The impact on the fertilizer industry
The year 2020 was one of the most turbulent in recent history. Initially, the shipping market appeared resilient despite the global pandemic, but the true impact was yet to unfold. Industrial activity significantly declined in the months of March, May, June, and July due to reduced demand and widespread factory shutdowns.
With global movement restrictions in place, businesses shut down, tourism ceased, and consumer demand dropped sharply. This led to a major decline in transport needs, causing vessels to lay idle while shipowners struggled to find employment for their fleets. Ports and anchorage areas, especially around Rotterdam, were filled with inactive ships, reminiscent of the 2008 financial crisis.
The downturn affected all segments of the shipping industry—from bulk carriers to LNG vessels—leading to a sharp decline in freight rates.
A turning point: light at the end of the tunnel?
For charterers, the abundance of available shipping tonnage resulted in low freight rates. However, shipowners saw a glimmer of hope towards the end of 2020 as demand for vessels rebounded. Factories resumed operations, industries worked to make up for lost time, and freight rates started to climb.
By November and December, demand for shipping surged, particularly due to year-end trading commitments. Supply chains, however, struggled to keep pace, leading to port congestion and longer turnaround times for vessels. Severe winter weather further disrupted operations, compounding the logistical bottlenecks.
Skyrocketing freight and container prices
The unexpected surge in demand led to an extreme increase in container prices. At the start of 2020, the cost of shipping a 40ft container from China to Rotterdam was approximately $2,000. By late 2021, the same container cost between $15,000 and $20,000.
This drastic spike forced major multinational companies to seek alternative transport methods. Some, including a well-known Swedish furniture retailer, resorted to chartering bulk carriers and manufacturing their own containers to navigate the volatile market.
The unusual development of freight rates in 2021
Traditionally, freight rates follow a cyclical pattern—low in early months, rising in spring, dipping in summer, and peaking at year-end. However, 2021 defied this trend, with freight rates continuing to rise throughout the year.
For companies like Hudig & Veder, which operates vessels in the 2,400-3,400 DWCC range, freight rates doubling became the new norm. This trend was observed worldwide, from China to South America and across various vessel sizes, including European Short Sea markets.
Supply chain disruptions: shortages of staff and materials
While demand surged, supply chain disruptions exacerbated market challenges. Labor shortages, particularly at ports, caused congestion and delays. In China, a lack of river pilots led to waiting times of up to two weeks, further tightening vessel availability and pushing freight rates higher.
Additionally, the industry faced material shortages, most notably in containers. These factors combined to create one of the most volatile shipping environments in recent history.
Decarbonization investments and rising fuel costs
Regulatory changes also played a crucial role in market fluctuations. The IMO (International Maritime Organization) introduced stricter emissions regulations in 2020, reducing the allowable sulfur content in fuel oil from 3.5% to 0.5%, and within designated Emission Control Areas, to just 0.1%.
Shipowners had to invest in cleaner, more expensive fuel alternatives or install scrubbers to comply with the new regulations. At the same time, energy prices soared—marine gas oil (MGO) prices in Rotterdam jumped from $200 per ton in April 2020 to $700 per ton by October 2021. These rising costs were inevitably passed on through higher freight rates.
The future of freight rates and the fertilizer industry
Looking ahead, high freight rates are expected to persist through much of 2022. While new vessel orders may eventually ease the supply shortage, it will take time before they enter the market.
For the fertilizer industry, the impact has been significant. Prices for some fertilizers have tripled over the past 18 months, driven in part by surging shipping costs. Despite this, the relationship between suppliers and buyers remains relatively stable, unlike in other industries where companies have sought alternative sourcing to offset high transportation expenses.
As we move forward, market trends remain difficult to predict. However, the expectation is that a more balanced market will emerge over time, allowing for greater stability in freight rates and supply chain operations.
