Lauren Saidel-Baker is an experienced speaker and economist. She graduated cum laude with honors in economics and a double major in religion from Wellesley College. Her experience in finance supports her commanding grasp of ITR Economics' programs and subscriptions and their practical applications.
In a recent blog post, I outlined the US’ shifting trade relationship with the rest of the world. In short, China is no longer our top trading partner; both Canada and Mexico surpassed it earlier this year. Our bilateral trade with each of these countries exceeded $300 billion during the first six months of 2019.
Although many factors – including tariffs and nationalistic tendencies – are contributing to the changing trade dynamics, we see an additional element on the horizon which will further skew trade: higher shipping rates. On Jan. 1, 2020, new regulations will lower the acceptable sulfur content in ships’ fuel from the current 3.5% to just 0.5%.
Replacing a portion of the shipping industry’s current four million barrels per day of high-sulfur fuel could strain refineries' capacity to produce lower-sulfur distillate. Ships also have the option of installing exhaust-cleaning systems known as scrubbers instead of using the more expensive, lower-sulfur fuel. These scrubber systems can cost several million dollars per retrofit. In addition to the expense, the systems are not installation-ready and can require up to a year of engineering planning. The Exhaust Gas Cleaning Systems Association recently released survey results that indicate that scrubbers were installed or on order for just 983 vessels as of the end of May, far from the 3,800 vessels predicted by the International Maritime Organization’s fuel availability study. Even the IMO estimate is a small fraction of the current global shipping fleet of 90,000 ships, 60,000 of which are currently traveling international trade routes.
The IMO has stated that the implementation date cannot be delayed. These regulations could raise global shipping fuel costs by up to 25%, as fuel supply and needed infrastructure will not be ready in just three and a half months.
Expect shipping rates to rise in response to the higher costs of these regulations. This will contribute to further evolution in global trade relationships and supply chains. These trends will likely benefit bilateral trade between the US and its regional neighbors. In some IMO Emission Control Areas, including most of coastlines of the US and Canada, the sulfur content limit is already 0.1%, which is lower than the new global limit. The new regulations, therefore, will not constitute a new obstacle to direct commerce between those two countries.
Be sure that you and your business are prepared for the impacts of these impending regulations. We encourage our clients to review their supply chains ahead of the January implementation, and evaluate their reliance on the global shipping fleet. Look to diversify where appropriate, especially into the geographies that will be the relative winners. Finally, incorporate higher shipping costs into your budget for 2020.