Changes in the energy market, the lingering effects of a record drought in 2012 and a slow national economic recovery all weighed heavily on the inland barge industry last year and continue to shape the industry’s decisions and direction.
Just how good or bad business is depends on whether a barge operator is in the dry or liquid market.
Ask a dry cargo operator about 2013 and you’ll hear “bad,” “lousy,” “difficult”and “tough.” You’ll also hear concerns about too much barge capacity.
The year got off to a rocky start for dry cargo, as operators were still recovering from losses from the 2012 drought that paralyzed barge traffic in much of the Midwest, and things got worse as coal shipments slumped and prices dropped.
However, for tank barge operators that move petroleum products, it’s a different story — record profits, strong barge utilization, favorable pricing, a frenzy of tank-barge building and projections of a strong market ahead.
One thing operators in both sectors agree on is that the aging lock and dam infrastructure along the nation’s 1,200 miles of inland waterways continues to be a drag on business. Unplanned emergency lock closures are becoming more frequent, and money from Washington is tight for modernization, operation and maintenance. “There are more and more closures, and it takes longer to go through the locks,” said Richard Calhoun, president of Cargo Carriers, a unit of Cargill Inc., Wayzata, Minn. “This is costing industry a lot of money. It is a real problem.”
The biggest story on the dry side is the steady decline in U.S. coal production. With demand for export coal down and a record number of U.S. coal plants closing and no new ones being considered, there is less demand for coal barges. Coal has been hurt by a number of factors — cheap natural gas, aging plants, declining electricity use in some regions and anti-pollution regulations responding to climate concerns.
Since 2008, coal has dropped from powering half of the U.S. electricity market to about 27 percent. In the next several years, analysts predict that hundreds of older coal-fired units will be shuttered. Of particular significance was the announcement in November that the Tennessee Valley Authority will retire eight coal-fired generating plants, all of which receive coal by barge.
Grain, mostly soybeans, corn and wheat, helped the dry sector squeak by, operators say, as a good harvest last summer (including a record corn crop) produced strong demand for grain barges and helped turn around some of the losses from the 2012 drought. This bright spot was expected to continue into 2014, as grain exports are forecast to increase 40 percent, according to the U.S. Department of Agriculture’s 2014 World Agricultural Supply and Demand Estimates report.
“The economy in the dry side is very difficult, and it will be for quite a while until we absorb that [barge] capacity because of the lack of demand in the coal market,” said Mark Knoy, president and CEO of American Commercial Lines (ACL), Jeffersonville, Ind. “There’s also a soft materials and construction market. We are just not seeing the improvements in the national economy that everyone is talking about. There has not been a lot of growth beyond what crude is driving, although there could be growth in grain.”
The barge industry’s health mirrors that of the U.S. economy, which is limping along with 2 percent growth, said Brent Dibner, president, Dibner Maritime Associates, a Massachusetts-based consulting firm that has several clients in the inland sector.
“It’s a very muted, sober situation. 2013 was a very discouraging, hard year,” said Dibner. “The barge industry is used to having cycles that are driven by less profound forces. But the situation now is run by major cataclysmic changes.”
Many barge companies, he said, have focused on coal shipping, believing this had a future. But now U.S. and global policies say otherwise. “Europe is committed to a different future, and these major trends are not likely to reverse,” Dibner said. “This is very discouraging to the industry.”
Companies must avoid barge oversupply and should become “superior suppliers of customers needs,” Dibner said. “That’s your only hope. You’re in a crowded space with many rivalries, and [the challenge] is to create differentiation. You compete by having better crews, fewer accidents, sensitive pricing, fuel efficiency. It’s a market with very slow growth.”
WANTED: TANK BARGES
The biggest story on the liquid side is the explosion in production of cheap natural gas, petrochemicals and crude oil. This has produced a huge demand for tank barges, which traditionally carry petrochemicals and natural gas feedstocks to chemical plants.
Moving crude oil is new, and barges are increasingly in demand because it’s a lower-cost alternative to railroads and pipelines. Both inland and coastal barges are benefitting from this “crude-by-barge” trend. Most of the crude activity comes from North Dakota’s Bakken formation and also from Canada. Crude oil makes up more than half of all petroleum moving by barge from the Midwest to the Gulf Coast, while refined products have also increased, according to River Transport News (RTN), which tracks the barge industry.
Kirby Corp., the nation’s largest tank barge operator, posted record fourth quarter earnings for 2013. The Houston-based company benefitted from the strong U.S. petrochemical production, stable refinery products and the development of U.S. shale formations. With an inland and coastal barge utilization of more than 90%, Kirby plans to build 37 new inland tank barges and an 185,000-bbl. articulated tug-barge unit in 2014.
The shift in market forces has many barge operators retooling business plans, trying to find new commodities for their barges, expanding into new services, idling or selling some of their equipment or adapting their barges to the new energy markets.
AEP River Operations, owned by American Electric Power, has entered the liquid cargo market with the launch of a new tank barge fleet. In January it took delivery of the first of 20 tank barges to transport petrochemicals and agricultural chemicals. The barges, being built at Jeffboat, will be completed later this year. (Jeffboat, a division of ACL, is the nation’s largest inland shipbuilder, located on 68 acres on the Ohio River in Jeffersonville.)
ACL is also adding to its tank barge fleet on the inland waterways and has scrapped 800 dry cargo barges.
“We are spending most of our efforts on the liquid side. We see growth there, and our company is now handling nearly 20% of crude that comes off the Canadian pipelines off the Illinois waterways, and the tows we put to work along the Gulf Coast are driven by good shipments out of the West Texas area,” said ACL’s Knoy.
But Knoy said it’s not yet clear what role barging will play in the larger transportation network that will move these growing energy products. “The energy market is still trying to figure out the best logistics to move oil, and it will be a combination of all the modes,” he said. “We will be a part of that. We just don’t know how big that will be.”
Other companies are digging deep for ways to diversify their business portfolios.
With the closure of FirstEnergy Corp.’s Hatfield’s Ferry power station near Pittsburgh, Campbell Transportation Company Inc. is turning to gas and other commodities to fill the loss of its coal business along the Monongahela River. Coal currently accounts for 70% of Campbell’s revenue, down from 85% five years ago, and the company predicts this could fall to less than 50% within 10 years. The Hatfield Ferry closure represents a loss of four million tons of coal, “like overnight,” said Peter Stephaich, Campbell’s chairman and CEO.
To adapt, Campbell is retooling the business. “We’re trying in the last few years to do a number of things differently geographically and in terms of products. We’re at the upper end of the Ohio River system so we can’t go north, so we must look down,” Stephaich said. “Diversification is pushed by the market.”
Campbell has idled as many as 80 barges in its 500-barge fleet and is looking to scrap another 30 coal barges this year. “Frankly, we have too many coal barges in the system,” Stephaich said.
The company also has its eye on the fast-growing hydraulic fracturing industry, which extracts gas from shale rock. This process generates a large amount of wastewater that must be taken elsewhere for treatment, and barges could be used once the U.S. Coast Guard approves a plan to allow shale-rock drillers to ship wastewater. But this will be a slow-growing business, Stephaich noted, and won’t produce immediate results.
Campbell is also converting 50 barges to begin hauling grain this spring, and is branching out into environmental services such as cleaning industrial tanks and rail cars.
DRY CARGO NEWBUILDS DIP
On the barge-building side, the 2012 drought and declining coal and grain traffic resulted in a drop in dry cargo barge construction last year to the lowest level since 2003, according to RTN. Shipyards produced half the number of hopper barges in 2013 (536), mostly under multiyear contracts, than it did in 2012 (1,076), according to RTN’s annual industry survey.
Companies were skittish about new barges, preferring instead to idle equipment, lease rather than build new ones, maintain what they have or delay capital expenses until markets improve.
On the other hand, construction of tank barges is going gangbusters, and many predict this will continue into 2014 as moving crude by barge becomes increasingly important in the shale oil boom.
However, all of this activity raises concerns about overbuilding. There are currently too many dry cargo barges to handle demand, and this situation seems to be correcting itself as newbuilds are down and retirements are up. But some worry that overbuilding could occur in the liquid sector as well should the current construction boom result in too many tank barges on the market.
“I’m getting very nervous as we get into 2014,” Walter E. Blessey Jr., chairman and CEO, Blessey Marine Services, Harahan, La., said during a WorkBoat webinar in December. “I feel 2014 will be the last hurrah for building tank barges for a good long time. I just don’t see it continuing, and the second that interest rates go up, it will cut off demand. So I’m bearish on the future of tank-barge building after this current year.”
Matt Woodruff, director of government affairs at Kirby, however, cautioned that the number of tank barge newbuilds is not the only factor to consider when determining overcapacity. Barges taken out of service and not replaced by new equipment must also be part of the equation.
So what’s the outlook for 2014?
Both tank and dry cargo barge operators are putting on a positive face, saying business is poised to improve.
“Things are looking better in 2014,” said Calhoun of Cargill. “We’re seeing more non-grain business [going] into the Gulf, and we’ll have stronger grain exports.”
“On the liquid side we see a lot of strength in petroleum and chemical movements, and we’re optimistic that 2014 will be reasonably strong,” added Daniel Mecklenborg, a senior vice president at Ingram Barge Co., Nashville, Tenn.