Oceangoing ships are performing very differently amid the crisis, depending on which cargo they carry. The same holds true in America’s river transport system. Consequences of this year’s two black swans — coronavirus and the oil price war — vary widely depending on whether a barge is carrying petrochemicals, crude oil, crops or coal.
Tank-barges
The largest tank-barge owner, Houston-based Kirby Corp. (NYSE: KEX), held a special conference call on Monday to address the current market upheaval. The primary cargoes tank-barges carry are liquids for the petrochemical sector, much more so than crude oil — and the petrochemical business is now driving the market higher.
According to Kirby CEO David Grzebinski, “Our utilization levels have been in the 95% range in recent weeks. This morning we were 97% utilized, which frankly is as busy as I’ve ever seen it.
“Our customers [petrochemical plants and refineries] want to make sure their supply chains are in good shape. The ramifications of having to shut down a plant due to not having supplies are huge. Barging is just a small cost in [comparison to] that.
“Make no mistake though: If the U.S. economy goes into recession — and we may be already there — they [plant owners] will probably cut down their volumes,” Grzebinski acknowledged.
He believes petrochemical shippers will first pare throughput in less efficient plants in Europe before doing so in the U.S. Construction on major new plants, such as Shell’s in Pennsylvania, has been halted due to coronavirus concerns. “My view is that once they start construction, they’ll complete the plants, but they’re going to be postponed,” he said. “The ones that are still looking for permits will be delayed until the world economy settles out.”
He conceded that plunging oil prices will decrease the amount of crude oil transported on the rivers, but asserted that the barge sector was in a better position to handle this than the last time it happened, in 2015.
“In 2015, we had 550 barges moving crude and 260-270 new barges coming to the market. When we got to the bottom in the market in 2018, there were about 130 barges moving crude,” he said, noting that all the excess barges redeployed from crude took years to be absorbed in noncrude markets.
“We’re at a different starting point this time. There are about 300 barges in the crude market and about 130 to be delivered this year, and I wouldn’t be surprised if it was only 50-75 [after deliveries are pushed back],” said Grzebinski, noting that if 150 barges ultimately ended up being redeployed out of the crude trade in the current cycle, it would only add about 4% in capacity to the noncrude tank-barge fleet.
Going forward, if petrochemical tank-barge demand declines due to a U.S. recession, he said Kirby’s margins can be protected in the short term by time-charter coverage, and beyond that, by reducing costs through the reduction of its chartered-in towboat fleet — the same strategy it used to protect margins during the 2008-09 financial crisis.
Dry-cargo barges
Market conditions for dry-cargo barges were more challenging than for tank-barges even before recent events. The coronavirus and the oil price war intensify those pressures.
American Commercial Lines (ACL), the country’s second-largest owner of dry–cargo barges, filed for Chapter 11 bankruptcy protection on Feb. 7. In a court filing explaining why it needed bankruptcy protection, it cited fallout from the U.S.-China trade war, among other reasons.
“The imposition of tariffs by China on U.S. soybean imports and continuing trade tensions between the U.S. and China have resulted in a decrease in demand for U.S.-produced soybeans, resulting in a direct decrease in demand for ACL’s services,” it said.
The Phase One trade agreement between the U.S. and China was signed on Jan. 15, offering hope of increased agricultural sales, but the coronavirus may have dashed such hopes, both by lowering China’s economic ability to make purchases and by re-escalating geopolitical tensions between the U.S. and China.
“Developments across the globe since the agreement was signed in mid-January, from the coronavirus outbreak to the falling oil price, have made it even less likely that China and the U.S. will be able to live up to their commitments and thereby help boost demand for the shipping industry,” said Peter Sand, chief economist of shipping association BIMCO, who doesn’t expect progress until “the dust has settled around coronavirus disruptions.”
ACL’s bankruptcy filing also pointed to declines in domestic coal shipments spurring redeployment of barge capacity from coal to other cargoes, creating barge overcapacity for those other markets, leading to “a decline in freight rates ACL was able to charge.” The Port of South Louisiana reported a 48% drop in coal volumes in full-year 2019 versus 2018, with overall barge calls down 14%.
The Saudi Arabia-induced collapse in the price of crude oil, now down to $20-$25 per barrel, is yet another negative for coal used for power generation, as lower crude pricing pushes down pricing of natural gas, which competes with coal. The economic fallout from coronavirus will also reduce demand for coal used for steel production. The U.S. Energy Information Administration expects U.S. coal production to decline by another 17% in 2020, to its lowest level in 50 years. More FreightWaves/American Shipper articles by Greg Miller