State Of The Industry: Trade Uncertainty Still Dominates Outlook For 2019
Every year at this time, The Waterways Journal asks leading experts and players in the barge industry and among its major customers to speak about the opportunities and challenges of the coming year.
Forecasting is a tricky endeavor at the best of times. But this year, there are two hairpin bends in the river ahead, around which no one can see.
One is the ongoing shutdown of the federal government, which has already stretched out to be the longest in the nation’s history. With both President Donald Trump and his Democratic Party opponents apparently believing they will benefit by allowing it to continue, a resolution is not in sight at press time, although various bills are being discussed.
The other hairpin turn is trade uncertainty, due to the Trump administration’s trade and tariff war with China. At press time, negotiations are underway between the U.S. and China to end the impasse. Rumors are swirling around the internet, including rumors of impending major purchases of U.S. goods, including soybeans, by China to reduce America’s trade deficit.
The trade dispute and its tariff war has been a wild card upending business as usual and changing the fortunes of several barged commodities, for better and for worse. At press time, business publications were reporting that China’s growth is slowing to 6 percent or less, its lowest in 28 years.
While business fundamentals in the U.S. remain strong according to most analysts, “There are some people trying to talk us into a recession,” said Ken Eriksen, senior vice president-client advisory and development and energy and transportation for Informa Economics IEG.
Stephen Sheridan, executive vice president business development- transportation products, Arcosa Marine Products Inc., told The Waterways Journal, “The trade dispute with China is already the biggest story of 2019, as it was in 2018. It’s in the back of everyone’s mind. It absolutely has to be resolved quickly.”
Tariffs And Soy Flows
Soybeans have been the most directly affected barged commodity. “There was an incredible drop in volume of beans that would have gone down Mississippi River system,” said Eriksen. Torsten Slok, chief international economist at Deutsche Bank, reported that U.S. soybean exports to China were down a stunning 98 percent in 2018 as a result of Chinese tariffs. Low prices did help some American soybeans find other purchasers. “The grain marketing associations are doing their best to find other markets,” said Eriksen.
As executive director of the Soy Transportation Coalition, Mike Steenhoek has been at the forefront of efforts by soy growers to communicate their concerns about the ongoing trade dispute with China and the resulting tariffs on American soybeans.
In the first half of last year, said Steenhoek, early warnings of a trade dispute with China led many U.S. farmers to a rush of “front-loaded” or locked-in contracts at $10 a bushel or more (vs. $9 at press time). Those contracts were not all with Chinese buyers, but would be delivered after tariffs took hold.
With the profits from those early sales, plus two rounds of special aid payments to soy growers from the Department of Agriculture’s Market Facilitation Program, Steenhoek said many farmers are finishing 2018 in the black despite the uncertainties of the tariff wars. The first round of those payments, launched in August, totaled $4.7 billion, and a second and final round launched December 17.
“But it’s the longer-term picture that is concerning,” said Steenhoek. He used the analogy of a sports bar owner who opens his bar right outside a baseball stadium in a big city. “That bar owner can count on 30,000 people going past his door about 80 times a year. But if that stadium relocated to another city, his business model is affected.”
Second Half Drop
It was in the year’s second half that tariffs began to dramatically affect soy exports and barge movements. Eriksen said the past year’s grain exports through key locks on the river system totaled about 4.4 million short tons, down from 6.4 million the year before. Total grain exports from Gulf ports totaled 886 million bushels, down from 1.2 billion bushels the year before.
Eriksen pointed out that the spread of swine flu in Chinese hog herds has also led to reduced demand for soy feed, apart from the tariffs. But he noted, “Domestic [soybean] crushers still have decent profit margins and we are exporting lots of soy meal.”
Corn has made up 56 percent of grain transits through key locks over the past five years, said Eriksen, versus 37 percent for soybeans. Corn, which was not affected by tariffs, has had a good year in terms of barge loads and export volumes. “A lot of corn still moved by barge this year,” said Eriksen. Since corn requires more fertilizer than soybeans, corn volumes also affect fertilizer barge loads.
Export Window Closing
Steenhoek said that even if trade disputes are resolved soon, it will take some time to restart exports. “It’s a whole export system, not just farmers,” he said. Asian vessels that used to carry U.S. soybeans are currently laid up near Singapore, for example. It will take time to restart those vessels, reassemble crews and get the whole machinery moving again, he said.
Eriksen and Steenhoek agree that the export window is closing as Brazil gets ready to harvest its soy crop. In a normal year, about 80 percent of U.S. soy exports happen between September and February. In February, the Brazilian and Argentine harvest seasons begin, and the market switches south.
As far as the transportation network is concerned, said Steenhoek, the most direct impact of the soy tariffs was felt by railroads going to the Pacific Northwest. Much of that rail network was specifically set up to carry soybeans and other export crops to West Coast ports. When the tariffs hit, much of those ag cargoes from states like North and South Dakota and Nebraska were simply stored, rerouted south on the Mississippi River or railed to Mexico, or moved via the St. Lawrence Seaway for export to Europe (grain exports through the seaway were up 7 percent by the end of the year).
Steenhoek said Argentina has been a surprise alternate destination for American soybeans, due to bad weather conditions last harvest season and a resulting shortfall in the Argentine soy crop. Normally about 50 million metric tons, this year’s Argentine crop was closer to 30 million metric tons, he said. “But that’s a one-time opportunity we can’t expect to see repeated.” Argentina exports mostly crushed soy meal and soybean oil, and it’s possible that some American beans ended up going to China from Argentina as oil or meal.
Plantings Affected
In November, the American Farm Bureau reported that for the 2019 crop year, the U.S. Department of Agriculture projected that soybean planted acreage will decline by 6.6 million acres in the coming planting season, dropping from a record 89.1 million acres planted in 2018 to 82.5 million acres.
If these projections are realized, it would be the third-largest acreage decline of all time and the largest year-over-year decline in soybean plantings since 2007. The decline in soybean acreage was anticipated because of the drop in exports and expectations for a nearly billion-bushel “carryout” and projections for decade-low soybean marketing year average prices.
Eriksen said that if there is any truth to rumors of an impending resolution to the trade wars, including major soy buys by China, that country would need to buy 20 million tons of American soybeans for U.S. farmers to begin to recover their position. Farmers could be left sitting on a mountain of aging soybeans if no trade resolution happens soon. “There is a lot of backed-up [soy] volume that has to move out; it will move in dribs and drabs,” said Eriksen.
Coal’s Wild Ride
Two stories about coal are being told in the media. On January 7, a headline in Fortune magazine blared, “Coal Plants Are Closing, Despite Trump’s Efforts.” Using information from the U.S. Energy Information Administration, the story pointed out that more coal power plants closed (about 20) during Trump’s first two years in the White House than in President Barack Obama’s entire first term.
About 30 domestic coal plants closed between 2013 and 2016.
But the coal export story is much brighter. In October, Forbes magazine wrote, “There are many, many falsehoods out there about coal. The biggest, of course, is that ‘coal is dead,’ an organized effort to scare away potential investors of the world’s most vital source of electricity. Indeed, the reality is quite different than what some insist that you believe. In fact, coal is still the main source of power in a leading 18 U.S. states, and still supplies almost 30 percent of American power.”
Regarding coal exports, Betsy Monseu, CEO of the American Coal Council, told The Waterways Journal, “[Coal] exports reached their highest level in five years in 2018, with strength in both thermal and metallurgical coal markets. Barged coal shipments to the Gulf benefitted from the strong international market, and particularly so for thermal coal from a volume standpoint.”
Monseu said EIA data shows a total of 116 million short tons exported in 2018, with thermal making up about 62 million and metallurgical about 54 million. The majority of U.S. export coal being shipped by barge for export moves down the Mississippi River system.
Monseu also noted that according to the BP Statistical Review of World Energy 2018 report, coal’s share of electricity generation worldwide remains at 38 percent. “That’s exactly the same share as in 1998, 20 years prior. I would add that 38 percent today is part of a bigger pie, due to global growth,” she said. Monseu emphasized that U.S. coal exports are not all about China. “U.S. export volumes to India are higher than [to] China,” she pointed out. “India is an important and growing market for thermal and metallurgical coal.”
As far as the coming year goes, she said, “It depends on the strength of key global economies and coal shipments from competing countries. General market reports indicate a significant amount of U.S. coal already sold for 2019. This could hedge a bit against some softening of demand, should that occur.”
Sheridan drew attention to one market sign of the encouraging coal export picture in 2019. According to Eriksen, the open hopper barge coal fleet is the oldest it’s ever been, about 17 years old, Nevertheless, Sheridan said, some barge operators are seeking used hopper barges in good condition to put to use in the coal export trade, driving up their price.
Steel Rise Helps And Hurts Barge Operators
The strong economy of 2018, driven by President Trump’s tax cuts, gave the domestic steel industry a huge boost. U.S. industry was split into two factions regarding the steel tariffs. Domestic steel producers welcomed them. In a widely publicized June move, U.S. Steel announced the reopening of a shuttered mill in Granite City, Ill., directly attributing it to the steel tariffs. But businesses like the petroleum industry and manufacturers of cars, appliances and other products that use a lot of imported steel opposed them.
Arc mill innovator Nucor Corporation, the country’s largest steel producer, strongly backed the administration’s steel tariffs. By October, Nucor was reporting a tripling of profits. In the first nine months of the year, Nucor reported net earnings of $1.71 billion, up significantly from the $934.8 million reported for the first three quarters of 2017.
In its fourth quarter report, Nucor Corporation CEO and President John Ferriola said, “As we head into 2019, we continue to see strong demand and higher year-over-year average prices across most products.”
In September, Nucor approved an investment of $650 million to expand the production capability of its Nucor Steel Gallatin plant, a barge-served, flat-rolled sheet steel mill located on the Ohio River in Ghent, Ky.
In January, Nucor said it was scouting Midwest locations for a new $1.35 billion plate steel production facility it intends to build. The company said the plate mill could begin production in 2022 and will be capable of producing 1.2 million tons of plate steel products per year.
Slowdown In New Builds
Barge operators were both helped and hurt by the steel tariffs and resulting increase in domestic steel prices. The tariffs led to increased barged movements of domestic steel products, which were up more than 25 percent according to some estimates. But the price jump made building new barges more expensive.
The higher price of plate steel is one factor in what Sheridan told The Waterways Journal would be a major slowdown in the numbers of new-builds this year. The other factor is the barge overbuilding of a few years ago along with declining demand for hoppers and the need to rebalance the open barge fleet.
“Very few hoppers will be built in 2019, even fewer than the 200 or so that were built in 2018,” Sheridan said. “The hopper barge-build this year could be fewer than 150, which is very low historically. Tank barge production, on the other hand, will be steady and strong in 2019. Higher operating costs and higher replacement costs for hoppers, due to high plate steel prices, should lend strength to barge rates in 2019.”
Oil and Gas Continue Rise
One area of the U.S. economy that continues to perform strongly despite trade uncertainty is the oil and gas sector.
The U.S. is still on track to become the world’s leading oil and gas producer. In fact, production is outstripping local storage. In its 2019 energy outlook, business and risk analyst Deloitte reported that crude oil price discounts have at times topped $20 a barrel in the Permian Basin and elsewhere because pipeline build-out lagged wellhead activity. Growth in natural gas production in the Marcellus Basin has also often outstripped pipeline capacity, depressing prices for producers.
On the Energy Coast, the biggest news so far in 2019 is the announcement of the Corps of Engineers awarding a $92 million construction contract to Great Lakes Dredge & Dock Company, LLC to deepen and widen the Corpus Christi Ship Channel from the Gulf of Mexico to Harbor Island as part of the Channel Improvement Project (WJ, January 14). When completed, this channel improvement will allow Very Large Crude Carriers to visit the port directly.
“The award of this first dredging contract is without a doubt the most important development we will see in 2019,” said Charles W. Zahn, chairman of the Port of Corpus Christi Commission, in a press release. The contract award culminated a years-long effort by the port. The port plans more dock space and pipeline infrastructure in tandem with the dredging.
Sean Strawbridge, CEO of the Port of Corpus Christi, said the buildout would increase pipeline capacity to 2.6 billion barrels, or three times current capacity. Most of that capacity will serve export markets.
AWO: Following Up, Building Relationships
Regardless of trade uncertainty, the mission of the barge industry’s advocates continues. Both The American Waterways Operators (AWO)—celebrating its 75th year of representing its members—and Waterways Council Inc. (WCI) saw impressive victories in 2018.
The passing and signing of a Vessel Incidental Discharge Act (VIDA), a top legislative goal for AWO, was one of 2018’s more important victories. But Washington allows no time to rest on any laurels. Now comes the need for implementation, Jennifer Carpenter, AWO’s chief operating officer, told The Waterways Journal.
That means the industry will be closely cooperating with the Coast Guard, as it did with the Subchapter M regulations, to make sure that the new regulations that will have to be written serve the act’s goals of increasing regulatory certainty for vessel owners and streamlining and rationalizing discharge regulations, while continuing to protect the environment.
Defending Jones Act
When asked what AWO’s most important priorities are for the coming year, Carpenter had no hesitation. “We want to drive a stake through the heart of the current anti-Jones Act effort in Congress,” she said. “We don’t just want to defeat it, we want to crush it forever.”
Carpenter was referring to efforts by libertarian think tanks—funded by perennial anti-Jones Act interests like oil companies, the state of Hawaii and the territory of Puerto Rico—to get the Jones Act repealed in 2020. Hurricane Maria in 2017 gave an opening to Jones Act opponents to argue that the act was responsible for Puerto Rico’s resupply difficulties, even though those arguments were disproven by later studies.
One of those think tanks, the Mercatus Institute, has a “Jones Act 2020 Project” dedicated to its repeal and is producing a steady drumbeat of stories and reports attacking and denigrating the Jones Act.
Support for the Jones Act remains strong among member of Congress in both parties, as well as among U.S. Navy and Coast Guard personal and leadership and maritime industry leaders. But nothing can be taken for granted, said Carpenter.
Educating New Members Of Congress
The perennial work of educating members of Congress about the inland waterways industry goes on. “There are 100 new members of Congress who came in on the November elections,” said Carpenter, “and very few of them have a maritime background. They will all need educating about our industry and our issues, so there’s a lot of work to do.”
AWO members have already embarked on a constant round of meetings with members of Congress and their staffs that will lead up to AWO’s Barge-In, an April “blitz” of such visits.
AWO and industry personnel will be building on the long history of bipartisan success that inland and maritime issues have enjoyed in Congress, especially this past year. “As we all know, politics now are very polarized and contentious,” said Carpenter. “Yet we have a huge opportunity and track record of bipartisan cooperation on our issues. We had VIDA pass the House with a bipartisan voice vote and pass the Senate by a 94-6 vote. The Water Resources and Development Act (WRDA) also passed overwhelmingly. Accomplishments like that are things that members of Congress of both parties love to take back to their constituents. They can tell them, ‘I supported this bill that strengthens our economy, provides good jobs and protects our environment by keeping trucks off the roads.’”
If Congress manages to keep to the biennial schedule it has begun to establish for WRDA bills, the next one will come due in 2020. But that will be during another election year that promises to be even more contentious than usual. That makes it even more important, said Carpenter, that AWO members spend 2019 getting the word out.
During the past year, AWO significantly increased the tempo of its communications to members as well as to lawmakers. It issued more newsletters and increased its presence on social media. But Carpenter stresses that everyone needs to be involved. “Get on social media and get in communication with your congressman, and get your friends in the industry to write, too,” she said.
Ambitious Infrastructure Menu
While trade uncertainty also affects infrastructure plans, Mike Toohey, president and CEO of Waterways Council Inc., believes that important gains can be made on waterways infrastructure in the coming year.
WCI’s goals for the year include continuing to oppose any additional taxation, tolling, lockage fees or other charges for the users of the inland waterways system and moving forward on projects on the Upper Ohio River navigation system and the Three Rivers project in Arkansas.
Another important goal, according to Deb Calhoun, senior vice president of WCI, is to “participate actively in AWO’s Unlock Our Jobs coalition efforts to control invasive species on the inland waterways system.” Last year, the Corps recommended the most expensive and complex of five options at the Brandon Road Lock and Dam on the Des Plaines River to strengthen the site’s measures to stop the migration of Asian carp. The plan must be funded by Congress and the state of Illinois.
Calhoun listed an ambitious menu of WCI’s other goals for the year:
• ensuring a FY2020 Energy and Water appropriation of the full amount supportable by the diesel fuel tax receipts deposited into the Inland Waterways Trust Fund (IWTF);
• conforming the cost-sharing for IWTF-financed construction projects to require 25 percent of the project cost from the IWTF and the remaining 75 percent from general revenues, the same formula used for deep draft navigation projects;
• full and efficient funding for inland waterways priority capital projects during FY2020, including $59 million for Lower Mon locks and dams, $90 million for Kentucky Lock and Dam, and $104 million for Chickamauga Lock and Dam;
• an increase in FY2020 overall Corps of Engineers’ Civil Works Program Operation and Maintenance (O&M) funding, which received $3.74 billion in FY2019;
• ensure FY2020 energy and water appropriations in the full amount targeted in WRRDA 2014 for the Harbor Maintenance Trust Fund;
• obtaining funding in FY2020 for authorized projects needing preconstruction engineering and design;
• preserving and strengthening the Navigation and Ecosystem Sustainability Program; and
• opposing any unauthorized lock closures on the inland waterways transportation system that are not supported by the systems commercial users and are not part of the normal decommissioning process.
Toohey told The Waterways Journal, “In addition to our work related to annual appropriations and authorizations, WCI looks to 2019 with optimism for the development of an infrastructure package that can be agreed upon by Congress and the administration. While some toll-based public-private partnership (P3) proposals may work well in other transportation programs such as highways, inland operators are already engaged in a successful P3 with the government through the collection of the 29-cent-per-gallon diesel fuel tax deposited into the Inland Waterways Trust Fund. We are hopeful that an infrastructure initiative would include inland waterways locks and dams and do no harm to the inland waterways transportation system by imposing tolls or increased fees.”
Caption for photo: Trade negotiations, the future of coal and a new Congress are among the wildcards that make it difficult to predict the fortunes of the barge industry this year. (Photo by Rev. David Rider)
