Good time to build barges?

If you like to watch freight move – barge tows, trains, trucks, etc. – there is a lot less of it now due to the sour economy. Weekly rail reports show traffic is down 25 percent.

On the plus side, coal has been the most resistant to the drop off, which bodes well for the barge industry. Domestic electricity demand is usually unaffected by short-term economic woes.

However, even the domestic market for electrical coal has declined for the first time. The recession will likely result in an unprecedented two-year decline in electricity demand. Demand for coal-based electricity generation has declined 5 percent from this time last year.

In response, coal companies are cutting production amidst customers’ swelling stockpiles. There has also been some idling of barges and railcars. Although the effects are expected to be temporary, the long-held notion that domestic coal demand for electricity is recession proof has been shattered.

In the face of this, the U.S. barge fleet has been declining for nearly a decade. Barge retirements have exceeded new construction for the last eight years, which has reduced the barge fleet by about 15 percent. Some of the retirements are from the huge overbuilding bubble of the late 1970s. Even with the reduced fleet, there still appears to be too many barges to support the weak short-term demand for bulk commodities.

The soft barge market should ease demand for new barge construction. With the expected excess shipyard capacity and low steel prices, now would seem to be a good time to shop around for newbuilds. However, building new barges when short-term demand is expected to stay soft requires both cash and a healthy dose of long-term optimism.

All the talk about alternative energy, clean coal, emissions regulations and weak electricity demand places even more uncertainty on the barge market. The industry may be poised for growth but that appears very unlikely through 2010. Instead, I expect another 1980s-1990s-style rollback in barge tonnage with plenty of surplus equipment. So, despite more shipyard slots and lower steel prices, this is not the time for new barge construction.

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Workboat Staff

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