Entry barriers and concentration in chemicals shipping

Abstract

"Entry Barriers and Concentration in Chemicals Shipping" is part of SNF project 1650 Strategisk atferd i noen utvalgte shippingsegmenter (Strategic behaviour in some selected shipping segments. Deep-sea chemicals shipping has for the last decade been dominated by four major players, Stolt-Nielsen, Odfjell, JOTankers and Seachem. During the same period, the risk-adjusted return of these operators has seemingly been higher than for other operators in comparable shipping markets. This report seeks to gain insight in the underlying mechanisms that have sustained the high-return oligopoly in the chemicals shipping market. The first question the report seeks to answer, is whether the oligopolists have exercised market power to deter entry from new competitors and, if yes, in what way. Secondly the report investigates the potential role of price collusion in the market. The purpose of the report is to shed light on both the question of entry deterrence and the question of collusion through theory of industrial organisation. The research strategy is to derive theoretical predictions of optimal behaviour in the chemicals market and then confront these predictions with factual behaviour from chemicals shipping. The report has two main findings. First, it is proposed that the leading incumbents follow a top dog strategy towards potential competition. This means that the established operators in chemicals shipping act tough to restrain small players and prevent potential new entrants. Toughness to deter competition can for instance be seen in the high level of investment in new chemical tankers in recent years, and in the high investments in "state of the art" maintenance of current vessels. Second, on the question of price collusion, it is proposed that the multimarket contact that is prevalent in chemicals shipping can sustain a situation with price collusion. However, this issue needs to be further explored in more data-intensive studies.