A Smoking Gun

Last week, the International Maritime Organization (IMO) and its member countries, agreed to a new strategy that will bring emissions down to net-zero ‘by or around’ 2050. However, environmental groups are furious, stating the targets do not go far enough.

Wealthier nations and small island states had called for a 50% reduction in emissions by 2030 and a 96% cut by 2040. However, with resistance from Brazil, China and Saudi Arabia, the new strategy will see ‘indicative checkpoints,’ rather than hard targets and these will aim to see emissions from shipping fall by at least 20% by 2030 and at least 70% by 2040. The agreement says that countries should ‘strive’ for a higher target of 30% by 2030 and 80% by 2040.

The global shipping industry is critical to world trade carrying up to 90% of commercial goods, by volume. However, shipping remains heavily reliant on fossil fuels, burning approximately 300m tonnes of toxic heavy fuel oil pa. and producing about 3% of global CO2 emissions. Maritime transport has proved hard to regulate as ships are often owned in one country, but registered with another. For example, small states like Liberia and Panama have huge numbers of vessels sailing under their national flags, but they have no real responsibility for these vessels. This complex industry structure meant shipping was omitted from the Paris climate agreement of 2015. The head of the Global Maritime Forum believes the new emissions plan is a ‘remarkable improvement,’ but admits the revised strategy ‘falls short to provide necessary clarity and strong commitments for a just and equitable Paris Agreement-aligned transition.’

Monday, 3^rd July 2023, was the hottest day ever recorded globally and the world’s average temperature reached a new high of 17°C, according to data from the US National Centre for Environmental Prediction. Any progress must be welcomed in achieving the 1.5°C warming target. However, at the same time we must accept that the price of goods may become more expensive as a result. Recent research shows that cutting shipping emissions in half this decade, would add about 10% to the total cost of operations.

Higher prices? That is not something central bankers, fighting inflation, will want to read.

To read our recent Alpha Bites – ‘A slow boat from China,’ click here

What have we been watching?

Markets continued to focus on inflation data with soft US data helping sentiment. The ‘gap’ between US and UK inflation and expectations of interest rates and future monetary policy between the Federal Reserve and Bank of England saw Sterling move up to $1.31. The flow of disappointing Chinese economic data continued.

NATO leaders met in Lithuania and received a welcome boost after Turkey dropped its objections to Sweden joining the alliance which will become the thirty-second member. G7 members ratified a wide-ranging security pact with Ukraine at the NATO summit but stopped short of providing a timeframe for it to join the alliance. PM Rishi Sunak urged NATO members to increase defence spending as fewer than half of those in the alliance are currently meeting the 2% of GDP budget target.

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UK retail sales increased by almost 5% in June as hot weather boosted demand for garden furniture and summer clothes. Meanwhile, average earnings grew by 7.3% in the three months to May, matching the highest level on record. Sterling edged above $1.31 on wage data which is likely to force the Bank of England to continue to hike interest rates. There were signs that higher interest rates are starting to dent confidence in the housing sector with housebuilder Barratt Developments saying that ‘reservations have slowed to more than normal seasonal trends from mid-May to the end of June’ while a survey by the Royal Institute of Chartered Surveyors showed weaker than expected activity. Meanwhile, Chancellor Jeremy Hunt is believed to have asked ministers to find over £2bn of savings for public sector pay offers of between 5%-7% so as not having to increase UK borrowing.  

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In Europe, the manufacturing PMI was even weaker than that of the UK, falling to 43.4 in June.  German and Italian manufacturers saw a sharp fall in activity at the end of the second quarter and there is growing evidence that the capital-intensive industrial sector is reacting negatively to the ECB’s interest rate hikes.

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US inflation was slightly below expectations as CPI dropped to 3% in June. Will the slight undershoot relative to expectations fundamentally change the Federal Reserve’s (Fed) view on hiking interest rates in July? Probably not as the Fed is still likely to feel uncomfortable with core inflation at 4.8%, although a September rate hike may not be deemed necessary, particularly if inflation keeps falling along its downward trajectory over the summer months.

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Chinese inflation was weaker than expected and fell for a fifth month-in-a-row. This should allow the authorities to undertake further stimulus measures although apart from minor interest rate cuts and some limited support for the struggling property sector, no transformational action has yet been taken. Meanwhile, economic data continues to disappoint with June exports dropping by 12.4% and imports by 6.4%. The Chinese economy grew by 6.3% in the second quarter but this was below market expectations. Another challenge for the authorities is that youth unemployment jumped to a record 21.3% in June.      

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Despite weak Chinese economic data Brent oil moved up to $79 on reports that Russian oil exports were falling.

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Finally, staying with global warming. Scientists believe daffodils could provide the key to more sustainable livestock farming. In laboratory tests, adding an extract from daffodils to livestock feed reduced methane in artificial cow stomachs by 96%. A four-year programme of trials is now beginning at farms around the UK. Sounds like a promising experiment and one not to be sniffed at!

Read Last Week’s Alpha Bites – Greedflation

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.