La Alianza Marítima. May 3, 2013

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1 May 3, 2013 La Alianza Marítima

2 Table of Content EXECUTIVE SUMMARY... 3 PURPOSE OF THE STUDY... 3 STRUCTURE OF THE STUDY... 3 KEY FINDINGS... 3 TRANSPORTATION COSTS... 7 OTHER FINDINGS I. INTRODUCTION OBJECTIVE OF THE STUDY STRUCTURE OF THE STUDY II. REVIEW OF THE LITERATURE STRUCTURE AND COMPETITION IN THE INDUSTRY STUDIES ON THE MARITIME INDUSTRY AND THE JONES ACT Subsidy provisions THE JONES ACT AND PUERTO RICO SUMMARY III. MAIN ECONOMIC TRENDS ECONOMIC GROWTH AND KEY DETERMINANTS EXTERNAL TRADE Exports Imports Main markets IV. GROWTH TRENDS AND STRUCTURE OF THE MARITIME CARGO INDUSTRY WORLDWIDE AND IN PUERTO RICO THE CONTAINER-SHIPPING INDUSTRY WORLDWIDE COMPETITIVE POSITION OF THE PORT OF SAN JUAN WITH RESPECT TO THE REGIÓN AND WORLDWIDE IN TERMS OF VOLUME OF CONTAINER TRADE STRUCTURE OF SHIPPING AND TRADE BY TYPE OF VESSEL GROWTH TRENDS AND TRAFFIC FLOWS Movement of domestic trade northbound and southbound by carriers Trade and real GNP growth Page 1

3 4.3.3 Capacity of shipping V. COMPOSITION OF CARGO AND TYPE OF EQUIPMENT NORTHBOUND SOUTHBOUND CONCENTRATION VI. TRANSPORTATION COSTS MARITIME TRANSPORTATION COSTS U.S COSTS IN PUERTO RICO Example of an impact in retail prices: JAC carriers vs. foreign carriers OCEAN FREIGHT RATES VII. SUMMARY OF KEY FINDINGS VIII. SOURCES CONSULTED APPENDIX A PUERTO RICO TRADE APPENDIX B VOLUME OF TRADE AND REAL GNP GROWTH Page 2

4 EXECUTIVE SUMMARY Purpose of the study The main objective of this report is to present an analysis and assessment of the maritime industry over the last decade, its competitive position, the transportation system serving the Puerto Rico/U.S. route (as defined under the Jones Act), the economic and demographic factors that might influence cargo movements, and secondly, an evaluation of recent economic studies on the industry worldwide, and on the economic impact of the Jones Act. Structure of the study The report is divided into four main topics. The first, which consist of the review of the literature, and of economic studies on the impact of the Jones Act on the U.S. and the local economy. The second provides an analysis of the main economic trends characterizing the Puerto Rican economy over the last decade. The third provides an analysis of the market structure and competition of the maritime cargo industry worldwide, the U.S., and in Puerto Rico. The fourth present the estimates of the average transportation costs of the Jones Act carriers service to Puerto Rico. These were derived from data supplied by The Maritime Alliance. Key findings With the introduction in 1956 of container shipping, the container liner shipping industry (CLSI) has become a complex system encompassing a primary transportation service across various points throughout the world. Globalized competition and other market forces have fostered consolidation trends and oligopolistic market structures in the CLSI. According to Sys (2009), the CLSI s market structure lies between a formal collusively oriented oligopoly and a more tacitly collusive one, concluding that globally, the container shipping industry is confronted with increased concentration. Other researchers also classified the CLSI as an oligopoly, due to the price operations of a cartel. In the case of Jones Act carriers, there is an opportunity to address the fact about the ease with which the international transportation community colludes via 3

5 annual conferences that are not subject to antitrust laws, such as the Sherman Act. Although correct that international trade is not subject to normal U.S. antitrust laws, the Shipping Act of 1984/OSRA 1998 does mimic antitrust laws, although with greater ability to collaborate. Jones Act carriers are fully subject to the antitrust laws, while carriers in international trades have more latitude to collude without violating legal standards. The above suggests that eliminating the Jones Act would not place Puerto Rico in a competitive market but instead one characterized by significant concentration. As a matter of fact, more than 40% of the global cargo is concentrated in three lines, Maersk, MSC, and CMA-CGM, and these plus COSCO have 41.0% of the world s liner fleet (in TEU terms). 1 Several studies have attempted to assess the economic costs related to sustaining Jones Act provisions (see chapter II). Nonetheless, the different assessments and variation in the quantity and type of cargo make conclusions difficult to arrive at. Other studies, on the other hand, highlight the economic and employment benefits of the Jones Act, arguing that such benefits outweigh the costs included in most Jones Act cost estimates. The consensus in recent literature suggests that there is a cost premium associated with operating vessels under U.S. laws using U.S. crews, vs. operating vessels using third world crews. This is a key effect of applying the Jones Act to the Puerto Rico and other U.S. domestic markets. Attempts to quantify the economic impact of the Jones Act have been classified by critics as speculative, due to not including all relevant factors in a costbenefit calculus. In the case of Puerto Rico, the effects of the Jones Act remain a contention in the literature. The recent study by Valentin-Mari and Alameda (2012), estimated 1 See Alphaliner (2013). The concentration in the world industry is going to increase. According to recent reports, Hapag-Lloy is in merger talks with Hamburg Sued, which woud create the world s fourth-largest carrier. See Magnusson (2013). 4

6 a cost to Puerto Rico s economy of $537.2 million attributable to the Jones Act in The study has serious methodological limitations: it bases its conclusions on an analysis made on the value of merchandise, not the volume of cargo and total freight costs paid in Puerto Rico. Total Jones Act carriers invoicing does not exceed $710.0 million per year, which suggests that attributing over 75% of that total to the Jones Act is misleading. An additional aspect to take into consideration is that, in the studies in the case of Puerto Rico (including that by Valentin-Mari and Alameda), actual shipping costs of foreign carriers are used and not the costs they would incur if they serve the domestic routes. Entering the domestic trade, non-jones Act carriers would have to comply with all federal laws (wages), and that cost advantage would disappear or at least The 2013 GAO Report Key Findings diminish. and Limitations The recent GAO (2013) study does not provides cost estimates for several reasons, although perhaps its most important finding would be that The effects of modifying the application of the Jones Act for Puerto Rico are highly uncertain. There has been an increase in the size of containers being used, from the traditional 40 size, to 53. In calendar 2011, 26.0% of the Southbound trade (SB) trade was carried in 53 containers. The sum of the Puerto Rico still operates via a closed loop service. This has resulted in dedicated, scheduled, regular shipping services from the Jones Act carriers, which represents an important benefit to customers in Puerto Rico. Any associated cost premium relevant to the Jones Act is highly dependent upon other economic factors, many of which have a much more direct impact upon final freight rates and total transportation costs. Some services between Jones Act and foreign carriers are not comparable, and the degree of substitutability between these has not been estimated. (In section 6.2 of the report an estimate is provided on the costs advantages to P.R.s customers with respect to container sizes, and the impact in terms of costs of downsizing to 40ft containers). The study also finds that because of cost advantages, unrestricted competition from foreign-flag vessels could result in the disappearance of most U.S.-flag vessels in this trade. 1 But the only cost advantage that foreign carriers have with respect to Jones Act Carriers is a labor-cost advantage. As explained in the report (p. 10), that cost advantage would disappear when foreign carriers would have to comply with the same labor rules and requirements as U.S.-flag container carriers. 5

7 45, 48 and 53 equipment was 47.3%, which is 18.3% more than the 40 equipment s trade volume (Data from PIERS). This shift to larger size equipment in Puerto Rico is a significant advantage. 2 The relatively high share of 53 containers in SB (and Northbound) is important for two reasons: (1) the use of bigger containers (53 ) is a key driver in transportation efficiency, as the cost of loading and unloading it is practically similar to a 40 container; (2) among international carriers containers of this size are not widely used, and they are not used in their service with Puerto Rico, which is a key difference between Jones Act carriers and international liners. 3 These sizes of containers (e.g. 53, 48, and 45 ) are not commonly used or available in international trade. The evolution of these container sizes plays a critical role in driving greater efficiencies for shippers and cargo owners: ü The introduction of these sizes has represented a significant complexity to Jones Act carriers, in terms of equipment inventories, vessel design and configurations, rebuilds, and higher costs. ü This constitutes a good example of how Jones Act carriers developed innovative offerings to make transportation services and costs more beneficial to customers, in line with intermodal solutions across the U.S. ü Reversing these benefits in an open, international liner scenario can represent significant incremental costs to shippers and/or consignees, as will be shown below. An upper level estimate could be between a 13% to 43% incremental rate per cubic foot utilization, or more than $80.0 million per year. 4 ü Research on container manufacturing sites and international shipyards indicates that there are no projects in the pipeline for these sizes. 2 For background on the origin of this size of container see Britannia (2011). 3 Some foreign carriers do use it. APL took delivery in 2007 of its first container of this size, for its South China-Los Angeles route. See TI-UP Resource Centre (2007). 4 Estimates based on data provided by La Alianza Marítima. 6

8 International, newly released ships continue to be designed for 20 and 40ft. containers only. Transportation Costs In the studies so far on P.R. s Jones Act trade, the cost dimension of transportation (terminal-to-terminal (TT) and inland) has not been examined explicitly. Thus, for the purpose of this report we have developed estimates of transportation and direct cost impact of Jones Act carriers (JAC), and the economies generated by them with respect to international service. The estimates are based on data supplied by PIERS, corresponding to the period from September 2011 through August They are presented in tables 1 to 3 below. Figure 1 above presents the Figure 1 distribution of the average operating costs by main categories for JAC. The biggest item is that of fuel (25.0%), and the smallest depreciation (5.0%). In other words, for every $1.00 of costs, 25 cents go to fuel. Vessel operations and vessel depreciation percentages are cost categories common to both, JAC and foreign carriers. Of the total annual volume of trade (in FEU s) for the period, SB trade accounted for 81.0%, and 87.0% of the estimated total revenue of the market. The average terminal-to-terminal (TT) rates for Northbound (NB) trade is $1,713 and for SB $2,510. 7

9 Based on current market costs the total annual estimated costs were $668.6 million; adding ROI (a conservative 5%) yields an estimated total market revenue of $703.8 million. Using the cost structure distribution in Figure 1, and based on the two cost items common to both carriers (JAC and international) an estimate is generated of the annual direct impact of foreign carriers in the PSJ, which is $48.5 million (see table 1 above). But a key aspect of a comparative cost analysis with international carriers is the one related to the size of the equipment in use, as mentioned in page 5 above. This is an area in which JAC carriers provide a cost advantage to local businesses compared to foreign carriers should they service the domestic routes. Table 2 presents estimates for the number of container (boxes) that would be required by downsizing 45, 48 and 53ft containers to 40ft ones, and the cost economies due to the use of 8

10 such bigger containers. These would be additional costs that would be incurred by businesses with JAC carriers if they have to use only 40ft containers, the norm with international carriers. The number of additional 40ft. containers that would be required (based on linear ft. differences) is 27,962, and in terms of the additional capacity that would be lost the number of containers would be 35,319. The inland cost (freight) economies (US/PR) that businesses receive with the use of bigger containers is estimated at around $35.3 million per year, with a corresponding savings in rates of $82.0 million. Total economies derived from the use of bigger containers are estimated at $120.8 million, or $424.0/FEU (Forty-foot equivalent unit). Table 3 below presents the estimates of the cost impacts of the different types of services, inland (US and SJU), and maritime (TT), and those related to international services. Total inland costs (freight) were estimated at $313.7 million, with total transportation costs estimated at $1,017.5 million. Inland costs represent 31.0% of the total, with U.S. costs accounting for 22.4%, and SJU inland costs 8.5% respectively. Maritime costs (TT) represent the bulk of the total costs, 69.2%. On the other hand, the cost impact due to international service was estimated at $79.3 million. 9

11 An estimate was made for comparison of what would be the potential increase in costs in the case of one product, imported poultry (fresh and frozen), under JAC and foreign carriers, all the way through the supply chain to retail. Under current JAC trade, the average retail price per pound of poultry was $1.69 (In January 2013); under a foreign carrier, taking into consideration the additional cost impacts derived in Table 3 the price would rise to $1.90/pound retail, an increase of 12.5%. The biggest increase would be in the case of TT costs, 17.0%. Internationally, ocean freight rates have gone through major transformations, stabilized, and moved up at a rapid pace since mid-2011 (see section 4.1 in chapter 4). A comparison between the global freight rates in January of this year of $2,713/FEU, with that estimated for P.R. s domestic trade for 2012, of $1,810/FEU shows that the average rate for international service is 33.0% higher than that for Puerto Rico. In an analysis of the cost structure of U.S. and foreign-flag vessels by MARAD (2011), for all types of ships and for containerships and RO/RO, daily wages or crew costs of U.S.-flag vessels represented 68% of the total vessel operating costs, and account for the biggest cost-differential with respect to foreign-flag vessels. In the case of containerships and RO/RO vessels, the situation is the same, with crew costs (daily wages) for U.S. vessels being 5.5 and 5.2 times higher than foreign-flag vessels respectively. In 2010, crewing costs for U.S.- flag containerships represented 70% of their total ADOC (Average Daily Operating Costs), and 28% in the case of foreign-flag containerships. The above aspect is a key point to take into consideration, if a foreign-flag carrier would transport domestic cargo between PSJ and JAX, for instance. Complying with the same labor rules and requirements as U.S.-flag container carriers do would reduce that labor-cost advantage, which would have a direct impact on their transportation costs. According to a study by MARAD (2011), complying with all the work rules and manning requirements in the U.S. that affect labor productivity and crewing flexibility result in overall crewing costs 10

12 that contribute approximately $12,000 to $15,000 per day to total U.S.-flag operating costs. This would almost erase the difference in ADOC between U.S.-flag and foreign-flag carriers estimated by MARAD at $12,599 in ADOC in The most critical element of transportation and doing business in Puerto Rico is the ability of carriers to arrive on time and deliver the cargo the same day. Jones Act carriers doing business in Puerto Rico have an average rate of 98% on-time arrival/cargo delivery, measured within a two hours tolerance rate. 6 This literally means that when a vessel arrives in the morning, and release most of its cargo by noontime, it will be at the supermarket or manufacturing plant for use the same or next day. Two key aspects are relevant: ü Compared with the current international liners performance of approximately 80%, it represents a big gap compared to the benefits of the close loop of sailings by Jones Act Carriers. 7 ü Simulating today s JAC cargo worth more than $700.0 million in transportation services and more than $6 billion dollars in acquisition value, a 80% service level will force several business costs to dramatically increase, among those; additional warehouse space, utilities, labor, inventory taxes (CRIM), obsolescence costs, cash flow considerations and carrying costs in general. There is another positive economic impact from Jones Act carriers, related to port infrastructure. They have invested through several decades a considerable amount of money expanding or improving the facilities at the Port of San Juan. The Puerto Rico Ports Authority (PRPA) plays a single landlord role, by providing the leased land with no added value benefits, e.g. pavement conditioning, offices, cranes, and other equipment. 5 We were not able to obtain from the JAC carriers a breakdown of their operating costs similar to that in the analysis by MARAD, but its conclusions in this regard would still be valid in P.R. s case. 6 Provided by La Alianza Marítima. 7 See Drewry (2012) and (2013); SeaIntel (2013). 11

13 Contrary to most jurisdictions in the world, the carriers fund most of the infrastructure required to do business at the port of SJU. This represents an estimated investment of more than $250.0 million in current replacement value. The carriers account for more than 75% of the land owned by PRPA, more than $7.5MM in leases, and $12.0 million in steady wharfage and dockage revenues. 8 International Liners doing business in Puerto Rico, as well as in many International jurisdictions, are not bound to contractual arrangements for port land leases and assets, which constitutes a significant revenue risk to port authorities or terminal operators, in the event of change of schedules or simply abandoning service to a particular port. As a matter of fact, more than 25.0% (more than 150,000 TEU s) of the cargo that enters Puerto Rico today comes from international liners that have no direct contractual relationships with the PRPA, and no infrastructure investments in the ports. 9 So far, no government or private entity, including international carriers, has presented a study or proposal as to how international lines can deliver a better service and lower cost proposition to Puerto Rico, on the assumption that the Jones Act is repealed. It has simply been assumed that new entrants would not lower costs. Other findings Globally, growth in container demand moved up, exceeding that of supply for the past two years, as world economic conditions improved, stabilizing in 2011 in line with more stable freight rates. Container trade increased 12.1% in 2010 after contracting in the previous year, with a similar performance in Container trade volumes worldwide, different from domestic trade in recent years, expanded at an average rate of 8.2% between 1990 and 2010, driven by productivity gains and a surge in demand across all trade lanes. 8 Data from the Maritime Division of the P.R. Ports Authority. 9 From La Alianza Marítima. 10 See UNCTAD (2011). 12

14 The Port of San Juan faces several challenges, related not only to cyclical economic factors, but also those pertaining to the industry and domestic service, some of which are: 1. The volume of total container trade handled (in TEUs twenty-foot equivalent units) has declined, from million in 2000 to million in fiscal 2011; 2. Between 2004 and 2011, the total volume of domestic trade (Northbound and Southbound) of the four shipping lines fell, from 834,924 to 627,364 TEUs, and the average capacity utilization in the Southbound trade declined from 94.6% to 76.4% during the same period (see Appendix A); 3. The share of Puerto Rico in the total U.S. Atlantic (plus Houston) container port traffic (in TEUs) went down, from 16.5% in 2000 to 7.6% in fiscal 2011, as the share in coastwise trade in total U.S. domestic waterborne commerce also fell, from 21.2% in 2000 to 18.4% in 2010; 4. Compared to other seaports in the region, in terms of container traffic handled (In TEUs), PSJ s traffic has trended down, while that of its immediate competitor (Dominican Republic) has increased considerably since The above developments took place in the context of a significant growth in container volume worldwide. In 2002, the total number of full containers shipped on world trade routes (excluding transshipment) amounted to 77.8 million TEUs, and by 2015 the volume is expected to reach million TEUs. 11 Maritime transportation plays a key role in the food supply in Puerto Rico, as all the food, agricultural products, and beverages that are imported come via maritime transportation. For instance, on average 50% of the total consumption of key agricultural products is imported (Data for 2009). In some cases, though, the proportion is higher, as in the case of poultry (82%), meats (91%), eggs 11 See Kong Yew Jeremy Kee (2006), p. 24, and UNCTAD

15 (65%), and coffee (59%). For some other staples, like rice, the proportion is 100%. Between 2002 and 2011, the volume of southbound trade of domestic carriers (in FEUs) declined at an annual compound rate of -2.4%. Northbound trade registered a similar but less pronounced trend over time. It is interesting to observe that southbound trade started to decline prior to the onset of the economic contraction (2007 to 2012). This suggests that other reasons were at play in the reduction in trade volume, while northbound trade actually increased in the period Another characteristic of the southbound trade is the high concentration or share that a small number of accounts have in the overall trade. According to data from JOC-PIERS (2012), the top 20 accounts are responsible for 41% of the southbound trade, with the top 43 accounting for 56%. Together with the significant growth in container volume worldwide, international shipping has been experiencing significant increases in the freight rates on the three major routes, Trans-Atlantic, Asia-US, and North America- Latin America. Transpacific freight rates are expected to increase 50% this year, with increases in the rates from $400 to $600 per 40ft. container (FEU), and Maersk recently increased by 30.0% its reefer container freight rates, and Hapag-Lloyd raised its freight rates for all container types by $300 per 40ft. container in its North America-Latin America and Caribbean routes See JOC (2013a), and K. Wallis (2013). 14

16 I. INTRODUCTION Today, the Port of San Juan (PSJ), as will be seen further on, faces some daunting challenges: 13 (1) The volume of total container trade handled (in TEUs) has declined, from million in 2000 to million in fiscal 2011; (2) Data provided by La Alianza Marítima (2012) indicates that between 2004 and 2011, the total volume of domestic trade (Northbound and Southbound) of the four shipping lines fell, from 834,924 to 627,364 TEUs, and the average capacity utilization in the Southbound trade declined from 94.6% to 76.4% during the same period (see Appendix A). 14 (3) The number of container ship and Ro/Ro vessel calls also has declined, from 647 in 2002 to 645 in 2010, with those of containers falling from 482 to 442 in the same period; (4) Total capacity (in FEUs) Source: UNCTAD (2011), p. 91. for containers and Ro/Ro has fallen, from 518,220 in 2007 to an estimated 490,636 in 2011; Regional Competition In Panama, there are plans to build two new ports at Balboa and Rodman. The development of a container terminal at Rodman port was previously estimated to cost $100 million and will have a capacity of 450,000 TEUs. The canal expansion, which is set to be completed in 2014 will allow for much larger although not the largest vessels to transit. In the Dominican Republic, the port of Caucedo, completed its second phase of development in 2011 with an additional 300 metres of quays. The port, which was originally estimated to cost $300 million, now has a handling capacity of 1.25 million TEUs. In Jamaica, the port of Kingston announced plans to extend the port to cater for the expected increased demand once the Panama Canal enlargement is completed. The $200 million project will see dredging works take the port s entrance channel down to 16 metres deep and the quay area extended by 1.5 km. Currently it handles 1.8 million TEUs container freight. 13 Data from: MARAD; U.S. Army Corps of Engineers; American Association of Ports Authorities; The World Bank, Container Port Traffic (2012). 14 Data here has been converted to TEUs from FEUs in order to maintain consistency with other related reports. 15

17 (5) The share of Puerto Rico in the total U.S. Atlantic (plus Houston) container port traffic (in TEUs) went down, from 16.5% in 2000 to 7.6% in fiscal 2011, as the share in coastwise trade in total U.S. domestic waterborne commerce also fell, from 21.2% in 2000 to 18.4% in 2010; (6) Regionally, the position of the PSJ in terms of total container port traffic handled (in TEUs) between 2007 and 2010 has fallen, while that of the Dominican Republic Challenges to the Container Market increased. The Port of and Concept Kingston is handling more container cargo than PSJ (see Table 2 in section 4.2), and; (7) P.R. s Liner Shipping Connectivity Index index (a measure of global trade connectivity), fell, from in 2004 to in Undoubtedly the economic contraction Ships are getting larger and more efficient but the container technology driving business is basically the same as 40 years ago. Modern terminal equipment is becoming widespread, requiring terminal operators to compete more through productivity gains, adopting technology-related improvements. Since technologies have a cycle, there is the question as to what will happen to the container system in the future. Global supply chains are exerting pressures on the container concept; for example, in the way containerized logistics systems are managed. Source: Notteboom and Rodrigue (2008), pp (in the U.S. and in Puerto Rico) has played a key role in these developments. Consumption of durable and nondurable goods, which to a significant extent is satisfied through imports (mostly via maritime transportation), has fallen (meaning less consumption of goods) but there might be other factors at play of a structural nature. 15 The Liner Shipping Connectivity Index is developed by the United Nations Commission on Trade and Development [UNCTAD]. It gives an overall picture of the island s accesibility to global trade (it does not include trade with the U.S.). It is generated from five components: (a) the number of ships; (b) the total container carrying capacity of those ships; (c) the maximum vessel size; (d) the number of services; and (e) the number of companies that deploy container ships on services to and from a country s ports. For each of the five components, a country s value is divided by the maximum value of that component in 2004, and for each country, the average of the five components is calculated. This average is then divided by the maximum average for 2004 and multiplied by 100. In this way, the index generates the value 100 for the country with the highest average index of the five components in value 100 for the country with the highest average index of the five components in See UNCTAD 16

18 For instance, in the case of (1) above, the downward trend was already evident before 2007, the start of the contraction in the Puerto Rican economy. There is also the declining share of Puerto Rico in U.S Atlantic trade, likely reflecting a similar trend in the share of coastwise trade in total U.S. domestic waterborne trade, which is evident before The size of containers has increased in recent years, which might account for the reduction in the number of vessel calls, but there has been a decline also in the capacity of containers and Ro/Ro since By fiscal 2011, according to data from the American Association of Ports Authority (2012), the volume of total container traffic handled (in TEUs) in the PSJ fell by 2.7% from 2010, with the port s ranking among North Atlantic ports falling to 12 from 10 in the previous year. 16 The above developments took place in the context of a significant growth in container volume worldwide. In 2002, the total number of full containers shipped on world trade routes (excluding transshipment) amounted to 77.8 million TEUs, and by 2015 the volume is expected to reach million TEUs. 17 This development has been accompanied by technological improvements, with larger vessels constructed Yet, as Notteboom and Rodrigue points out, the technical concept of a container vessel has not changed dramatically. and the Developments in the liner trade globally In 2009, the top 30 liner carriers reported an estimated collective loss of $19.4 billion from a reported $5 billion profit the year before. In 2010, the same liners are estimated to have earned a combined $17 billion. Profits are forecast to be about $8 billion in The turnaround by 2011 is attributable to the following factors: world is still embracing an old concept the container to deal with the challenges of contemporary global supply chains. 18 After significant losses in 2009, the situation is estimated to having improved in 2010 and ü ü ü Methods adopted by the carriers, which absorbed capacity; A fall in fuel prices, in some cases by as much as 30%; An increase in demand from merchandise trade. Source: UNCTAD (2011), p AAPA (2012). North American Container Traffic: 2011 Port ranking by TEUs. 17 Jeremy Kee Kong (2006), p. 24; Theo Notteboom and Jean-Paul Rodrigue (2008), p Ibid., pp

19 Figure 1 Global Production Networks Production Trade Services Distribution Logistics Networks Consumption Freight integration Source: Adapted from Notteboom and Rodrigue (2008), p Objective of the study The main objective of the study is to provide an analysis and evaluation of the structure of the maritime cargo industry in Puerto Rico, with special reference to domestic trade, and its competitive condition. This also considers transportation costs (to the extent the information has been made available), market structure, traffic volumes and composition of cargo Structure of the study The report is divided into four main topics. The first consist of the review of the literature, and of economic studies on the impact of the Jones Act on the U.S. and the local economy. The second provides an analysis of the main economic trends characterizing the Puerto Rican economy over the last decade. The third provides an analysis of the market structure and competition of the maritime cargo industry worldwide, the U.S., and in Puerto Rico. The fourth presents estimates on transportation costs. 18

20 II. REVIEW OF THE LITERATURE This section presents a review of the studies and reports consulted for this study. It is divided into three main areas: the first, on the industry and market structures, and competition; the second on the U.S. maritime industry and cabotage; and the third on the Jones Act and Puerto Rico, which includes a selection of recent studies with estimates of the economic impact of the law in the U.S. and Puerto Rico. 2.1 Structure and competition in the industry With the introduction in 1956 of container shipping, 19 the container liner shipping industry (CLSI) has become a complex system providing primary transportation services across throughout the world. 20 This system flows along two production chains, one being the firms internal production chain, the other being the maritime logistics chain, with the latter an important enabler of international trade. 21 Globalized competition and other market forces have fostered consolidation trends and oligopolistic market structures in the CLSI. 22 Since the CLSI spreads its cost structure alongside the many operations in the logistics chain, various patterns of vertical and horizontal cooperation have emerged in the industry. 23 According to Sys (2009), the CLSI s market structure lies between a formal collusively oriented oligopoly and a more tacitly collusive one. She studied, among other measures, the firms market share instability, income/output distribution and the Herfindahl-Hirschman index throughout the decade, concluding that globally, the container shipping industry is confronted with increased concentration. 24 Other researchers also classified the CLSI as an oligopoly, due to the price operations of a cartel. 25 The above suggest that leaving the Jones Act would not place Puerto Rico in a competitive market, but further one that is highly concentrated. 19 See M. Levinson (2006), pp Simone Caschili, Francesca R. Medda (2012), p Dong-Wook Song and Photis M. Panayides (2008), Ross Robinson (2002), pp César Ducruet and Theo Notteboom (2012), p See Eddy Van de Voorde, Thierry Vanelslander (2009). 24 Christa Sys (2009), p Nancy R. Fox (1994); Christa Sys, Hilde Meersman, Eddy Van de Voorde (2011) 19

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