Contrary Currents For Barge Industry To Continue In 2020
No one operating barges needed to be told that 2019 was a tough year for the barge industry. Historic flooding on most river systems combined with trade turmoil to bring severe hits to corn and soybean farmers, drastically reducing bargeloads of fertilizer and agricultural products even after the harvest rush when waters receded. Floods prevented 19.8 million acres from being planted in 2019.
Jennifer Carpenter, CEO and president of The American Waterways Operators, said, “2019 was a very difficult year for operators on the inland system, and especially in the inland dry sector, with sustained high-water conditions, dredging challenges and the impact on customers (and therefore cargo volumes) of tariffs and trade tensions. As we move into a new year—and hopefully improved market conditions in these sectors—AWO’s priority is to make sure we’re helping members solve the problems that are in front of them now, and anticipate the ones coming around the bend.”
Mark Knoy, president and CEO of American Commercial Barge Line (ACBL), said, “I think we’re all looking for some better times ahead, with more normal operating conditions and margins that allow reinvestment in the industry. I know we, not unlike others, need to recover from the recent downturns in the energy renaissance and grain exports, along with the most severe weather impacts I’ve seen in my career [occurring] over the last few years. Here at ACBL we are working toward a more disciplined approach to cost-sharing of navigational events that cripple barge lines and significantly increase our cost, due to no fault of our own.”
Knoy added, “While some freight rates have appreciated, we still face downward pressure in agricultural and coal markets that need significant improvements in demand before the barge industry can realize a true recovery from what we have seen in the last three to four years.”
On January 14, the Wall Street Journal, citing unnamed sources, reported that ACBL was negotiating with creditors to restructure $1 billion in corporate debt.
Ag Exports Down
Ken Eriksen, senior vice president-agribusiness intelligence for IHS Markit, said, “the fleet of dry barges, open and covered, is too many for the volume of dry bulk commodities now moving on the inland navigation system.”
“It has been an epic year, with farmers planting crops late on persistent spring rain events; trade deals affecting commodity flows; global competitors gaining greater influence in traditional U.S. markets; navigation that never found its moorings, whether on the inland waterways or loading deep draft vessels; and all the while, African swine fever has crimped global consumption levels for feed grains and ingredients,” he said.
According to the Foreign Agricultural Service of the USDA, calendar year 2019 saw 11.9 million metric tons of grain and oilseeds move to China via the Mississippi River—vs. 16.4 million metric tons in 2017, the last full year before the trade war, representing a loss of 27.4 percent. Total Mississippi River exports (regardless of destination) were down 14.1 percent, as increased sales to other destinations favorable to Center Gulf shipments made up some of the difference. Ethanol exports to China totaled 2.2 million barrels in 2016, but zero barrels in 2019. Exports of dried distillers’ grains (DDG), the high-protein byproduct of ethanol manufacture, totaled 2.6 million tons in 2016, and a mere 200,000 tons in 2019 (prorated with November data).
“Now that the U.S. and China have signed their trade agreement, we will not see a panacea of volumes to China in the near term” according to Eriksen. “It will be during the U.S. new crop harvest, during the third and fourth quarters of 2020, before sizeable volumes will pick up. But with the anticipated Illinois River closure and bunching large volumes into a short window could make the end of the year interesting for barge operators.”
Coal continued to decline, which meant coal bargeloads declined. The replacement of coal-fired plants with those fired by natural gas, and the shift to other forms of energy, is good news for the U.S.’s emissions and for air quality. But the fact remains that in terms of energy output, one bargeload of oil replaces many bargeloads of coal, not to mention that pipelines serve some new gas-fired plants that replaced barge-served electricity plants.
Knoy said, “While we are hauling hundreds of bargeloads of wind towers and blades, it is nowhere near enough to offset the loss of domestic and export steam coal. Regional [barge] operators that have been tied exclusively to the coal generation industry over the last 50 years are in for a rough road in attempting to redeploy these assets to other businesses. Many of these coal assets do not convert economically to other commodities and river segments very easily.”
The U.S. oil and gas renaissance, thanks to hydraulic fracturing and horizontal drilling, has made the U.S. into a leading energy exporter again. That is great news for American consumers and businesses that use energy, and for America’s geopolitical position. The more they produced, the more drillers learned about producing more oil and gas from each well with less equipment and manpower.
However, that success was achieved by heavy borrowing from eager lenders who thought energy lending was a sure bet. Their problem was that their very success has kept oil and gas prices low. Now that they have shown that they can quickly and efficiently produce, drillers need to show they can make a profit in an environment of oil and gas abundance.
In October, Bloomberg News reported, “U.S. shale oil plays are ‘riding the edge of profitability’ at current prices, and the industry faces a significant slowdown in fracking activity if crude falls below $50 a barrel for a sustained period.” Bloomberg quoted an oil and gas expert saying, “These [drilling] firms are now being judged by their ability to generate free cash flow.”
In January, world natural gas prices stood at their lowest level in 30 years, thanks partly to glutted inventories, and partly to a U.S. winter not cold enough to provide a big demand surge.
Barge Equipment Overbuilding
Just like lenders, the barge industry, too, eagerly embraced the booming energy sector. Knoy said, “The major downturn in shale drilling and fracking has had a negative impact on our industry demand as well. We’ve learned over the last few years just how much positive impact the oil and gas industry had on the dry cargo side of our business, now that we’ve seen less cement, steel tubing and pipe, along with frac sand going into these markets. When we once saw hundreds of barges moving frac sand thousands of miles, we now have less than 100 barges hauling frac sand dozens of miles.”
On the one hand, said Knoy, “The [liquid] barge industry primarily serves refiners and they have what they need. New crude production is geared toward the export market. The expected slowdown in the rate of output growth (due to production discipline imposed by producers’ investors) will have little or no effect on liquid cargoes.”
Jim Stark, president of the Gulf Intracoastal Canal Association, agrees, saying, “I believe GIWW traffic will remain resilient. It has hovered between 112-120 million tons the past several years and there is no indication that this will decline.”
But Knoy added: “Like some energy investments that were in-the-money a few years ago when oil was above $100 per barrel, our industry has made some equipment investment decisions in the barge industry that don’t make as much sense today in these shifting end markets. I think access to cheap capital and aggressive tax treatment led to some overbuilding in our industry over the last five years. The lower revenues in many cases have been driven by an oversupply of capacity.”
Eriksen said he expects the number of barge retirements to be “nominal as scrap steel prices are not a great incentive for scrapping. Moreover, the number of barges available at a scrapping age is not robust currently.”
All these factors that have driven down barge rates convinced some operators that they can’t sustain the costs of complying with the Subchapter M regulations and have driven consolidation in the industry, according to Knoy. “Too many operators have grown without any regard for investing in horsepower to move their fleet,” he said.
“They will need a strong appreciation in rates to offset the significant investment needed in mainline towboats with new emissions requirements. The regulatory burden on many operators that do not have a sufficient sized fleet to spread the cost cannot compete with large competitors that can absorb the added cost on a smaller amount per unit.”
The biggest concern for barge operators in 2020 is the same as it was last year: the weather.
R.D. James, assistant secretary of the Army for civil works, told The Waterways Journal he is already worried about a repeat of unusually high spring flooding this year on the Missouri, Upper Mississippi and Ohio rivers. Upper Midwest soils are still super-saturated from last year’s floods. Although the snowpack accumulation season is not even half-way through, parts of the Mississippi River are already at flood stage. The Ohio River, which was largely spared the floods of 2019, is also experiencing high water, and spring forecasts for rainfall are higher than normal.
“Last year’s volume was way in excess of what we normally do,” said James. “We’re going to try to be better prepared this year for dredging in the Lower Mississippi.” He said dredging operations would be better funded this year, and dredges will be prepositioned for quicker response.
The Corps has new dredges under contract for construction. James said the dredge McFarland needs replacement, since it costs more to keep operable than a new dredge would cost. But the replacement dredge, which will have twice the dredging capacity, will take 2-1/2 years to build.
James pointed out that the Corps is restricted in the amount of dredging it can do: “We’re just trying to keep the channels open.” Another restriction is total U.S. dredging capacity.
Stark said weather will certainly affect operations on the Gulf Intracoastal Waterway this year. “On the GIWW, that means navigation challenges at the Port Allen Lock and Morgan City, and congestion at the New Orleans area locks. Safety is of course paramount during these events and weather often results in delays. Hurricanes and tropical storms will likely disrupt normal GIWW operations. Our time-tested Joint Hurricane Protocol must be ready to address waterways issues. GICA will be working this spring to refresh our operating protocol and update our processes to ensure the inland industry is ready to respond.”
Improving Corps Processes
On the operational front, James is positive about how the Corps is improving its operations. “Since I’ve been here, I’ve been trying to advise the Corps on how to speed up decision processes—how to spend less time sitting in rooms, and more time moving dirt.” He has decentralized permitting authorities that were centralized after Hurricane Katrina, giving Corps districts more authority in order to reduce the number of steps needed for permitting decisions.
But, to quote a recent film, with great power comes great responsibility: James said he has pushed Corps districts to be in constant touch with their partners, including the navigation industry. James is also involved with rewriting the levee safety program and improving regulatory consistency and predictability. “If I can expedite projects, I’ll be happy,” he said.
Julie Ufner, newly installed president and CEO of the National Waterways Conference (NWC) echoed James’s comments. NWC has been significantly involved in the Corps’ “Revolutionize Civil Works” efforts to streamline the permit and project delivery process. “The Corps is working to incorporate nonfederal sponsors and stakeholders more meaningfully in the project-development process, which ultimately creates stronger projects and strengthens local communities,” she said.
James is cautiously optimistic about lock and dam construction projects, saying their funding seems to be moving through Congress in a timely manner. “I’m pushing as hard as I can to get our system to where it ought to be.”
James is concerned that there is not enough meaningful support for the Navigation and Ecosystem Sustainability Program (NESP). James said he had recently received a letter of support for NESP from 51 members of Congress, “but there doesn’t seem to be funding coming out of the pipeline.”
Trade turmoil rivalled weather as a key challenge for the barge industry in 2019. Many looked forward to the signing of a comprehensive trade deal with China and an end to the trade wars.
The recent passage and signing of the United States-Mexico-Canada Agreement (USMCA) provides significant relief for farm exports, especially dairy producers. Taken together, both countries buy more agricultural exports than China, and the new deal significantly reduces dairy tariffs from Canada.
As far as USMCA’s direct effect on bargeloads, however, Knoy said the mostly likely positive impact would be due to its increase from 63.5 percent to 75 percent of a vehicle’s parts that must be manufactured in the U.S. to be free of tariffs. “This could be a slight boost for domestic steel,” he said. “The other changes will not affect [the barge industry] significantly.”
The Phase I China deal still inspires caution as more details emerge. Notably, agricultural commodity futures markets have not risen significantly, indicating skepticism among farmers and their customers about how the deal will play out for them. Knoy notes that on the China deal, “finer detail, including the exact value of specific farm purchases (e.g., soybeans) was not provided, making the impact on barging uncertain. Obviously, there is potential.”
For instance, China is supposedly committing itself to buy more than $32 billion in U.S. agricultural products over a two-year period, part of a promise to increase purchases of all U.S. purchases of goods and services by $200 million during that period. But language in the deal says it must only “strive” toward those buys “according to market conditions”—likely meaning that if it can buy cheaper elsewhere, it can and will.
By American design, the agreement precludes either side appealing to the World Trade Organization or other international bodies (which the Trump administration distrusts) if one side deems the other to be acting in bad faith. Many tariffs also remain in place, to await Phase II.
Whatever the business environment, waterways advocates must continue the long-term work of persuading Congress to improve and maintain our nation’s waterways infrastructure. Carpenter reports that the level of bipartisan support remains high.
“I think it’s notable that despite the polarization and partisanship in Washington, D.C., that we see play out every day, when it comes to support for the domestic maritime industry, our waterways infrastructure, and the policies that sustain them, there is a level of bipartisan consensus that might surprise a lot of folks watching Fox News or CNN,” she said.
“The good news is that there are strong supporters across the political spectrum, from conservative Republicans to liberal Democrats, of the Jones Act, of biennial Water Resources Development Act (WRDA) bills and annual appropriations that keep our inland waterways infrastructure robust and reliable, and of policies that enable American maritime companies to keep creating jobs and keeping our nation’s commerce moving.”
Likewise, Ufner doesn’t see any lessening of bipartisanship. Like Carpenter, she points out that bipartisanship is a hallmark of water infrastructure issues. In the recent past, cooperation on WRDA has been achieved even in the face of partisan disagreement on other issues. “It would be great to pass WRDA this year, keeping to a two-year schedule, as it was in the past,” Ufner told The Waterways Journal.
What concerns Ufner about the coming year is the level of distractions facing members of Congress. The impeachment trial of President Donald Trump is just getting underway, to be held in the Senate after the House of Representatives forwarded articles of impeachment. Since members of the Senate are supposed to act as a jury, they are restricted in some of the same ways that jurors are. Senate rules require that all senators be present and listening in the chamber from 1 p.m. onward during the trial; they are not allowed to use phones or other electronic devices.
No one knows how long the trial phase will last. The impeachment trial of President Bill Clinton lasted six weeks. As long as it lasts, Ufner is concerned that Senators will have less time to consider and pass infrastructure legislation. House members, too, will likely be preoccupied with impeachment.
Apart from the impeachment, upcoming elections will reduce the time that legislators have to focus on infrastructure. Some of those senators required to be present at the impeachment trial are themselves campaigning for re-election, or for president.
Carpenter agrees, and adds that there are always distractions for members of Congress: “It can be challenging to find time on the legislative calendar to attend to the business of passing a Coast Guard authorization bill that provides relief from towing vessel inspection user fees, or crafting and passing a WRDA bill, but our challenge is to work with our many supporters in both chambers and on both sides of the aisle to get the job done. And I’m optimistic that we will do that.”
The top AWO legislative priority for the past few years has been the Vessel Incidental Discharge Act (VIDA), and here Carpenter is cautiously optimistic.
“Early this year, EPA will be publishing its notice of proposed rulemaking establishing standards for vessel discharges under VIDA,” she said. “That will give us our first real opportunity to assess how close the agency has come to getting it right.
“In the meantime, we’re encouraged by the level of communication and cooperation we’ve seen between EPA and the Coast Guard, because this will be crucial to getting the VIDA regulations done well and on time. EPA had two years—until December 2020—to publish a final rule establishing standards for vessel discharges under VIDA, and the Coast Guard has two years after that—until December 2022—to publish regulations telling vessel owners how to meet those standards.
“When both those rules are in place and in effect, the Vessel General Permit will go away and state regulation will be pre-empted. So it’s very important that the agencies stay on track.”
While Carpenter says her organization was “encouraged” by the agencies’ outreach to stakeholders, “We’re going to need to review the proposed rules with a fine-tooth comb and submit comments to help EPA and the Coast Guard get them right.”
Jones Act Challenges
An increasing concern of Carpenter and the AWO is how attacks on the Jones Act have ratcheted up.
“2020 will be one of the most intense years of anti-Jones Act attacks we’ve seen yet, and we are ready for them,” she said. “It’s incredible to me that some of our opponents are saying that because the Jones Act is 100 years old, it’s outlived its usefulness to our country. I think the exact opposite is true.
“The Jones Act is an incredible asset to American security—and security is timeless. Look around the world and see what our adversaries and strategic competitors are up to. Why, in the face of these challenges, would we ever want to unilaterally disarm and abandon our ability to keep vessels operating on our domestic waterways in American hands? The Jones Act is more relevant than ever in this very challenging, very delicate security environment. We need to educate, educate, educate, so that efforts to repeal, weaken or waiver the law go down to the defeat they deserve.”
The barge industry has faced downturns and tough times before.
“In the end,” said Knoy, “the fundamentals remain outstanding in our industry. Shippers are always winners with the great efficiency and safe carriage that barge transportation provides. Carriers, on the other hand, face constant challenges with regulatory requirements such as Subchapter M and the cost of compliance versus its value proposition.
“Of course, the public always wins with easing rail and highway congestions, and fewer emissions [of barges] per ton-mile. All of this adds up to an even bigger win for the environment with the most fuel-efficient, environmentally friendly and safest mode of bulk transportation.”
“The United States has what growing economies need: food, fuel and fiber, and the U.S. is positioned to supply the world with those commodities,” said Eriksen, “and the most efficient means accessing the global economy out of the United States is the U.S. inland waterway system.”
Carpenter said, “There’s nothing I’d rather be doing than working with and for this industry, which is made up of incredible, hard-working people doing honest, important work that is critical to our nation’s economy, security, environment and quality of life.”