THE INTERNATIONAL ASSOCIATION OF INDEPENDENT TANKER OWNERS

Transcription

1 THE INTERNATIONAL ASSOCIATION OF INDEPENDENT TANKER OWNERS COMMENTS ON THE EUROPEAN COMMISSION'S DRAFT GUIDELINES ON THE APPLICATION OF ARTICLE 81 OF THE EC TREATY TO MARITIME TRANSPORT SERVICES 1. OVERVIEW 1.1 The International Association of Independent Tanker Owners ("INTERTANKO") wishes to comment on certain aspects of the Commission's draft guidelines on the application of Article 81 of the EC Treaty to maritime transport services, published in the Official Journal on 14 September 2007 (the "draft guidelines") INTERTANKO has been the voice of independent tanker owners since Membership is open to independent tanker owners and operators of oil and chemical tankers, ie non-oil companies, who fulfil INTERTANKO's membership criteria. Independent owners operate some 80% of the world's tanker fleet and the vast majority of these are INTERTANKO members. As of November 2007, the organisation has 270 members, whose combined fleet comprises more than 2,800 tankers totalling 225 million dwt, which is 70% of the world's independent tanker fleet. INTERTANKO's associate membership stands at some 300 companies with an interest in shipping of oil and chemicals. 1.3 Given the focus of INTERTANKO's members' businesses, it has commented only on those issues that are most relevant and important to its members' businesses. Its comments relate to the following areas of the draft guidelines: whether vessel size should be used as a guide to market definition (paragraphs 24 and 25): INTERTANKO considers that there is significant substitutability between vessel sizes and that the draft guidelines' emphasis on the boundaries between vessel size should be reduced; 1 INTERTANKO was assisted by Matthew Levitt and Angus Coulter of Lovells LLP in the preparation of these comments. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 1 of 11

2 the ability of vessels adapted or built specially to carry one type of cargo to compete in the market for another type of cargo (paragraphs 22 and 23): INTERTANKO considers that there is substantial switching between cargo types within the tanker sector and that this section as currently drafted implies that barriers to switching are more significant than is in fact the case; the geographic scope of relevant markets (paragraphs 28 to 30): INTERTANKO considers that this section could provide more useful guidance if illustrated with real-world examples, and that tanker markets could form the basis of such an example; pools that generally fall under Article 81(1) EC (paragraph 67): INTERTANKO considers that this section should be revised to make clear that the mere fact that a pool manager agrees a price for use of a pool vessel does not constitute "price fixing" or, if this is the Commission's view, that this view be made absolutely explicit; applicability of Article 81(3) EC (paragraph 72): INTERTANKO considers that this section needs significant expansion by the Commission, particularly given the points noted above in relation to pools that generally fall under Article 81(1). 1.4 INTERTANKO has also had the benefit of seeing the comments on the draft guidelines that the European Community Shipowners' Association ("ECSA") is proposing to send to the Commission. INTERTANKO supports the arguments and propositions contained in ECSA's paper and has supplemented it by way of the present submission only where INTERTANKO has further comments to add. 2. PRODUCT MARKET - VESSEL SIZES 2.1 In paragraphs 24 and 25 of the draft guidelines, the Commission sets out its position on possible market segmentation based upon the standard industrial sizes of vessels: "24. Vessel types are usually subdivided into a number of standard industrial sizes (33). In normal market conditions, due to considerable economies of scale, a service with a significant mismatch between cargo volume and vessel size does not appear to be able to offer a competitive freight rate. In addition, substitutability of vessel sizes may be limited by draught restrictions in ports and canals. In general therefore, the substitutability of different vessel sizes needs to be assessed so as to ascertain whether each vessel size constitutes a separate relevant market. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 2 of 11

3 25. The existence of chains of substitution between vessel sizes in tramp shipping should also be considered. In certain tramp shipping markets, vessel sizes at the extreme of the market are not directly substitutable. Chain substitution effects may nevertheless constrain pricing at the extremes and lead to their inclusion in a broader market definition." 2.2 In addition, this text includes a footnote (footnote 33): "( 33 ) It appears to be the industry's perception that vessel sizes constitute separate markets. The trade press and the Baltic Exchange publish price indexes for each standard vessel size. Consultants' reports divide the market on the basis of vessels' sizes." 2.3 While the Commission does not state this explicitly, the implication of this section of the draft guidelines appears to be that the Commission considers that each such vessel size is, at least prima facie, likely to constitute a separate relevant market. INTERTANKO considers that, while there may be instances in which size divisions between vessels do delineate the boundaries between product markets, there are many instances where this is not the case. INTERTANKO considers that these exceptions are so many that it would be misleading to consider that vessel size is a useful starting point for market definition. 2.4 It is the case that larger vessels generally benefit from economies of scale and have lower running costs per unit carried if they are carrying their maximum capacity. This in turn means that a larger vessel can often accept a lower price than could a smaller vessel. However, demand for independent tankers is highly variable, both in terms of total demand and the size of individual cargoes which shippers wish to have transported at any one time. In a situation of under demand for smaller cargoes, the price for carriage of cargoes by smaller vessels may fall so that the unit price falls below that of larger vessels. Similarly, if there is high demand for the carriage of large cargoes, this may push up the market price for carrying such cargoes in ships of a matching size to the point where this price rises to or above the market price for carrying such a cargo in two or more smaller vessels. 2.5 By way of example, a VLCC tanker has around twice the capacity of a Suezmax tanker, which in turn has around twice the capacity of an Aframax tanker. As a long term trend, Baltic Exchange rates for VLCCs are lower than for Suezmax vessels, which are lower than those for Aframax vessels. However, during a fairly typical 18 month period starting in January 2005, there were four periods where one or both of these price relationships were reversed, including one period where VLCC rates were above those for Aframax vessels. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 3 of 11

4 2.6 The economies of scale of different vessels are also only relevant in cases where a cargo that a shipper wishes to be transported matches exactly or very closely the size of a vessel. Where the size of a shipper's shipment is such that, if carried by a single vessel, this would imply that that vessel had a significant amount of unused capacity, the actual rate per unit for carrying that cargo by that vessel may be much higher than the unit rate that would apply if the vessel was full. In this case, it may be cost effective to split the cargo between two or more smaller vessels which would be full or nearly full. This would be the all the more true where a larger vessel has different tanks, since the capacity of the tank of a large vessel may be equal to, or smaller than, the capacity of a smaller vessel. 2.7 In addition to the economies of scale, paragraph 24 of the Commission's guidelines notes that there are other characteristics of vessel size that may be relevant, eg draught. INTERTANKO notes the point made by ECSA that draught restrictions apply only to a limited number of vessels and ports, and can be addressed by, for example, transhipment to smaller vessels. INTERTANKO agrees with the points made by ECSA. In terms of overall impact on possible segmentation of the market, any such issues will have an opposite effect to those of economies of scale for larger vessels, ie the use of small vessels may allow shorter routes to be taken and cost of transhipment etc to be avoided. Balancing such savings against possible lesser economies of scale will give a very complicated picture of what vessel or combination of vessels would be most cost effective for a given cargo. 2.8 The examples given above are not exhaustive. There is a range of complex interactions between the different vessel sizes. Given this, any suggestion that vessel sizes can be used as a convenient proxy for market definition, rather than one of many factors to be considered, would not be supported by INTERTANKO. 2.9 INTERTANKO considers that it is likely that many or most vessel sizes of a given type of tanker ought to be considered as part of the same market, particularly once the chain of substitution points raised at paragraph 25 of the draft guidelines are considered For these reasons, INTERTANKO considers that the Commission should add a clarificatory sentence to paragraph 24, for example, "However, there is no presumption that each vessel size will constitute a separate market." 2.11 INTERTANKO also suggests that footnote 33 be deleted. As it stands, this does not seem to add to the guidance provided by the draft guidelines but merely to be a summary of certain information that the Commission has encountered while preparing the draft KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 4 of 11

5 guidelines. If this footnote is to be retained, INTERTANKO would suggest that it would provide more useful guidance if it were redrafted to say whether the Commission agrees with the industry views that it puts forward in that footnote. 3. PRODUCT MARKET - CARGO TYPE 3.1 In paragraphs 22 and 23 of the draft guidelines, the Commission considers the importance of the cargo type which a vessel can carry in defining the market. "22. The physical and technical conditions of the cargo to be carried and the vessel type provide the first indications as to the relevant market from the supply-side (31). If vessels can be adjusted to transport different cargoes at negligible cost and in a short time-frame (32), tramp shipping service providers are able to compete for the transport of several types of cargo. In such circumstances, the relevant market will comprise more than one type of cargo. 23. However, there are a number of vessel types that are technically adapted and/or specially built to provide specialised transport services. Although specialised vessels may also carry other types of cargo, they are generally at a competitive disadvantage. The ability of specialised service providers to compete in other markets may, therefore, be limited." 3.2 The two footnotes to paragraph 22 read as follows: "( 31 ) For example, liquid bulk cargo cannot be carried on dry bulk vessels or reefer cargo cannot be transported on car carriers. Many oil tankers are able to carry dirty and clean petroleum products. However, a tanker cannot immediately carry clean products after having transported dirty products. ( 32 ) Switching a dry bulk vessel from the transport of coal to grain might require only a one-day cleaning process that might be done during a ballast voyage." 3.3 INTERTANKO agrees that the type of cargo that a vessel can carry is important. Clearly, transportation of cargoes on two different vessels that can by no means carry the same type of cargo would be unlikely to fall within the same product market. However, INTERTANKO considers that the Commission's draft guidelines as they currently stand may lead to the inference that switching between cargo types is more of a barrier to effective competition within the market than is in fact the case. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 5 of 11

6 3.4 Whether this is the Commission's intention or not, all tanker vessels fall within the description in paragraph 23 of the draft guidelines of vessels that "are technically adapted and/or specially built to provide specialised transport services". 3.5 Each tanker is designed with a particular class of liquid bulk product or products in mind. As suggested in footnote 31 to the draft guidelines, depending upon the class of products for which it has been designed, a tanker may be more or less easily adapted to carry a different class of products. A complete survey of all classes of tankers and the possible switching between them is beyond the scope of this paper. However, INTERTANKO would draw the Commission's attention to the possible types of switching set out in section of EU report COMP/2006/D2/002 on the legal and economic analysis of tramp maritime services (the "Fearnley Report"). Types of switching that it considered were possible included: carriage of IMO 3 chemical cargoes on clean petroleum product tankers and on chemical parcel tankers; carriage of clean petroleum products on IMO class 3 tankers; carriage of dirty petroleum products and crude oil on clean petroleum product tankers; carriage of dirty petroleum products on crude oil tankers and vice versa. 3.6 The types of switching indicated by the Fearnley Report are not necessarily exhaustive, but its descriptions of what is involved in this type of switching is instructive. Some such switching is costless and some involves costs and time of varying amounts. 3.7 Given the differing costs of switching, different types of switching will take place depending upon market conditions. Where demand for carriage of a particular product type is particularly high, significant amounts of switching may be expected from vessels primarily designed to carry other product types. 3.8 INTERTANKO considers that there are two ways in which the Commission's current wording misrepresents the way in which switching may take place and its impact. 3.9 First, in paragraph 22, the Commission states that tramp shipping service providers are able to compete for the transport of several types of cargo if (and with the implication that only if) "vessels can be adjusted to transport different cargoes at negligible cost and in a short time frame", giving the example of a short time frame being a single day's cleaning. By this standard, many of the types of switching seen in the tanker sector are not of negligible cost and do not take place within a short time frame. INTERTANKO considers KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 6 of 11

7 that these criteria are far too restrictive. Significant variations between demand in different areas of tanker transportation can lead to economically rational switching between cargo types even where the costs involved in such switching are not negligible and where the time taken is more than one day. Such switching is still common enough and rapid enough for the vessels that can be so switched to be treated as part of the same market as those vessels already carrying that type of cargo Secondly, the Commission does not define what is meant by "specialised transport services", but paragraph 23 as drafted certainly implies that these would include many or all tankers. INTERTANKO does not agree that, for tankers at least, vessels that may be switched to another type of cargo "are generally at a competitive disadvantage". For tankers, the costs (if any) of switching product type are generally one-off. Once switching to a product type has taken place a tanker is generally at no competitive disadvantage compared to one that has always carried that product type Given all of the above, INTERTANKO would recommend three changes to the draft guidelines in this area: in paragraph 22, that the Commission replace the reference to switching at "negligible" cost with a reference to "comparatively low" cost; in footnote 32, that it be made clear that the example given does not imply that switching that would take more than one day would not be considered in defining the relevant market; in paragraph 23, that, rather than stating that specialised vessels carrying other types of cargo "are generally" at a competitive disadvantage, to state that such vessels "may be" at a competitive disadvantage. 4. GEOGRAPHIC MARKET 4.1 INTERTANKO notes that the draft guidelines deal very briefly (in paragraphs 28 to 30) with the question of geographic market definition. This section could usefully be expanded with specific examples of the geographic dimension of real world transportation markets. 4.2 INTERTANKO considers that the tanker sector could provide usefully illustrate the proposition that non-liner shipping markets are very wide in geographic scope, probably worldwide. Tankers carry commodity products which are traded in highly variable quantities in different parts of the world just as the price of those commodities varies significantly over time and between geographic location. Such variation can be large and rapid, leading to highly unpredictable and varying patterns of trade between ports. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 7 of 11

8 Indeed, changes to commodity prices during the duration of a voyage may lead to certain tankers being redirected to a new destination while at sea. In addition to these variable routes, both tanker companies and shippers employing those tanker companies generally have a worldwide scope, allowing a shipper to develop a relationship with a tanker company for the provision of transportation services from a wide range of ports. INTERTANKO considers that the situation in such markets could be usefully contrasted with one where a market is composed of trade routes between fixed ports or groups of ports. 4.3 If the Commission considers that a tanker example would be a useful one to include, INTERTANKO would be happy to develop this example further with the input of its members. 5. POOLS THAT GENERALLY FALL UNDER ARTICLE 81(1) 5.1 The draft guidelines deal in a single paragraph with this class of pools (paragraph 67): "If a pool agreement between competitors has as its object the restriction of competition by means of price fixing, output limitation or sharing of markets or customers it will fall under Article 81(1) of the Treaty. Agreements between competitors involving price fixing will always fall under Article 81(1) of the Treaty irrespective of the market power of the parties." 5.2 INTERTANKO has a number of concerns with this guidance. The Commission s position 5.3 As is apparent from paragraph 62 of the draft guidelines, pools involve the provision of shipping services at a price that has been set on behalf of the participants, rather than by direct negotiation by the individual pool participants with the shipper whose cargo is transported by that vessel. Paragraphs 65 to 72 of the draft guidelines suggest that pools have a range of different characteristics, some of which may make them anti-competitive and some pro-competitive in their net effects. However, since all pools have, as one of their functions, joint marketing and negotiation of freight rates by the pool manager, paragraph 67 suggests that the Commission considers all pools to fall within Article 81(1), unless involving non-competitors. 5.4 If the Commission does consider that all pools will fall within Article 81(1), paragraph 67 would be the most important part of these guidelines for the bulk shipping industry. It would imply that there would be no pools that fall into the class "Agreements that may fall under Article 81(1)" and that, unless they do not involve actual or potential competitors, they are all in breach of Article 81(1) unless capable of exemption. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 8 of 11

9 5.5 If this is the Commission's view, INTERTANKO suggests that it would be advisable to ensure that the Commission makes its position explicit so that pool participants are under no illusions as to the Commission s assessment of pool arrangements. Do all pools involve price-fixing? 5.6 INTERTANKO does not think that the view starkly expressed at paragraph 67 is applicable to the pools of which it is aware. INTERTANKO considers that a distinction needs to be drawn between "price fixing" as a classic hard-core restriction, on the one hand, and, on the other hand, the agreement of prices with customers as an important, necessary but secondary feature of pools. In many cases, pools are not price fixers but price takers: they do not set the price at which their services will be sold. 5.7 INTERTANKO's understanding is also that, in many tanker markets, a great deal of negotiating power for prices lies with brokers. Brokers set the prices for any given cargo on the basis of a bidding process; the lowest price received by the broker will be successful. In this way, the price is competed down. 5.8 The implication of "price fixing" is that the market price would otherwise have been lower than the price agreed and the market output higher. That is not an accurate representation of INTERTANKO s experience of pools. Where pools are successful in bidding for business, the joint negotiation involved is the purely administrative function of offering a price that would have been the same, whoever was accepting it. Indeed, since this is an essential part of the operation of often pro-competitive pooling arrangements, allowing for efficient use of vessels, it may have the effect of increasing market output to a higher, more competitive level. 5.9 In many cases the market price is outside the control of a tanker operator, whether that operator is a pool manager or vessel owner. This is, for example, particularly the case when the market share of the operator in question is low, where the buying power of shippers or brokers is significant or where a highly transparent market price creates conditions close to perfect competition The buying power of shippers in tanker markets is often significant, particularly where the shippers are oil companies. This power is increasing as oil companies consolidate further. Oil companies can also increase their buying power by the actual or potential withholding of demand from the open market if prices rise. Such withholding (or delaying) of demand is possible because, for example: oil companies have their own fleets that can be substituted for open market tankers; they are sometimes shipping products to other arms of their own business; and they are often involved in operation of the terminals from and/or to which the products are shipped. KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 9 of 11

10 5.11 Similarly, transparency in tanker markets is extremely high, with prices and other key market information being published on at least a daily basis by the trade press, by brokers and by bodies such as the Baltic Exchange and Platts. Against such a transparent background, even a pool (or individual operator) with a relatively high share of a market is a price taker Whether or not the Commission accepts that a given pool can be seen wholly as a joint production agreement, INTERTANKO submits that the proper way to view the agreement of prices in many pools is as akin to that set out in paragraph 90 of the Commission's horizontal guidelines: "where a production joint venture that also carries out the distribution of the manufactured products sets the sales prices for these products, provided that the price fixing by the joint venture is the effect of integrating the various functions" A pool not only creates the relevant product by bringing vessels under joint management; it also distributes the product by dealing with customers (or brokers representing customers). This extract also recognises that the agreement of a price is often not the object but the effect and a necessary by-product of creating an efficient pool of vessels INTERTANKO would suggest that this paragraph of the Commission's horizontal guidelines could usefully be cross-referenced in a footnote to this section, or to section on pools that may fall under Article 81(1), noting that this is a qualification to section Need to retain the "object" concept 5.15 This distinction between object and effect is one that could also usefully be addressed by the language used in paragraph 67 of the draft guidelines. The first sentence makes the statement that pools with price fixing as their "object" will generally fall within Article 81(1). The second sentence, which at first sight merely repeats part of what is said in the first sentence, makes no reference to "object", and is thus broader in scope. INTERTANKO would suggest that this second sentence be deleted. As explained above, pools are, so far as INTERTANKO is aware, rarely created with the object of coordination of prices, but for other reasons, with the need to agree a price being a simple by-product of the main objects of the pool Deletion of the second sentence would also delete a footnote cross-referring to sections of the Commission's guidelines on horizontal agreements dealing with commercialisation agreements. As explained above, INTERTANKO does not consider that, for most pools, a commercialisation agreement is the right model to apply. At the very least, if this is the KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 10 of 11

11 Commission's unambiguous view of how this question should be analysed, that view ought to be explicitly stated, rather than implied by a footnote. 6. APPLICABILITY OF ARTICLE 81(3) OF THE TREATY 6.1 INTERTANKO is surprised and disappointed that Article 81(3) is dealt with in a single paragraph (paragraph 72) of the draft guidelines. 6.2 As noted above, the current draft guidelines imply that most pools will fall within Article 81(1). In the absence of changes to section 3.3.1, most ship-owners will therefore be reliant on the guidance that the Commission can provide on the application of Article 81(3) in order to establish whether their participation in pools is lawful. Given that there is no possibility of notification for individual exemption and that the four conditions of Article 81(3) are cumulative, it is critical that further guidance is provided. 6.3 In particular, INTERTANKO feels that the Commission needs to explain how the indispensability condition, paraphrased at paragraph 72 (c), applies in the context of pools. 6.4 Light-touch, non-prescriptive guidelines would, it may be hoped, encourage undertakings to establish new and different structures to innovate and maximise efficiencies in the tramp shipping sector. 6.5 ECSA has provided specific examples of factors that it would like to see reflected in the draft guidelines' consideration of each of the four conditions of Article 81(3). INTERTANKO would endorse this call. 6.6 INTERTANKO would also suggest that this area at least is one where circulation of a further draft for consultation before publication of the finalised guidelines would be prudent. * * * KRF-12301/ , INTERTANKO comments to draft EU competition rules guidelines, 16 Nov Page 11 of 11