To somewhat open up to competition, a combined terminal should be a common user one open to everyone interested in calling Reykjavik. Thereby the cooperation has opened up for competition.
Other measures could be considered to open up for completion from outside NVO parties interested in offering services to and from Iceland on the vessels of the trade.
Conclusion
This article is intended to open up discussions about economies of scale in the trade between Iceland and UK Continent in order to reduce the cost for importers and exporters to and from Iceland.
To shift the discussion on cost of freight from the two phone calls; to Eimskip and Samskip to compare their rates to a serious discussion about what is the optimal structure in the Icelandic trade.
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[1] On the NE Asia –USWC route Matson which has 1% marketshare on the route offers faster alternative than the competion as part of their triangulation, LA, Hawai, Guam, China and back to US. JOC.com 17072014
[2] ABP Port of Immingham Masterplan 2010-2030, October 2012, p 46.
[3] Based on Bunkerworld.com 15.04.2014
[4] Information about consumption of the larger vessels is from the owners material available on the web