UNCTAD warns: Consolidation in the shipping industry could lead to oligopoly

2017-11-01 09:00

The United Nations Conference on Trade and Development (UNCTAD) recently warned in its latest review of maritime transport that continued overcapacity is driving consolidation among shipping companies, which could bring about a new market order. However, recent mergers among major shipping companies and the development of large alliances could lead to an oligopolistic market structure.

UNCTAD Secretary-General Mukhisa Kituyi pointed out that market demand is lower than previously anticipated, coupled with a large influx of ships into the market, leading to a persistent oversupply of capacity in the shipping industry. Consolidation and aggregation of cargo transportation can improve economies of scale and reduce operating costs, but market transformation also brings some risks. In the long run, once the industry stabilizes, shipping companies may exercise their market power, restricting capacity supply and raising freight rates. In addition, the increasing concentration of the shipping market increases the risk of distortion of fair competition and will affect freight rates and shippers.

Shamika N. Sirimanne, Director of the Division on Technology and Logistics at UNCTAD, said that the risk in the shipping market is that after the market capacity concentration increases, it may lead to an oligopolistic market structure. In the markets of many developing countries, there are currently no more than three capacity providers. Regulators will need to monitor shipping mergers and acquisitions and alliance developments to ensure fair market competition. Therefore, the shipping market needs to revisit the rules of consortia and alliances to determine whether these rules need to be amended to prevent the abuse of their market power and to balance the interests of shippers, ports, and carriers.

Shamika N. Sirimanne stated, "The negative impact of increasing market concentration is the emergence of more and more large transport companies, especially in container shipping. We are seeing an oligopolistic structure forming, which is a great concern. Since transport is crucial to the economies of developing countries, we are worried that an oligopoly will reduce competition."

The report further indicates that global container ports are facing continued pressure from the ongoing development of larger vessels, and must also cope with cascading of vessels from major to secondary trade routes, as well as increasingly serious cybersecurity threats. Although investment is key to improving ports, unless larger vessels can ensure the transport of more goods, the additional costs invested by ports may not be worthwhile for adapting to larger vessels, but rather investing in more space and adding more equipment to handle current cargo volumes.

Between 2000 and 2016, a total of 292 port projects with a total investment of US$68.6 billion were implemented to improve port infrastructure and superstructure. However, the 2017 Review of Maritime Transport pointed out that, on average, freight and insurance costs account for about 15% of the value of imports, but this gap is much higher for smaller and more vulnerable economies. Among them, the average freight and insurance costs for small island developing states account for 22% of the value of imports, 21% for least developed countries, and 19% for inland developing countries. The persistent high transportation costs in many developing countries stem mainly from low port efficiency, inadequate infrastructure, limited economies of scale, and weak competitiveness in the transport market. Therefore, helping developing countries improve the factors contributing to high transportation costs is key to economic development.

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 and is one of the permanent bodies of the UN General Assembly. UNCTAD is an intergovernmental organization that reviews issues related to national trade and economic development. It is the only intergovernmental agency within the UN system that comprehensively addresses development and trade, finance, technology, investment, and sustainable development-related issues. Its headquarters is in Geneva, Switzerland, and it currently has 192 member states.

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