Time To Cash In On The Inland Market?
By Basil Karatzas
The inland marine market has been enjoying a welcome renaissance since the summer of last year; while U.S. grain exports remained robust in 2021, movement of coal provided a least-expected additional demand for barges, and a recovering U.S. economy combined with a generous stimulus package further spurred demand for construction and infrastructure.
By the end of the second half of 2021, the market rally in the inland market was in full swing, and by early 2022 many operators were reporting full expected utilization of their hopper fleet for the whole 2022, with no redeliveries of tonnage scheduled for the rest of the year.
On one hand, the U.S. economy has been well in a recovery mode post COVID-19 since late 2021, and thus business activity has been strong as both pent-up and structural demand came back roaring. As such, tonnage demand has been strong. On the other hand, on tonnage supply, on the back of strong commodity prices, newbuilding cost for new marine assets has skyrocketed, more than doubling for hopper barges since 2021. As a result, newbuilding orders, and tonnage growth, have come to a stall.
While newbuilding orders dropped, scrap activity has ticked up. As commodities prices have also skyrocketed, owners of vintage tonnage got an opportunity to monetize any old languishing tonnage along the riverfront. All in all, the actual hopper barge fleet has shrunk by a small margin. Thus, demand for cargo and trade has been growing while the fleet (tonnage supply) seems to have actually shrunk, which partially explains the tightness of the market.
And, as if domestic market fundamentals have not been strong enough, present global geo-political events are likely to have an additional favorable impact on the market. The Russian invasion of Ukraine, irrespective of the logic and moral justification of the invasion, affects the so-called Europe’s breadbasket: between Russia and Ukraine, grains exports out of the Black Sea consist of approximately 28 percent of the world trade; that is, one in three bushels exported globally come out of the Sea of Azov and Odessa.
Unless there is an expedient solution to the military action, it can be assumed that this year’s harvest season has been lost in Ukraine and Russia; as a result, grain-importing countries will have to look elsewhere to substitute their grain imports; that bodes well for the U.S. and likely in 2022, the U.S. will be exporting every bushel available, thus boosting demand for inland barge trade. Incidentally, these developments are likely to be positive for the international dry bulk shipping market as ton-miles will increase for dry bulk ships.
The second big punch of the Russian invasion in Ukraine is the impact on energy pricing. Europeans, and most notably Germans, have depended too heavily on Russian LNG, which now they have to learn to walk away from. German demand for energy was already precarious as the country switched off three of its six nuclear plants in 2021 and is expected to shut down the remaining three in 2022. Germany was already importing coal from the U.S. in 2021 for power generation, and in 2022, U.S. coal exports seem to be even stronger; and, at an age of high oil prices, coal becomes less an objectionable fossil fuel, and coal trade, whether for export or local consumption, is expected to strongly support the inland (and also blue-water dry bulk market).
No wonder then that the inland market has been so robust: on the back of stronger than expected demand in 2021 and geo-political factors in 2022, commodities traders have put the pedal to the metal; and, with few new barges built and older barges having been scrapped, the market is poised for a very good year.
Our marine appraisal practice has been fielding calls from leasing companies and banks since early this year, to the effect: “We financed new barges for a client in 2021, and now the client wants to do more barges but the cost is higher by 40 percent since last year; is this real?” The market is real all right, and a tough call indeed on whether to finance new assets in a market that has appreciated so much so fast.
Playing the devil’s advocate, probably this is a good time for a leasing company or a bank to “unload” inland marine assets now that the market is strong. For transactions maturing in the next two to three years, it’s probably a great time to try to sell existing transactions instead of waiting until maturity when residual values can be lower than now. Whether for operators or lessors with more strategic portfolios, there has been strong demand for acquisition of inland marine assets with a few years of charter remaining. And from the owners’/operators’ point of view, there has been robust desire to put this strong market to work by doing sale and lease-back transactions whereby they can monetize on currently strong asset prices, and also divest of the residual risk.
Probably the market has still some steam to move upwards, but again, the perfect storm circumstances may not be around for long. For whatever it is for now, it’s a perfect opportunity to straighten up any underwater or risky positions in one’s portfolio; a good opportunity to monetize assets as well, now that they have appreciated in value so much.
Basil Karatzas is the CEO of Karatzas Marine Advisors & Company, a marine appraisals, marine surveys and brokerage firm, active in every aspect and with type of marine asset for both domestic and international shipping. The firm employs highly credentialized and qualified marine and finance professionals.
The opinions experessed in this article are the author’s and not necessarily those of The Waterways Journal.
