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US seeks to phase in shipping rules, sending refiners' shares sharply lower

Washington

US refiners are getting stung by President Donald Trump's efforts to keep consumer prices from rising in the runup to the 2020 election.

The Trump administration is seeking to slow the implementation in 2020 of tighter fuel restrictions on the global shipping industry. The rules, which would slash by more than 80 per cent the sulphur allowed in fuel burned by the biggest cargo ships, are expected to increase the cost to move everything from soyabeans to Apple iPhones across the oceans, with some of that cost potentially passed on to consumers. Shares of refiners slumped the most in over two years.

The move risks alienating an industry that supported Mr Trump, and which stands to gain from the increase in demand for cleaner-burning diesel fuel. US refineries are more sophisticated than many competitors in other parts of the world, and American companies have invested billions in upgrading their facilities to produce fuel that meets the new rules. It would be the second setback for refiners this month, after Mr Trump decided to allow petrol stations to sell fuel with 15 per cent ethanol all year.

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"The US refining industry has been preparing for IMO 2020 for over a decade and has made substantial investments to ensure that we can timely supply US and global marine customers with compliant fuel," Chet Thompson, president of the American Fuel and Petrochemical Manufacturers trade group, wrote in an e-mail. "Altering the implementation schedule this late in the game - to the extent that this is even legally possible - is a bad idea and could undermine US investments."

Analysts have said the rules, commonly referred to as IMO 2020, would increase demand for diesel fuel, sending prices higher. Bank of America Merrill Lynch analysts said in early October that demand for diesel may increase by as much as 1.4 million barrels a day. Shipping industry trade groups have pressed for a phased-in start to the new rules.

The International Maritime Organization's Marine Environment Protection Committee is scheduled to hold meetings this week in London. The panel is expected to adopt a ban for ships to carry high-sulphur fuel, a move that may make the IMO's wider sulphur curbs more effective.

The US will attend the meeting to work on the "experience-building phase" proposed by a number of countries and industry groups and led by the Marshall Islands, according to Lisa Novak, a spokeswoman for the US Coast Guard. Such a move would "best facilitate the implementation of the 2020 sulphur cap", she said in a statement.

"This is a fairly typical story of Washington coming to the party six months late," said James Lucier, managing director of Capital Alpha Partners. "Financial markets analysts have been focused on this issue since early spring. The administration does not have a lot of good options at this point. Jawboning may be the best that they can do."

The IMO doesn't comment on the positions of individual member states, a spokesman said by e-mail. All member states can participate in the IMO meetings and bring their views to the table for discussion.

It's unclear how much the Trump administration would be able to slow or change the implementation of the rules, given their global adoption.

"The European Union is pushing to get greenhouse gas rules for bunker fuels," said Kevin Book, managing director of Washington-based consultancy ClearView Energy Partners. "That means they are unlikely to support a policy of loosening sulphur standards, backtracking on a conventional pollutant as they are moving to pare down greenhouse gases."

The BI North American Refining & Marketing index slid 6.5 per cent on Friday, the most since Jan 13, 2016. Valero Energy Corp fell 10 per cent, with PBF Energy Inc down 9.9 per cent.

"I think the stock movement is likely overdone just because the real options for Trump to make any significant change are probably more limited than people think," said Mr Lucier. BLOOMBERG