Sulphur emission restrictions driving up shipping costs

Trade wars, policy shifts, and geopolitical uncertainty are all weighing on financial markets and global outlooks. Among all the turmoil, concern over climate change and global greenhouse gas emissions is growing, influencing policy worldwide.

While 2019 started with ocean freight rates pulling back, impending restrictions on the industry’s sulphur dioxide emissions are putting significant upward pressure on fuel costs.

RealAgriculture’s Lyndsey Smith caught up with Stéfane Marion, chief economist and strategist with the National Bank of Canada, at the Pulse and Special Crops Convention in Montreal to discuss how environmental policy is behind the increase in global shipping costs, and how de-globalization on the heels of trade disruption will create challenges for the agriculture industry.

“There is a new very stringent rule that will be put in place of January 2020, which is called IMO 2020. It requires the shipping industry to lower its sulphur dioxide emissions,” he says. “This means that the shipping industry will have to revert to cleaner diesel as opposed to bunker oil, which is currently what is used right now.” Cleaner diesel costs more. Alternatively, shippers could spend big bucks retro-fitting ships to “scrub” emissions, but both options add to costs. (Story continues below)

“We’ve already seen a big increase in shipping costs, or the Baltic Dry Index — which is important for the agricultural sector —  which are up roughly 300 per cent since February. So despite the fact that there’s a global economic slowdown, the fight against climate change is starting to have a real impact on global shipping costs. I think this is something that we’re likely to face over the next few years.”

Marion adds that when it comes to potential trade wars between the U.S. and China, how we view globalization will evolve.

“I think that as both these countries want to establish the new sphere of influence, for the first time in over a generation we’re not going to look at globalization in the same way we did before. We tended to think that the economy is becoming more globalized,” he explains. “Right now with these trade tensions, even if there is a deal that will be reachable over the next while — which we believe it will, which will avoid the recession — regionalization is still something that will be with us for the foreseeable future.”

 

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