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Why the price of almost everything could go up in 2020

International regulations on pollution from ships will have wide-ranging impact
New pollution controls for international shipping to have wide-ranging impact on cost of transportin
New pollution controls for international shipping to have wide-ranging impact on cost of transporting goods. Photo Chung Chow

Brace yourself, dear consumer. Starting in 2020, and perhaps even this year, the cost of virtually everything could go up.

And no, it’s not because of taxes.

In less than a year from now, an obscure new international regulation that most people have probably never heard of goes into effect that could have a wide-ranging impact on oil and gas prices, transportation costs and, ultimately, the cost of importing and exporting.

While all developed countries will feel the impact, Canada could be hit particularly hard because it is both an oil-producing nation and a major exporter of bulk commodities.

Sectors from grain farmers on the Prairies to lumber producers and miners may be affected by higher diesel and transportation costs.

In January 2020, the International Maritime Organization (IMO) will implement new controls on pollution from ships plying international waters.

It will require international vessels — from container ships to cruise ships and bulk carriers — to lower the sulphur content in their emissions to 0.5 per cent from 3.5 per cent.

The changes will affect as many as 80,000 ships. Shipping companies generally have three options to comply, all of them expensive.

They can install scrubbers (at a cost of $2 million to $6 million) and continue burning cheap, high-sulphur bunker fuel. Some will opt to build new vessels that run on clean methanol or liquefied natural gas.

Most — at least 60 per cent, according to one estimate — are expected to switch from bunker fuel to lower-sulphur diesel, because it doesn’t require any engine retrofits.

“Most ship owners are probably going to choose the compliant fuel,” said Robert Lewis-Manning, president of the Chamber of Shipping of B.C. “We can see the number fitting scrubbers is actually relatively low.”

But diesel is already twice the price of bunker fuel, and fuel accounts for about 30 per cent of the cost to shippers. And according to the International Energy Agency, diesel prices will go up with the increased demand — up to 30 per cent.

Given that 90 per cent of the goods people consume move by ship, it’s likely the higher transportation costs will get passed on to consumers in the form of higher prices. Consumers may feel the increase, even if they don’t see it.

The switch will also have a ripple effect on refining. Diesel prices will almost certainly increase (in fact, they already have), and so might the price of gasoline.

The new IMO regulations will cost the shipping industry an estimated $60 billion a year, according to Wood Mackenzie. The total economic cost of the new regulations may reach $1 trillion over five years, according to S&P Global Platts.

“The transportation cost is going to go up,” Lewis-Manning said. “So anything that has to be moved by vessel, the cost will have to be passed down somewhere in that chain. We’re all going to feel it.”

He added that those transportation costs will likely start making their way down the chain this year, because some shippers have already begun to make the switch from bunker fuel to diesel.

“If you make an assumption that you’re going to use compliant fuel, you’re already starting to prepare for that with some additional freight charge in 2019, because the costs you will start to absorb will happen this year,” Lewis-Manning said.

“You have to have your tanks cleaned, and these are expensive evolutions. Some of that cost is already starting to be passed on through the supply chain. It’s difficult to say what it means to the cost of your iPhone that you’re importing from China. But I think it will be material.”

While there have been plenty of analyses of the new IMO regulations’ impact on the shipping and oil and gas industries, there’s been a surprising lack of analysis of the wider economic impacts.

“I think it is a bit of a sleeper issue,” said David Gillen, director of the Centre for Transportation Studies at the University of British Columbia’s Sauder School of Business.

“My sense is we’re not going to see substantive increases in consumer prices as a consequence of the fuel cost increase, say, on container ships. But where you are going to see it is in the movement of commodities.

“And so those input prices are going to go up, and they are going to have a trickle-down effect to consumer goods.”

Gillen said that Maersk has estimated the new regulations will cost $100 to $175 per twenty-foot-equivalent unit (TEU).

“When you look at what’s in a TEU, the impact on downstream consumer prices would not appear to be all that high,” Gillen said.

The greater impact would be on bulk commodity exporters, and Canada is a bulk commodity-exporting nation. Exporters of major Canadian commodities like grain, lumber, metallurgical coal, iron ore, aluminum, copper and potash can expect to pay higher transportation costs, Gillen said.

Canadians might therefore pay higher prices for finished goods, such as furniture, cars and fertilizers.

“All of these [bulk shippers] are operating in world markets,” Gillen said. “Margins are very thin. Any increase in transportation costs is going to be paid for by producers because they can’t raise their prices.

“So that’s going to end up being — in a sense — a tax on the producers of those commodities, which, in the case of Canadians, we’re going to get lower returns in the coal and potash, sulphur, grain and lumber.”

The biggest impact on consumers could be in the price of gasoline and diesel.

The demand for diesel is expected to soar, which is good for refiners but not so good for farmers, the trucking industry, railways and other diesel users.

Dan McTeague, an oil and gas analyst for GasBuddy, points out that diesel prices already started creeping up in 2017 and have outstripped gasoline prices. He thinks it’s largely due to the fact that shipping companies have already begun making the switch, which is driving up the demand for diesel.

“Diesel prices have already gone up,” McTeague said. “A good number of companies out there have already gone through the process of making the conversion. So we’ve seen diesel prices eclipse gasoline.”

Allan Fogwill, CEO of the Canadian Energy Research Institute, said increased demand for diesel could have an impact on gasoline prices as well, since refineries will be inclined to produce more diesel and less gasoline.

“If they can create more diesel and less gasoline, then they’d probably do that, and therefore that would increase the price of gasoline,” he said. 

See related story on impact on oil industry.

nbennett@biv.com

@nbennett_biv

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