All of the top ten ocean container carriers have been accused by shippers of systematic price gouging and unfair practices in the past 18 months, according to complaints lodged with the U.S. Federal Maritime Commission (FMC). Shippers say carriers attempted to cash in on the dramatic spike in spot rates that resulted from increased demand for household and other items during the COVID-19 pandemic, at the expense of their long-term customers.
The complaints have been deemed of “national significance” by an FMC judge. Erin M. Wirth, FMC’s chief administrative law judge, commented in the case of MCS Industries, Inc. v. COSCO Shipping Lines Co., et al., FMC Docket No. 21-05, initiated in July, 2021, that the Shipping Act violations alleged “are of national significance, for example, that one of the largest container lines in the world ‘sought to take advantage of unprecedented high pricing by forcing shippers with service contracts…to resort to spot market purchases’ by the ‘practice of systematically failing to meet its quantity commitments to Complainant between certain ports.’”
Shipping costs are an important driver of inflation around the world, according to a March 2022 report based on research by the International Monetary Fund. “When freight rates double, inflation picks up by about 0.7 percentage point,” said Yan Carrière-Swallow, Pragyan Deb, Davide Furceri, Daniel Jiménez and Jonathan D. Ostry, the report’s authors, in a March 28, 2022, blog on the IMF’s website. “Most importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months.”
The Pendulum Swing
Many of the FMC cases have been subject to confidential settlements, and carriers have pushed back strongly against the accusations, citing their own challenges during the pandemic crunch. However, the period seems to mark a low point in the ongoing tit-for-tat battle between shippers and carriers over freight rates. It also colors the current situation, where the “power pendulum” has swung back towards shippers, as demand for ocean freight drops, and carriers begin to receive newly built ships, creating excess capacity and driving down rates.
The FMC has been handling a flurry of complaints lodged by shippers against ocean carriers since the beginning of 2022. The complaints typically include accusations that ocean carriers engaged in violations of the Shipping Act of 1984 by failing to honor their long-term contract rates, instead offering space on containerships to other parties at far higher rates, and also that they charged unwarranted demurrage fees.
Ocean carriers accused by shippers of price-gouging or inflated fees, including artificially creating capacity scarcity by using “blank sailings” to drive prices higher, include all ten of the top carriers — Maersk, MSC, Cosco, CMA CGM, Hapag-Lloyd, Ocean Network Express, Evergreen, OOCL, HMM and Yang Ming.
A typical complaint, lodged with the FMC March 18, 2022, by Foreign Tire Sales, Inc. (FTS) against Evergreen Shipping Agency (America) Corp; as Agent For Evergreen Line, states, “Evergreen advised FTS and its vendors that there was no space in ships bound for the USA and then turned around and gave the space that should have been given to FTS to Non-Vessel Operators… at much higher rates than the rates promised in the contract between FTS and Evergreen.”
FTS said in the complaint that, since the onset of the pandemic, “multiple global ocean freight carriers” including Evergreen had “unjustly and unreasonably exploited customers such as FTS by substantially increasing their profits at the expense of shippers such as FTS and the U.S. consuming public which has been forced to absorb higher product prices due to the improper increased freight costs.” The case was the subject of a confidential settlement, approved by the FMC, May 3, 2022.
Another example is the complaint brought by Achim Importing Company Inc., an importer of home furnishings, against Yang Ming – a member of one of the three major ocean alliances. Instead of honoring the pricing and minimum quantity commitments in its service contract, Achim claimed, Yang Ming began a practice of “systematically favoring other shippers, including spot market purchasers willing to pay high rates.” As a result, Achim said, it had to obtain space on the spot market at enormous expense. That case was also settled, in August 2022.
Carriers Push Back
Norman Choi, in-house counsel for Yang Ming responded to a request for comment by saying that Yang Ming had consistently denied Achim’s allegations. “At present, Achim remains a loyal and long-standing customer of Yang Ming who continues to deliver Achim’s cargo and respond to its transportation needs without issue.”
In his May 24 response, Choi went on to say, “In truth, the operations of Yang Ming, including fleet deployment and equipment availability, was severely impacted by the pandemic’s effects, which included worldwide congestion at marine terminals and labor shortages such as trucker availability. Like most other carriers, Yang Ming faced unprecedented market demand surges that challenged vessel capacity.”
That argument was echoed by Willy Shih, the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School. “Don’t forget, there was a huge demand crunch, and schedule reliability went out the window. Everyone was thrown off schedule,” he said. “Plus, congestion removes capacity from the system,” he added, pointing out that there was a lot of congestion during this period, including at major trans-Pacific port destinations such as Los Angeles.
Nevertheless, there was a notable spike in complaints by shippers against major ocean carriers between January 1, 2022, and May 20, 2023, numbering more than 18 during that time, compared to only a handful in the period between January 1, 2019, and June 1, 2020. Those earlier complaints typically allege over-charges of no more than a few tens of thousands of dollars. By contrast, in its April 27, 2023, complaint filed with the FMC against OOCL, Bed Bath & Beyond claimed “brazen price gouging and profiteering” had cost the retailer $31.7 million in extra freight charges, additional costs and lost profits. Bed Bath & Beyond declined to comment further, saying “As is our practice, we do not comment on legal matters.”
There is no doubt that the ocean carriers — whatever challenges they faced — made profits for 2021 and 2022 unseen for at least ten years, while Bed Bath & Beyond filed for Chapter 11 bankruptcy April 23, 2023. According to Simon Heaney, senior manager for container research at Drewry Maritime Research, the container shipping industry reported before-tax profit of $296 billion in 2022, and expects a $16.5 billion profit in 2023. Heaney was speaking during an April 25 Webinar, “Drewry Container Market Outlook.”
By contrast, Drewry predicts the industry will report a $10 billion loss in 2024 as new contracts are signed at significantly lower rates, and a flood of new ships results in effective capacity growth of 25% during 2023.
OOCL filed an “Answer To Verified Complaint” to the FMC May 23, stating, “(Bed Bath & Beyond) BBBY's allegations that Respondents somehow drove up freight rates, created artificial scarcity, unjustly and unreasonably exploited customers, and refused to deal with BBBY are entirely false. As documented by the Commission itself, during the time period in question carriers faced unprecedented challenges arising from spiking demand, record growth in U.S. imports, global intermodal supply chain delays and congestion, and shoreside COVID restrictions. These factors caused severe and protracted trans-Pacific vessel delays, which removed a significant proportion of functional capacity from the market, disrupted vessel schedules, and stretched to the limit every part of the inland intermodal supply chain. Respondents took no action to drive up freight rates, nor did they create artificial scarcity. Rather, Respondents invested in providing new capacity and service options, and worked cooperatively with BBBY and other shippers to provide the highest levels of service quality under extraordinary circumstances.”
FMC Fines for Demurrage Over-Charging
Several of the complaints include, or are solely related to, allegations of unfair demurrage charges. In May 2023, the FMC reported that Ocean Network Express Ptd. Ltd. (ONE) had agreed to pay a $1.7 million civil penalty after entering into a compromise agreement with the FMC in April to resolve allegations it violated rules by assessing detention charges when appointments were unavailable during allocated free time to return equipment. Wan Hai agreed to pay $950,000 in civil penalties to address similar allegations. In June 2022, Hapag Lloyd AG paid $2 million in civil penalties to resolve allegations it violated The Shipping Act (46 U.S.C. § 41102(c)) in how it assessed detention charges.
Apart from Yang Ming, the other ocean carriers, contacted for comment, did not respond.
Denial of Collusion
Responding to a question as to whether there was collusion between Yang Ming and other carriers, Choi said, “This claim is patently false and is resoundingly rejected by Yang Ming. At no time did Yang Ming engage, work, or discuss with our competitors in an unlawful manner to affect demand, supply, or price.”
Choi said, “It’s noteworthy to mention that the Federal Maritime Commission’s Fact Finding 29 investigation into the effects of COVID-19 on the ocean shipping supply chain found that ‘competition among ocean common carriers, among the three major alliances and among the members in each of these alliances, is vigorous.’ Commissioner Dye also found that the market for container shipping services to the U.S. is either ‘not concentrated’ or only ‘minimally concentrated,’ and competition in the market is ‘vigorous.’”
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