CAPM-β of Carriers and Consolidators in Liner Shipping: Volume Contracts under the Rotterdam Rules in Perspective

Abstract: Liner shipping, which provides transportation by ships operating on a regular schedule between specified ports in accordance with publicly available timetables of sailing dates, is now a mature industry. The various players which are part of the liner shipping industry, namely, ocean carriers, port operators, freight forwarders or consolidators, customs, hinterland haulage carriers, inland navigation carriers, market regulators, etc., are increasingly interdependent on each other leading to inter-industry partnership. The recent global financial crisis has led to better vertical and horizontal cooperation among the ocean carriers and the nodal service providers in the liner shipping industry. However, some of the major liner carriers are yet to post profits as the freight rates were severely affected during the crisis. Amidst this evolving market environment, the liner shipping industry which used to be highly regulated through the conference system has witnessed the emergence of the contract paradigm of free bargaining norms where there is in place a service contract as promulgated under the Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998 in the United States (US). The uniqueness of individual contracts between shippers and carriers has now been recognized in the US through these Acts for almost three decades. This uniqueness, it would appear, has influenced the development of the volume contract concept in the newly adopted convention called the Rotterdam Rules and has provided the impetus for introducing bargaining freedom in carriage of goods wholly or partly by sea. The thesis analyses the various economic and financial implications associated with the bargaining freedom under volume contracts through estimation and drawing the time-varying systematic risk, β in the liner shipping industry by using Kalman filters and relate the estimated path of β to market changes during 1980–2013, depending on availability of data. To interpret the market environment in the liner shipping industry, the focus is on two points. The first is that the introduction of policies for promoting competition increases β, and the second is that an increase in market power due to cooperation and concentration among firms reduces β. The result of the analysis is varied across jurisdictions showing a certain degree of dependence on the position of national or regional legislation in which the liner shipping company is operating. The thesis also attempts to view the volume contract concept from a particular vantage point, namely, the perspective of the shipper, who in the present world trade scenario is often a non-traditional entity such as a logistics service provider, freight forwarder or consolidator. Global players in the consolidation business like DHL and UPS along with a section of the liner shipping carriers, equipped with state of the art information technology, has opened up a new era of cooperation in the liner shipping business with capacity-based pricing, time-based pricing, and service-based pricing. It is submitted that the introduction of volume contracts will enable these consolidation companies to take advantage of the freedom of contract in expanding their business within the mature liner shipping industry thereby creating value for themselves as well as for small and medium shippers. It is notable in this context that consolidators licensed in the US were allowed service contract parity through the NVOCC Service Arrangements (NSA) rule in December 2004, when dealing with their shipper-customers. However, there were certain tariff publication requirements which did not allow consolidators to reap the full benefit of the NSA rule. In February 2010, the publication requirements were relaxed creating a new wave of opportunity for consolidators. The financial analysis therefore includes estimation and drawing the β in the consolidation business by using Kalman filters and relate the estimated path of β to market changes during the period 1988–2013, depending on availability of data, depicting the growing business opportunity for these nodal service providers who are an important part of the liner shipping industry. The commercial viability of volume contracts with regard to the liner shipping industry is presented in conclusion which also reflect the viewpoints of the authors.