Shipping and freight report

FERTILIZER TRANSPORT

Shipping and freight report

With around 90 percent of global trade requiring sea transport, shipping remains the life blood of the world economy. Intercontinental trade, the bulk transport of raw materials, and the import/export of food and manufactured goods all rely on affordable and effective shipping.

Left: The Canpotexoperated MV Ultra Regina delivers potash by sea to ports globally.

PHOTO: CANPOTEX

Merchant shipping has grown into a large-scale global industry that generates in excess of half a trillion dollars in freight rates. A global fleet of tens of thousands of ocean-going vessels transports every kind of cargo between ports. Individual ships are technically-sophisticated, high-value assets that can cost over $200 million to build.

In early 2019, the total world fleet stood at 95,402 ships, with a total combined capacity of two billion dead-weight tonnes (dwt). Bulk carriers and oil tankers predominate, having a 43 percent and 29 percent share of capacity, respectively.

Fertilizer shipping – a niche segment

The international fertilizer trade occupies a relatively-small niche segment of the global shipping market, accounting for around three percent of total dry bulk trade. Nevertheless, more than 150 million tonnes of fertilizers and fertilizer raw materials are shipped across the globe annually (Figure 1). Fertilizer shipments are also heavily associated with certain ports and dedicated terminals – such as the Neptune Bulk Terminal in the port of Vancouver, Canada, those in the Baltic such as the Russian port of Ust-Luga and Klaipéda in Lithuania, as well as Yuzhny in the Black Sea and Jorf Lasfar in Morocco.

Fertilisers are mainly shipped, from their country of origin to destinations worldwide, in relatively small Handysize or Supramax bulk carriers, as well as larger Panamax carriers to a lesser extent (Figure 2).

A volatile market

The dry bulk freight market has endured a rocky ride over the last two decades, experiencing periods of growth, collapse and rebalancing. Key market events include:

• The capacity build-up during the commodity super cycle of 2000-2008, leading to the gross oversupply of vessels.
• The financial crisis that ended this period which precipitated a general commodity/freight market collapse.
• Latterly, following the dry freight market’s historic low in 2016, a slow rebalancing of vessel supply with cargo demand.

Fig. 1: Global shipping of fertilizer and fertilizer raw materials

Fig. 2: Vessel sizes, deadweight tonnage (dwt)

As freight indices show (Figure 3), shipping market trading conditions have mostly remained tight since the financial crash of a decade ago. In May 2008, freight rates hit a peak – $141,000/ day for Supramax and $82,000/day for Handysize cargoes. But a precipitous crash in the dry bulk market saw these rates collapse by the end of that year – to around $5,000/day for both Supramax and Handysize vessels. Although freight rates partially rebounded subsequently, they have remained a fraction of 2008 peak levels, with Supramax and Handy-size rates averaging around $12,000/day and $9,000/day, respectively, between 2009 and 2018, for example1 .

The Baltic Dry Index

The Baltic Dry Index (BDI) is the generally accepted measure of the cost of transporting bulk raw materials by sea (Figure 3). Created by the London-based Baltic Exchange, this shipping and trade index is actually a composite of three sub-indices for different size bulk carriers: Capesize, Panamax and Supramax. The BDI takes into account 23 different shipping routes carrying coal, iron ore, grains and many other commodities.

Freight, like many commodities, is more volatile today than it was pre-2008. This is particularly true of Capesize. Because the BDI is weighted more to Capesize shipping (40 percent), relative to Panamax and Supramax sizes (30 percent each), any volatility in the Capesize sub-index tends to skew the overall BDI (Figure 4).

However, for fertilizer shipments – which are not generally carried in larger Capesize vessels – less volatile indices such as the Baltic Handysize Index (BHSI), Baltic Panamax Index (BPI) and the Baltic Supramax Index (BSI) are more representative of freight rates. Freight rates for these smaller vessels tend to move in tandem2 .

Landmark peaks and troughs in the BDI since 2000 include:

• Commodities super boom peak in excess of 11,000 in May 2008
• Collapse to below 700 in December 2008 during the financial crisis
• Partial rebound to 4,600 by November 2009
• Historic low of 290 in February 2016
• Peak of 1,800 in July 2018 when China trade sanctions kicked in
• An eight-month slide from a 2,500 high in September 2019 to below 400 in mid-May 2020, as the Covid-19 pandemic took hold
• Partial rebound to 2,100 by mid-October 2020.

While freight rates have been in a general upward trend in the past two to three years, they remain historically low. Vessel owners are operating in a volatile market buffeted by multiple issues such US-China trade dispute, IMO 2020 (see box) and the Covid-19 pandemic.

Rising freight demand

Dry bulk freight is subject to the same fundamentals as other markets. The general maxim that ‘the market is what the market will bear’ therefore also holds true for freight. In practice, this means that freight rates are set according to what the charterer is willing to pay – not based on the vessel’s running cost. This means that the margins between freight rates and operating costs can be tight.

World seaborne trade grew from under five billion tonnes in 1995 to 11 billion tonnes in 2018 – an all-time high – with 7.8 billion tonnes being classified as dry cargo. Overall growth in seaborne trade has been relatively sluggish since 2013, compared to the 4-7 percent growth rates seen in the years following the 2008 financial crisis. Nevertheless, dry cargo shipments increased by more than forty percent over the decade to 2018.

Global seaborne trade in bulk commodities has risen every year this century – except for 2009 and 2015 – to reach a record level of 5.2 billion tonnes in 20182 .

Weak freight rates of recent years are therefore not linked to a lack demand. Instead, the oversupply of vessels has been a key factor. The global fleet grew at an extraordinary rate between 2008 and 2013 but has moderated since. Although shipping capacity still grew by 2.6 percent in 2019, the upward trend, with the exception of 2017, has slowed year-on-year since 2011. For bulk carriers, world tonnages on order have also slid from above 150,000 dwt in 2016 to below 50,000 dwt last year.

There’s also an expectation that uneconomic vessels will be demolished in reaction to the introduction of IMO 2020 regulations.

Vessel oversupply and scrappage

The delivery of new ships into a market already at over capacity will make increased scrapping of vessels necessary. Much of the scrapping activity in recent years has been driven by the obsolescence of Panamax ships. However, this process halted in 2018 due to the increasing value of these vessels.

An all-time record of over 670,000 twenty-foot equivalent units – TEUs, the standard measure of container capacity – was scrapped in 2016. The following year, however, higher freight demand coupled with falling scrap prices resulted in a lower than expected total in 2017, with only 427,250 TEUs ultimately scrapped. This trend continued in 2018 when scrapping dropped to a seven year low of 111,200 TEUs.

Despite the lower numbers of vessels scrapped in 2017 and 2018, totals were predicted to rise again in future years due to the introduction of new International Maritime Organisation (IMO) fuel regulations this year (see box).

The IMO’s 0.5 percent sulphur cap on fuel – introduced from the start of January – was expected to prompt an up-tick in scrapping rates.

The new regulation requires vessels to switch to Very Low Sulphur Fuel Oil (VLSFO), or install scrubbers so they can continue using conventional heavy fuel oil (HFO).

Consequently, older, smaller, less fuel-efficient vessels are expected to be scrapped in response to the IMO sulphur cap – projected at 26 million dwt equivalent in 2019 and 44 million dwt equivalent in 2020. The cost of adding scrubbers to such vessels may exceed their asset value. These same vessels are in a double bind as – being less fuel-efficient – they could also prove too expensive to operate using VLSFO.

Fig. 3: The Baltic Dry Index, 1995-2020

Fig. 4: Historic freight rates for Capesize, Panamax, Supramax and Handysize vessels

Covid-19 pandemic hits seaborne trade

The global Covid-19 pandemic is likely to depress seaborne trade by one billion tonnes in 2020, according to a half-year assessment by Clarksons in July. The London-based shipping services provider is forecasting the most severe contraction in sea freight in almost four decades.

In a July statement, Steve Gordon, managing director of Clarksons Research, said: “The severity of the Covid-19 economic shock on the shipping industry is becoming clearer: we estimate seaborne trade fell by 10.6 percent year-on-year (y-oy) in May. Our annual projections suggest trade will contract by 5.6 percent across 2020, representing one billion tonnes of ‘lost’ trade and the sharpest decline for over 35 years.”

The Baltic Dry Index (BDI), having started 2020 at 976, also slumped to a low of 343 by mid-May, before recovering to 2,097 by mid-October. Indeed, the BDI slumped by a dramatic 19 percent in the first week of May alone, closing at 514 points. The Capesize index was the hardest hit that week, with freight rates falling to just $4,858/day. Those Capesize vessels without fuel scrubbers fared even worse, with Clarksons reporting average spot rates of just $2,357/day that week.

Clarksons’ half-year assessment also revealed a shipbuilding decline, with a 20 percent y-o-y decline in new vessel deliveries.

Covid-19’s shipping impacts did, however, appear to peak in spring with a partial respite as the year progressed. There were even signs that port activity in China had normalised by July.

Nevertheless, Clarksons still predicts “huge multi-year risks” and a “difficult and bumpy road” ahead for shipping – albeit offset by periodic improvements in freight rates linked to large swings in month to month demand.

Directly comparing the current Covid19 pandemic with the financial crisis of a decade ago, Clarksons suggested that shipping would experience “a significantly deeper initial impact but sharper rebound”.

Covid-19 and fertilizer freight

Analysts Argus monitor a basket of fertilizer freight rates together with low-sulphur marine fuel costs. The basket covers four trade routes to key destinations east and west of Suez:

• Phosphates: Saudi Arabia-India East Coast, 25,000-35,000 tonne shipments
• Urea: Algeria-Brazil, 30,000 tonne shipments l Sulphur: Middle East-Brazil. 30,00035,000 tonne shipments
• Potash: Red Sea-India East Coast, 25,000-35,000 tonne shipments
• Fuel oil bunker (0.5% sulphur): Singapore price.

Argus reported a continuing rally in fertilizer freight rates in a half-year report in June. Average rates for dry bulk fertilizers rose for seven consecutive weeks, after hitting a low at the end of April. This was supported by a rise in bunker prices. For the four key routes selected by Argus, fertilizer freight rates rose by an average of $4/t between end-April and mid-June.

Prior to this, average rates across the four routes fell for six weeks in a row. On average, the cost of shipping fell by $5.75/t between the 19th March and 23rd April. From that point onwards, the $11.875/t average freight rate for this basket of routes rose week-on-week to hit $15.875/t by mid-June. The rise in freight rates, that began at the start of May, reflected a climb in marine fuel prices.

Fertilizer shipments have continued throughout the pandemic despite the slowdown in overall global trade, reports Argus, due to the designation of fertilizers by governments as a crucial part of the food supply chain.

References

1. Malone, B., 2019. Dry bulk freight market – a study in uncertainty. TSI 2019 Sulphur World Symposium, 15-17 April 2019, Prague.

2. Sabah, D., 2019. How the fertilizer industry can use freight to its advantage. CRU Fertilizer Latino Americano, 28-30 January 2019, Mexico City.