THE TRAMP SHIPPING BUSINESS AND THE EU COMPETITION LAW An introductory view of tramp shipping pools under Article 101 TFEU Bachelor’s Final Degree Project Barcelona School of Nautical Studies Universitat Politècnica de Catalunya · BarcelonaTech Candidate: Francisco Javier Méndez Roca Supervised by: Dr. Jaime Rodrigo de Larrucea Bachelor’s Degree in Nautical Sciences and Maritime Transport Major in Maritime Business and Port Logistics Barcelona, November 2015 Departament of Nautical Sciences and Engineering Acknowledgements May I start thanking all those people who supported me and have seen me grow up, not only throughout the attainment of this Project but also during my life, who are constantly in my thoughts. First of all, I would like to make special mention and express my most sincere gratitude to Dr. Jaime Rodrigo de Larrucea, who not only has guided and advised me for the consecution of this paper, but has also mentored me in my studies and early career since I started my nautical studies. Likewise I consider myself fortunate to have been able to enjoy his wisdom and also his amusing lectures. I equally thank my family, specially my parents who strived to keep me going in the good times and, what is more important, in the bad ones. They always provided me their support and advice even without asking them. To my father who, since I was a child, shared with me his passion, wisdom and experience in the shipping business. To my mother for her determination, fortitude, patience and endless efforts to bring me up against all odds. Also to my sister Eliza for her good mood and patience to follow and review my project. Furthermore, deserve a special mention: All my colleagues from Weco Maritima. Expressly, Manuel Dominguez and Pedro Paez who oriented and taught me since that 1 July 2012, when I started working there. It was my first working experience from which I learned so much, particularly regarding project and breakbulk cargo. Mr. Paco Castañer, for sharing with me his vast knowledge on dry bulk chartering and providing me with his observations, advices and corrections. Also my classmate Marc Terradellas. One of my greatest motivations is be able to, partly, compensate them for all that at some time. i THE TRAMP SHIPPING BUSINESS AND THE EU COMPETITION LAW ii Abstract By the way the tramp shipping industry works, it is considered close to perfect competition model, where the atomicity, homogeneity and information transparency are evident. Many small shipping companies compete for a volatile and unpredictable demand. Despite there are some entry barriers to the market, these can be easily mitigated by the way this market works. Tramp shipping companies co-operate among them in pools, in order to bid for large contracts of affreightment, which otherwise, shipowners could not perform on their own. Tramp shipping pools raise competition concerns, and under the EU Competition Rules, these agreements shall be assessed on case-by-case basis in order to determine whether an agreement may jeopardise competition within common market. To do so, an assessment under Article 101 TFEU is required. Normally, tramp shipping pools created for the right purposes, do not entail competition restrictions. Conversely, those agreements that have a combined market share considerably high or involve hardcore restrictions, are prohibited under Article 101 (1). These agreements have three options: terminate their agreement; demonstrate that economic efficiencies brought by the agreement outweigh restrictions under Article 101 (3); and lastly and most appealing, try to restructure the agreement creating a full-function joint venture in order to fall under a more certain legal framework, the EC Merger Rules. iii THE TRAMP SHIPPING BUSINESS AND THE EU COMPETITION LAW iv Table of Contents FIGURES IX TABLES X KEY WORDS XI ABBREVIATIONS XII INTRODUCTION XV CHAPTER ONE. WHAT IS TRAMP SHIPPING 21 1.1 THE LEGAL DEFINITION OF TRAMP 21 1.2 THE LATEST DEFINITION. 24 CHAPTER TWO. MAIN FEATURES OF TRAMP SHIPPING 27 2.1 GLOBALLY COMPETITIVE MARKETS 28 2.2 CLOSE TO PERFECT COMPETITION MODEL 29 2.2.1 ATOMICITY 30 2.2.2 HOMOGENEOUS PRODUCT 30 2.2.3 INFORMATION TRANSPARENCY 31 2.3 DIFFERENT SUB-MARKET SEGMENTS IN RESPONSE TO CUSTOMER NEEDS 31 2.4 COMPETITION BETWEEN SUB-MARKETS FOR CARGO 32 2.5 VOLATILE AND UNPREDICTABLE DEMAND 33 2.6 MANY ENTREPRENEURIAL COMPANIES 36 2.7 GLOBAL TRADE PATTERNS 38 2.7.1 DRY BULK TRADE PATTERNS 39 2.7.2 LIQUID BULK TRADE PATTERNS 40 2.7.3 NEO-BULK TRADE PATTERNS 42 2.8 EASY OF ENTRY AND EXIT 43 2.9 COST EFECTIVENESS 46 2.10 RESPONSIVENESS TO DEVELOPMENT OF MARKET AND SHIPPER’S NEEDS 46 v THE TRAMP SHIPPING BUSINESS AND THE EU COMPETITION LAW CHAPTER THREE. TRAMP MARKET SEGMENTS 49 3.1 DRY BULK 50 3.1.1 HANDYSIZE 50 3.1.2 HANDYMAX 50 3.1.3 PANAMAX 51 3.1.5 CAPESIZE 52 3.2 LIQUID BULK 52 3.2.1 OIL TANKERS 53 3.2.1.A HANDYSIZE 54 3.2.1.B MEDIUM RANGE 54 3.2.1.C PANAMAX 54 3.2.1.D LR1/LR2 54 3.2.1.E AFRAMAX 55 3.2.1.F SUEZMAX 55 3.2.1.G VLCC/ULCC 55 3.2.2. CHEMICAL TANKERS 56 3.2.2.A IMO 1 TYPE 57 3.2.2.B IMO 2 TYPE 57 3.2.2.C IMO 3 TYPE 57 3.2.3. GAS CARRIERS 58 3.2.3.A LNG CARRIERS 59 3.2.3.B LPG CARRIERS 60 3.3 NEO BULK 61 3.3.1 RO-RO VESSELS 62 3.3.2 OPEN HATCH BULK CARRIERS 62 3.3.3 REEFERS 63 3.3.4 MULTIPURPOSE AND HEAVY LIFT VESSELS 64 CHAPTER FOUR. SHIPPING MARKETS 65 4.1 THE FOUR SHIPPING MARKETS 66 4.1.1 THE NEWBUILDING MARKET 67 4.1.1.A THE PURCHASING PROCEDURE 69 4.1.1.B THE SHIPBUILDING CONTRACT 70 4.1.1.C SHIPBUILDING FINANCE 71 4.1.2 THE SALE AND PURCHASE MARKET 73 4.1.2.A THE SALE AND PURCHASE PROCEEDING 74 4.1.2.B SHIP PRICES 78 4.1.3 THE FREIGHT MARKET 79 4.1.3.A THE CHARTER-PARTY 80 4.1.3.B VOYAGE CHARTER 82 vi 4.1.3.C CONTRACTS OF AFFREIGHTMENT 84 4.1.3.D TIME CHARTER 85 4.1.3.E BAREBOAT CHARTER 87 4.1.3.F FREIGHT DERIVATIVES 88 4.1.4 DEMOLITION MARKET 90 4.2 THE ROLE OF BROKERS 93 4.3 SHIPPING MARKET CYCLES 95 CHAPTER FIVE. HORITZONTAL CO-OPERATION AGREEMENTS: POOLS 99 5.1 POOLS 100 5.1.1 POOL PURPOSE 102 5.1.2 CENTRAL ADMINISTRATION AND POOL MANAGEMENT 104 5.1.3 WEIGHTING SYSTEM 107 5.2 CONTRACTUAL BASIS 111 5.2.1 NON-COMPETE CLAUSES 111 5.2.2 LOCK IN PERIODS AND EXIT CLAUSES 112 5.2.3 EXCHANGE OF INFORMATION 113 5.3 BIMCO’S POOLCON 114 5.3.1 WHAT IS POOLCON? 114 5.3.2 A BRIEF REVIEW OF POOLCON A 115 5.3.2.A PART I 115 5.3.2.B PART II 116 5.4 DO POOL AGREEMENTS RAISE COMPETITIVE CONCERNS UNDER EU COMPETITION LAW? 121 CHAPTER SIX. TRAMP POOLS UNDER THE EU COMPETITION LAW 123 6.1 DETERMINING THE RELEVANT MARKET 124 6.1.1 PRODUCT MARKET 125 6.1.2 GEOGRAPHIC MARKET 127 6.1.3 MARKET SHARE 128 6.2 TRAMP POOL AGREEMENTS UNDER ART. 101 TFEU 129 6.3 ART. 101 TFEU (1) 130 6.3.1 POOL AGREEMENTS THAT DO NOT FALL UNDER ARTICLE 101 (1) 131 6.3.2 POOL AGREEMENTS THAT GENERALLY FALL UNDER ARTICLE 101 (1) 133 6.3.3 POOL AGREEMENTS THAT MAY FALL UNDER ARTICLE 101 (1) 136 6.4 ART. 101 TFEU (3) 138 6.4.1 ECONOMIC EFFICIENCIES 139 6.4.2 FAIR SHARE OF BENEFITS TO CONSUMERS 140 6.4.3 INDISPENSABILITY 141 6.4.4 NO ELIMINATION OF COMPETITION 142 6.5 EU MERGER REGULATION 144 vii THE TRAMP SHIPPING BUSINESS AND THE EU COMPETITION LAW CONCLUSIONS AND FINAL ASSESSMENT 147 SOURCES 155 BIBLIOGRAPHY 155 REGULATIONS 158 COMMISION NOTICES AND GUIDELINES 159 CASE LAW 160 TRAMP REPORTS 160 ONLINE SOURCES 161 ANNEX A. – ARTICLES 101 AND 102 TFEU 163 A1.1 ARTICLE 101 TFEU (EX ARTICLE 81 TEC) 163 A1.2 ARTICLE 102 TFEU (EX ARTICLE 82 TEC) 164 ANNEX B. – SAMPLE COPY OF BIMCO’S POOLCON A. 165 ANNEX C. – MARKET SHARES ON CO-OPERATION AGREEMENTS 186 viii Figures Figure 1. Main characteristics of the three shipping market segments. 25 Figure 2. World Oil Demand Quarterly. 34 Figure 3. Comparison between Dow Jones Industrial Average Index and the Baltic Dry Index. 35 Figure 4. Structure of international seaborne trade, 2014. 39 Figure 5. Average of Time Charter Routes for Baltic Indices (2014-2015) in USD per Day. 92 Figure 6. Dry Bulk Demolition in Million DWT (2014-2015). 92 Figure 7. Main Structure and Activities of a Member-controlled Pools. 107 Figure 8. Weighting factors of the pool’s distribution formula. 109 ix THE TRAMP SHIPPING BUSINESS AND THE EU COMPETITION LAW Tables Table 1. Cargo Fleet by Company Size. 36 Tabla 2. Tramp Fleet Ownership Profile. 37 Table 3. Deliveries of newbuildings, types and countries where built. 67 Table 4. Baltic Exchange Tanker Index. 80 Table 5. Charter-parties Cost Distribution. 82 Table 6. Tonnage Sold for Demolition, Major Vessel Types and Countries 91 x Key Words Antitrust Regulations; Article 101 TFEU; Charter Parties; Chartering; Contracts of Affreightment; Dry Bulk Cargo; European Competition Law; European Union; Liquid Bulk Cargo; Maritime Law; Neo-bulk; POOLCON A; Shipping Cycles; Ship Sale and Purchase; Shipping Market; Shipping Pools; Specialized Shipping; Time Charter; Tramp Pool Agreements; Tramp Shipping; and Voyage Charter.