The world is a very complex place. For those who think otherwise consider the case of fertilisers, an essential component of efficient agriculture, improving yields, and increasing productivity. Most industrially produced fertiliser is nitrogen based, and this requires ammonia. Most ammonia is made using natural gas. The price of ammonia roughly tripled in Europe between January and March of this year, perhaps not really surprising considering that natural gas accounts for about 80% of the variable costs of ammonia.
Naturally this is leading to an increase in the price of fertilisers which farmers will have to absorb for at least the next couple of years. Farmers will have to pass on these costs to the consumers or reduce the amount of fertilisers they put on their fileds. Price rises are more or less certain: farmers will be unwilling to produce crops at a loss, but a reduction of the use of fertilisers could lead to lower crop yields, and reducing overall supply, which may then lead to higher prices.
High natural gas prices are already causing problems, and if prices for natural gas remain high, it may mean the closure of fertiliser manufacturing plants or even permanent shutdowns. There are already substantial temporary cuts in European fertiliser production by companies including Yara, BASF, CF Industries and Fertiberia.
Gas prices have risen for six consecutive quarters and third-quarter prices nearly tripled year on year to $304 per 1,000 cubic metres, according to Gazprom. Can we expect a reduction in gas prices any time soon? There are no signs on the horizon: Gazprom’s export prices are already setting new records, and more are likely to follow: “High gas prices are not a temporary phenomenon,” said Alexander Ivannikov, the head of Gazprom’s economic department. “The market environment tells us that in any case, based on our expectations and our calculations, next year’s average weighted price will in no way be lower than . . . this year,” according to Gazprom Export’s deputy department head Andrey Zotov.
What are the substitutes for industrially produced fertilisers? Don’t look to more intensive recycling of food waste, sewage, or raw manure, it’s already running a high capacity, at least in Europe. And there are now also significant price increases in other principal mineral fertilisers such as phosphate and potash, along with sulphur, when you can get hold of them. Many producing countries are limiting exports this year to support their domestic agriculture, or for other, more interesting reasons.
China, the world’s largest phosphate producer, has suspended or severely limited exports of phosphate-rich fertilisers since July, and most shipments have stopped. The cuts are expected to last until June of next year.
Russia has announced restrictions on nitrogen and phosphate fertiliser exports for six months effective from December 1. This has the effect of directly subsidising domestic farms, reducing domestic prices and supporting Russia’s grain exports.
Some of the shortfall of Russian and Chinese phosphate exports will be made up by OCP, the Moroccan phosphate monopoly. Most of this is already taken up by India and Mexico, but the trade is already well established and there is little extra capacity for new customers.
One of the largest producers of potash in Europe is Belarus, and although sanctions have been put in place by the EU they have not included the higher grades of potash from the mines owned by Belaruskali, the state monopoly. On December 8, delayed sanctions by the US start, intending to cut off nearly all potash exports — about a fifth of the world supply.
Most Belarusian potash is exported through the port of Lithuania, but with sanctions coming in now that route is more or less blocked now.
Belarus could export through rail links in Russia, but Russia has its own significant potash producer, Uralkali, which will likely take care of their own interests first, including avoiding US sanctions. Around ten percent of Belarusian fertilisers transported through Lithuania go to EU markets, with the rest travelling to China, India, Brazil and other countries. Prices are already rising as supply falls.
Belarus’s president Alexander Lukashenko has said that they may redirect export flows of potash fertilizers from Lithuania to Russian ports: “We will supply those volumes, loading them in Murmansk, not an issue, and we will supply [them] via the Northern Sea Route across lots to China, which is our main market, and to India.”
This seems a lot like wishful thinking to me: the Northern Sea Route is not (yet) open all year round and ice class ships would be needed. Still more tonne-mile demand. But it’s a big loss of traffic for Klaipeda: the port shipped almost 10.7 million tonnes of Belarus potash last year via a terminal 30% owned by Belaruskali. The port of Klaipeda said in a statement that the impact of sanctions will not be major and is likely to be compensated by growth elsewhere. Perhaps another case of wishful thinking.
So apart from Belarus who else has this stuff? Nutrien for one, the Canadian fertiliser group which has huge potash resources in Saskatchewan. Anticipating the sanctions on Belarus, Nutrien said it would “surge production to an annualised run-rate of 17m tonnes during the fourth quarter”. But with increased production comes higher prices: the prices of Nutrien’s potash products sold outside North America have risen 105 per cent this year.
This could just be a short-term spike of course. Fertiliser prices have surged in the past, only to decline again as producers increased capacity and farmers cut back on their fertiliser use. The difference this time is that natural gas is in short supply which cannot suddenly be increased and also very expensive. Apart from the higher prices Asian customers are willing to pay, there is no finance available – due to ESG rules – to speed up natural gas production expansion. Green finance policy is reducing the ability for farmers to grow enough food, and warm people, and generate enough electricity. And here we are thinking that LNG could be a suitable transition fuel for shipping, assuming that enough will be available?
To recap: natural gas is in short supply due to environmental, geopolitical and financial reasons, exacerbated by a shift away from coal and fuel oil as a fuel for power generation. The natural gas that is available for ammonia production is much more expensive sending increased costs to farmers. Farmers will be using less fertiliser so crop yields will be lower, sending up the price of food, and increasing overall inflationary pressures. Sanctions applied against Belarus will mean less availability of mineral fertilisers, and those, like Canada, that can increase production doubled their prices giving farmers the same problem, if in a different package.
Russia is happy (Gazprom, grain exporters and fertiliser producers are benefitting), China is making sure they have enough of everything at the expense of everyone else, and in the meantime… well in the meantime it is a very difficult maze to navigate.
What does this mean for shipping? This short walk through fertilisers raises far more questions than answers, touching at many of the elements that keeps shipping going: tonne-mile demand, marine propulsion, macro-economics, port use and availability, finance, geopolitics, trade routes and the good old freight market, not to mention newbuilding design and insurance. This is about tankers, containerships, bulk carriers and bunker barges. (It seems to me the ideal shipping opportunity is an ice classed ultramax which burns green methanol as a fuel, but there don’t seem to be that many around).
This is also about unintended consequences, not so much chaos theory and butterflies fluttering their wings, but a shortage of this will lead to increase of that, which will lead people to different things, where the best of intentions may backfire on those that dream of better things.
Traditionally, fertiliser was excrement and other waste – runny shit in other words, or muck – spread over or dug into fields to replace essential nutrients that had been eaten up or washed away during the growing of crops. “Where there’s muck, there’s money” is an old English saying, and it’s true today, if you consider the modern industrial equivalent of muck. What is not so obvious is that feeding the world, even with vegetable and cereal crops, is as dependent on hydrocarbons as any other human activity. The desire for a green economy, and having green fields that produce enough for the world to eat, are, it seems, more opposed to each other than connected. The good thing is that shipping continues to help the world get what it needs, bridging the gap between supply and demand over space and time. The bad thing is that a truly green economy cannot be developed overnight and by good intentions. We will certainly have to get our hands dirty in the meantime, if only to keep people fed.