New sulphur regulations in fuel will shakeup shipping industry

There’s a storm approaching but we don’t know how bad the storm is going to be,” said Glen Kedzie, energy and environmental counsel for the American Trucking Associations.

With tough shipping regulations, set by the United Nations shipping agency, the International Maritime Organization (IMO), coming into force on January 1. 2020, the cost of shipping is likely to rise towards the end of this year.

RC Willey Home Furnishings, a U.S. furniture company, is concerned that the new global clean air rules will cause a disruption in the transportation industry.

For shipping companies around the world, this is likely to be their biggest shakeup in decades. The rise in shipping costs will only add to existing pressures of a global economic slowdown as well as the threat of an escalating trade war between the United States and China.

While consumers are not expected to pay more for goods, higher transport bills and disruption to company deliveries could further dent economic growth.

Ship owners will have to cut sulphur emissions to 0.5% from 3.5%. They will have to start using low-sulphur fuel, install exhaust gas cleaning systems or opt for other, more expensive, clean fuels such as liquefied natural gas. Alternatively, they could travel more slowly.

Jeff Child, president of Berkshire Hathaway’s RC Willey Home Furnishings, moved the delivery of about 450 containers from September and October to July and August since he wants to avoid any disruption in the peak fourth quarter.

“We just don’t want to get caught in a situation where it affects our inventory,” said Child.

According to analysts, the container industry, which transports consumer goods ranging from sofas, designer clothes and bananas, is likely to be hit with extra costs of around $10 billion.

According to Denmark’s Maersk and Swiss headquartered MSC, the world’s two biggest container shipping lines, they face an annual additional costs of over $2 billion each.

“The sulphur cap will further put pressure on ocean freight rates and we… will have to pass those costs on to remain competitive,” said Peder Winther, global head of Panalpina Group, an ocean freighting Swiss transportation company.

IMPACT ON TRUCKING INDUSTRY

According to economists, manufacturers are expected to absorb their part of the cost and are unlikely to raise the price of consumer goods; however the hit to companies could be a drag on the world economy.

Nestle S.A.’s spokesperson stated, it was talking to transport companies about “fuel adjustment methodology” to reflect the impact of the new rules.

“Higher fuel prices would result in higher transport costs,” said Peter Nagle, an economist with the World Bank’s Development Prospects Group. “This would have the potential to lead to slower economic growth and trade.”

Although the IMO rules do no apply to trucking companies they are likely to suffer since they will face new competition from ships. This alone is expected to push up the price of diesel fuel for trucks by as much as 100%.

“I’m at the whim of the market. All I can do is let the customers know what’s going on,” said Mike Baicher, president and chief executive of New Jersey based West End Express, which runs 90 trucks in New York, New Jersey and along the East Coast. “There is only so much that the trucking company can absorb.”

In a letter sent to top U.S. government officials including National Security Advisor John Bolton, transport associations including trucking groups said there was consensus that U.S. transport industries would be “negatively affected by IMO 2020 pricing pressure”. It said there could be market disruptions.

“There’s a storm approaching but we don’t know how bad the storm is going to be,” said Glen Kedzie, energy and environmental counsel for the American Trucking Associations.

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